Test Bank for Macroeconomics in Modules, 3e Paul Krugman, Robin Wells (All Chapters) Chapter 1 1. Scarcity in economics means: *a. we do not have sufficient resources to produce all the goods and services we want. b. the wants of people are limited. c. there must be poor people in rich countries. d. shortages exist in nearly all markets.
2. If resources are “scarce,” it means that they: *a. cannot provide enough goods or services to satisfy all human material wants and needs. b. have no opportunity cost. c. are probably not valued by consumers. d. have an unlimited supply.
3. A key theme fundamental to all of economics is that: a. there are limited wants. b. we are a rich country but are simply not aware of it. *c. people have unlimited wants but face limited means to satisfy them. d. there are unlimited resources.
4. The problem of scarcity is confronted by: a. industrialized societies only. b. preindustrialized societies only. c. societies governed by communist philosophies only. *d. all societies.
5. When we are forced to make choices, we are facing the concept of: a. human capital. b. inflation. *c. scarcity. d. economic aggregates.
6. We are forced to make choices because of:
a. exploitation. b. efficiency. *c. scarcity. d. the margin.
7. Scarcity exists when: a. making choices among two or more alternatives is not necessary. b. individuals can have more of any good without giving up anything. *c. individuals can have more of one good but only by giving up something else. d. resources are unlimited.
8. Scarcity in economics means: *a. we do not have sufficient resources to produce all of the goods and services we want. b. the wants of people are limited. c. there must be poor people in rich countries. d. economists are clearly not doing their jobs.
9. Although fresh water is very abundant in most places, it is scarce because: a. it has no alternative uses. *b. there is not enough of it to meet all needs. c. it is a free good. d. scarce goods in general are not all that costly.
10. Fresh water is considered a scarce good because: *a. not enough of it is available for all needs. b. it does not have any uses. c. scarce goods are less expensive. d. not enough of it is available for all needs and because it is less expensive.
11. The problem of determining what goods and services society should produce: a. exists because we can produce more than we need or want. *b. exists because there are not enough resources to provide all of the goods and services that people want to purchase. c. would not exist if all goods and services were scarce. d. would not exist if government owned all of the resources.
12. In China, which would NOT be a resource in the production of rice? a. fertile land b. labor c. capital equipment *d. money
13. A resource is anything that: *a. can be used in production. b. for which you pay. c. is in scarce supply. d. can be consumed.
14. We have to make choices because: a. we have unlimited income. *b. resources are scarce. c. resources are infinite. d. with good planning, trade-offs can be avoided.
15. When a chef creates a dinner plate of food for a customer, which represents
physical capital? a. the chef *b. the oven c. the food ingredients d. the chef's training and experience I think this may be a redundant answer to “A”
16. Manny is attending college and majoring in economics. By doing so, Manny is
primarily improving his: a. land. b. labor. c. capital. *d. human capital.
17. Which is not an example of a resource? a. land b. labor c. capital *d. production
18. Which can best be considered the resources used in the production of
computers? a. money from investors b. wages of computer engineers *c. computer engineers d. taxes paid on the profits from the sale of the computers
19. Corner offices in high-rise office buildings usually cost more to rent than other
offices. This best illustrates the economic principle of: a. normative economics. *b. scarce resources. c. resources being used as efficiently as possible to achieve society's goals. d. opportunity costs.
20. In Ventura County, California, strawberry production is limited by the number of
acres available for agriculture production. The statement that best represents this economic concept is: *a. resources are scarce. b. the cost of something is what you give up to get it. c. normative economics describes how the economy should work. d. resources should be used as efficiently as possible to achieve society's goals.
21. You like to read Vogue and Sports Illustrated. You have only $5 to spend, so
you only buy Sports Illustrated. The statement that best represents this economic concept is: *a. resources are scarce. b. the real cost of something is what you must give up to get it. c. positive economics explains how the economy actually works. d. economic models are used to answer “what if” questions.
22. Intel finds it difficult to hire enough skilled computer engineers. The statement
that best represents this economic concept is: *a. resources are scarce. b. the real cost of something is what you must give up to get it. c. economists may disagree due to differences in their political views. d. economic models are simplified representations of reality.
23. In Colorado, there has been a drought, and rural communities are fighting with
urban areas over water. The statement that best represents this economic concept is: *a. resources are scarce. b. resources should be used as efficiently as possible to achieve society's goals. c. the real cost of something is what you must give up to get it. d. economic models are used to answer “what if” questions.
24. Opportunity cost is: a. about half of the monetary cost of a product. b. the dollar payment for a product. c. the benefit derived from a product. *d. the value of the best alternative forgone in making any choice.
25. The opportunity cost of something is: a. greater during periods of rising prices. b. equal to the money cost. c. less during periods of falling prices. *d. what is given up to acquire it.
26. Whenever a choice is made: *a. the cost of that choice could be referred to as opportunity cost. b. the cost is easy to measure in dollar terms. c. efficiency is improved. d. scarcity is not the problem.
27. You can spend $100 on either a new economics textbook or a new CD player. If
you choose to buy the new economics textbook, the opportunity cost is: a. $100. *b. your enjoyment of the new CD player. c. both the $100 and your enjoyment of the new CD player. d. impossible to determine.
28. Margo spends $10,000 on one year's college tuition. The opportunity cost of
spending one year in college for Margo is: a. $10,000. b. whatever she would have purchased with the $10,000 instead. c. whatever she would have earned had she not been in college.
*d. whatever she would have purchased with the $10,000 and whatever she would have earned had she not been in college.
29. If the state government allocates additional spending on education, the
opportunity cost is: a. zero. b. the dollar amount of the additional spending. c. considered only if additional taxes need to be raised to fund the spending. *d. measured in terms of the best alternative use for that money.
30. Khalil is offered a free ticket to the opera. His opportunity cost of going to the
opera is: a. zero—the tickets were free. b. the price listed on the ticket. *c. whatever Khalil would have done had he not gone to the opera. d. the price listed on the ticket or whatever Khalil would have done had he not gone to the opera.
31. The cost of leaving the skating championship before it ends is ________, while
the cost of staying for the entire match is ________. a. the opportunity cost of not seeing the perfect “10” performance that happens; zero—the ticket to the championship is already paid, so there is no cost *b. the opportunity cost of not seeing the perfect “10” performance that happens; the opportunity cost of what else you could have done during that time c. zero—you don't have to pay to leave; zero—the ticket to the match is already paid so there is no cost d. the cost of the ticket; the cost of the ticket
32. A new fast-food restaurant offered a free meal (valued at $5) a week for a year
to its first 100 customers. Ramona camped out for 48 hours before the opening to be one of the first 100 customers. The cost of the free meal a week for a year for Ramona was: a. zero. b. $260. *c. whatever she would have done with those 48 hours. d. The cost is impossible to determine.
33. The local Taco Hut charges the same price for everything on its menu: $3 will
buy a taco, a burrito, or nachos. You buy the taco and think that if you had not
purchased the taco, you would have purchased the burrito. The opportunity cost of the taco is: a. the $3. *b. your enjoyment of the burrito. c. the $3 and your enjoyment of the burrito. d. the $3, your enjoyment of the burrito, and your enjoyment of the nachos.
34. For an economist, the cost of something is: a. the amount of money you paid for it. *b. what you gave up to get it. c. always equal to its market value. d. the quantity of resources used to produce it.
35. The best measure of the opportunity cost of any choice is: a. the monetary cost of that choice. *b. whatever you have given up to make that choice, even if no monetary costs are involved. c. the cost associated with not taking full advantage of the opportunity offered by that choice. d. your hourly wage.
36. While buying refreshments for an upcoming party, you notice that a six-pack of
Americana Beer costs $2 and a six-pack of Bavarian Beer costs $4. You buy the sixpack of Bavarian Beer, although you wonder if maybe two six-packs of Americana Beer would have been a better choice. The opportunity cost of the Bavarian Beer is: a. the $4. b. a six-pack of Americana Beer. *c. two six-packs of Americana Beer. d. the $4 and the six-pack of Americana Beer.
37. Your elderly grandma tells you: “I haven't been taking my beloved walks
because I'm concerned about falling and getting hurt. See, there is always a cost to doing something. But if you don't do anything, then there is no cost.” Your grandma does not understand the concept of: a. scarcity in economics. b. efficiency in economics. *c. opportunity cost in economics. d. models in economics.
38. The cost of leaving a championship soccer match before it ends is ________,
while the cost of staying for the entire match is ________.
a. the opportunity cost of not seeing the winning goal with two minutes to go; zero—the ticket to the match is already paid so there is no cost *b. the opportunity cost of not seeing the winning goal with two minutes to go; the opportunity cost of what else you could have done during that time c. zero—you don't have to pay to leave; zero—the ticket to the match is already paid so there is no cost d. the cost of the ticket; also the cost of the ticket
39. Zoe's grandparents are excited about finally paying off their mortgage, because
they say, “Our cost of housing is now zero.” Zoe should explain to them the economic principle of: a. scarcity: resources are limited. *b. opportunity cost: by living in the house, they are giving up the opportunity to sell the house, buy a smaller one, and pocket the difference. c. normative economics, which explains how the economy should work. d. equity: it is unfair that some people are still paying off their mortgage.
40. The university recently inherited a large mansion from a wealthy alumnus. The
university plans to use the mansion for faculty parties and to house distinguished guests. The opportunity cost of the mansion to the university is: a. zero, because it was a gift. b. the original cost of building the mansion. *c. the amount the university would receive if it sold the mansion. d. the cost of catering the parties at the mansion.
41. A new startup airline is offering free round-trip tickets to anywhere to the first
600 people who enter the office on the airline's first day of business. You arrive 24 hours before they are scheduled to open to be sure to get the free tickets, and you buy food from vendors while waiting in line. The cost of the tickets to you is: a. zero. b. just the cost of food while you wait in line. *c. the cost of food while you wait in line and the opportunity cost of your time spent in line. d. the actual value of the ticket.
42. A friend comes up to you and offers to give you a free ticket to the local
professional team's baseball game that night. You decide to attend the game. The game takes five hours and costs you $15 for transportation. If you had not attended
the game, you would have worked at your part-time job for $8 an hour. What is the cost to you of attending the game? a. The cost is zero—the ticket is free. b. $65 c. $40 *d. $55
43. For a student that owns his or her own home and doesn't plan to live in the
dorm the cost of going to college is: a. tuition and the cost of housing. b. tuition, the cost of housing, and the cost of books. *c. tuition, the cost of books, and forgone income. d. forgone income only.
44. You have $1 to spend on a vending machine snack. A bag of chips will cost you
$1 and the candy bar will also cost you $1. If you choose the bag of chips, the opportunity cost of buying the chips is: a. $1 plus the enjoyment you would have received from the candy bar. b. $2 minus the enjoyment you received from the bag of chips. c. $1. *d. the enjoyment you would have received from the candy bar.
45. A college student is faced with a difficult decision of how to spend one hour
tonight. She could babysit her professor's child at an hourly wage of $7, she could work at the college library at a wage of $6, or she could finish her economics homework assignment. If she chooses to complete her homework assignment, she has incurred an opportunity cost equal to: *a. $7. b. $6. c. $13. d. $0.
46. If you decide to go to Cancún with your friends during spring break, you realize
you cannot go to Paris with your sister in the summer. The statement that best represents this economic concept is: *a. the real cost of something is what you must give up to get it. b. positive economics explains how the economy actually works. c. normative economics describes how the economy should work. d. there are gains from trade.
47. You decide to join the economics club, but this means you can't join the
accounting club because it meets at the same time. The statement that best represents this economic concept is: *a. the real cost of something is what you must give up to get it. b. economic models are used to answer “what if” questions. c. people usually avoid opportunity costs. d. there are gains from trade.
48. The student center on campus has burritos, bagels, or burgers for lunch, and
they all cost the same. You decide to have a burger today, but if they were out of burgers, you would have bought a bagel. Your opportunity cost of buying a burger is your: a. enjoyment of the burger. *b. enjoyment of the bagel. c. enjoyment of the burrito. d. enjoyment of the bagel and burrito.
49. When the San Francisco city manager faces a complaint that the city council
chamber podium is not accessible to individuals with disabilities, he responds that the $1 million improvement will not happen because “that money could be spent building 70 curb ramps.” The statement that best represents this economic concept is: a. resources are scarce. *b. the real cost of something is what you must give up to get it. c. economic models are simplified representations of reality. d. when markets don't achieve efficiency, government intervention can improve society's welfare.
50. The student center on campus has burritos, bagels, or burgers for lunch, and
they all cost the same. You love burgers and bagels, but you decide to have a burger today. If they were out of burgers, you would have bought a bagel. The statement that best represents this economic concept is: *a. the real cost of something is what you must give up to get it. b. physical capital is a factor of production. c. resources are used to produce something else. d. normative economics describes how the economy should work.
51. Microeconomics deals with:
a. the working of the entire economy or large sectors of it. b. economic growth. *c. individual decision makers in the economy. d. gross domestic product.
52. The study of a single firm and how it determines prices would fall under the
study of: a. macroeconomics. *b. microeconomics. c. economic growth. d. fiscal policy.
53. Macroeconomics deals with: a. bits and pieces of the economy. b. the question of how a business unit should operate profitably. *c. the working of the entire economy or large sectors of it. d. how individuals make decisions.
54. The primary emphasis in macroeconomics is on: a. how firms set prices. *b. the national economy. c. marginal analysis. d. bits and pieces of the economy.
55. Which would be studied in macroeconomics? a. the change in automobile sales due to a change in the price of automobiles b. the impact of a tax reduction on the profits of an individual business *c. recessions d. the unemployment of workers displaced by technological change in the typesetting industry
56. The basic concern of microeconomics is: a. to keep business firms from losing money. b. to prove that capitalism is better than socialism. *c. to study the choices people make. d. to use unlimited resources to produce goods and services to satisfy limited wants.
57. How people choose among the alternatives available to them is:
a. not part of the study of economics. b. impossible to describe. *c. the study of microeconomics. d. the emphasis in the study of macroeconomics.
58. In contrast to the conclusions drawn from microeconomics, many economists
would argue that in macroeconomics, government: a. control of rent prices increases overall economic activity. b. intervention in markets usually leaves society as a whole worse off. c. taxation of goods and services does not create a deadweight loss of economic welfare. *d. intervention in markets can prevent or reduce the effects of adverse events on the macroeconomy.
59. Which area suggests a limited role for government? *a. microeconomics b. macroeconomics c. microeconomics and macroeconomics d. government policy
60. The widely held view that the government should take an active role in the
macroeconomy dates to: a. the Civil War. b. World War I. *c. the Great Depression. d. the Vietnam War.
61. Changing the level of government spending is an example of: *a. fiscal policy. b. interest rate policy. c. monetary policy. d. exchange rate policy.
62. The modern tools of macroeconomic policy are: a. tax policy and antitrust policy. *b. fiscal policy and monetary policy. c. monetary policy and exchange rate policy. d. capital policy and labor policy.
63. Controlling interest rates is an example of: a. fiscal policy. b. tax policy. *c. monetary policy. d. exchange rate policy.
64. Fiscal policy refers to the: a. control of interest rates. *b. control of government spending and taxation. c. control of the quantity of money. d. control of interest rates and of government spending.
65. The economist whose writings in the 1930s concluded that the cause of an
economic depression is inadequate spending was: a. Herbert Hoover. *b. John Maynard Keynes. c. Andrew Mellon. d. Joseph Schumpeter.
66. One role for government policy is to: a. provide insurance to cover damages from macroeconomic fluctuations. *b. attempt to manage short-run macroeconomic fluctuations. c. subsidize private insurance for businesses to cover harm from macroeconomic fluctuations. d. avoid Keynesian economics.
67. Among the tools available to macroeconomic policymakers is: *a. fiscal policy, for use in controlling government spending and taxation. b. antitrust policy, to break up monopolies. c. environmental policy, to clean up the economy. d. improving FDA standards for food and drugs.
68. Economic theory in 1936 changed dramatically with the publication of: *a. The General Theory of Employment, Interest and Money, by John Maynard Keynes. b. An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith. c. The Road to Serfdom, by F. A. Hayek. d. Principles of Economics, by Paul Samuelson.
69. The central mission of modern macroeconomics is to prevent: a. shortages. b. surpluses. c. high gas prices. *d. a deep recession like the Great Depression.
70. Which are considered to be the two types of macroeconomic policies? *a. monetary and fiscal policy b. monetary and regulation policy c. fiscal and regulation policy d. fiscal policy and price controls
71. Fiscal policy attempts to affect the level of overall spending in the economy by
making changes in: a. the interest rate. b. the money supply. c. banking regulations. *d. taxes and spending.
72. Monetary policy attempts to affect the overall level of spending in the economy
by making changes in: a. taxes. b. taxes and spending. c. taxes and interest rates. *d. interest rates and the quantity of money.
73. Monetary policy attempts to affect the overall level of spending in the economy
through: a. changes in the inflation rate. *b. changes in the quantity of money or the interest rate. c. changes in tax policy or government spending. d. discretionary regulation of profits and wages.
74. Fiscal policy attempts to affect the overall level of spending in the economy
through: a. changes in the inflation rate. b. changes in the quantity of money or the interest rate. *c. changes in tax policy or government spending. d. discretionary regulation of profits and wages.
75. If macroeconomic policy has been successful over time, it is likely that the
economy has not seen: a. any inflation. *b. any severe recessions. c. any unemployment. d. a business cycle.
76. Monetary policy involves: a. changes in government spending. b. changes in government tax receipts. *c. changes in the quantity of money. d. changes in tax rates.
77. Fiscal policy involves: a. changes in interest rates. *b. changes in government spending. c. changes in the quantity of money. d. changes in the quantity of money and interest rates.
78. The onset of the Great Depression: a. was not a shock to anyone, since most economists predicted the roaring '20s were bound to end in disaster. b. created a disagreement between the Hoover administration and conventional economists because Hoover wanted the government to intervene much more quickly than most others. *c. came as a considerable shock to the conventional wisdom of economics at that time and opened the door for critiques of mainstream thought by economists like John Maynard Keynes. d. was in 1918 at the end of World War I.
79. The General Theory of Employment, Interest, and Money, written by _______
and published in _______, transformed the way economists thought about macroeconomics. a. Milton Friedman; 1946 b. Paul Samuelson; 1940 *c. John Maynard Keynes; 1936 d. Paul Lucas; 1966
80. The General Theory of Employment, Interest, and Money, was written by:
a. Robert Lucas. b. David Ricardo. *c. John Maynard Keynes. d. Thomas Malthus.
81. Keynesian economics stressed: *a. the importance of total spending. b. the self-correcting power of free markets. c. the long run. d. that the Depression should run its course to bring down the high cost of living.
82. In recent times, the U.S. government has been trying to help the economy
through one of the worst economic slumps ever. The policies used are based on: *a. Keynesian theory. b. classical theory. c. supply-side theory. d. trickle-down theory.
83. Keynesian economics promotes the economic idea that: a. government intervention in the economy can be destabilizing. *b. the government can help a depressed economy via fiscal and monetary policies. c. the private sector is perfectly capable to regulate itself. d. the free market system will always prevail.
84. The economic policy of changing the quantity of money, hence the interest rate,
hence overall spending in the economy, is known as: *a. monetary policy. b. fiscal policy. c. free-market policy. d. trickle-down policy.
85. The economic policy that uses changes in government spending and taxes to
affect the overall spending in the economy is known as: a. a tax-and-spend policy. b. monetary policy. *c. fiscal policy. d. free-trade policy.
86. John Maynard Keynes believed that the government:
*a. should actively try to mitigate the effects of recessions by using fiscal and monetary policies. b. should not interfere with the economy and should let the economy self-correct. c. should intervene only when there is a boom but let the recession run its course. d. should not use fiscal and monetary policies, as these policies have long-term adverse effects on the economy.
87. A simplified representation that is used to study a real situation is called: *a. a model. b. a production possibility frontier. c. an assumption. d. a trade-off.
88. The models that economists construct: *a. usually make simplifying assumptions. b. often rely on physical constructs, such as those used by architects. c. rarely use mathematical equations or graphs. d. attempt to replicate the real world.
89. When building a model, economists: *a. simplify reality in order to highlight what really matters. b. attempt to duplicate reality in all of its complexity. c. ignore the facts and instead try to determine what the facts should be. d. are careful to avoid the scientific method.
90. The models used in economics: a. are usually limited to variables that are directly related. b. are essentially not reliable because they are not testable in the real world. c. are of necessity unrealistic and not related to the real world. *d. emphasize basic relationships by abstracting from complexities in the everyday world.
91. Economic models are: a. created and used to duplicate reality. b. useless if they are simple. c. made generally of wood, plastic, and/or metal.
*d. often useful in forming economic policy.
92. The importance of an economic model is that it allows us to: a. build a complex and accurate model of the economy. b. build an accurate mathematical model of the economy. *c. focus on the effects of only one change at a time. d. avoid opportunity costs.
93. Which two statements is a positive statement? Which is a normative statement?
X. The federal minimum wage is increasing to $7.50 an hour. Y. The minimum wage should be high enough that families will not live in poverty. *a. X is positive; Y is normative. b. X is positive; Y is positive. c. X is normative; Y is positive. d. X is normative; Y is normative.
94. Which is a normative statement? a. Women's labor force participation rate has increased during the past 100 years. b. The federal minimum wage is higher today than it was in 1990. c. Children in the United States are required to go to school until they reach a certain age. *d. The best way to encourage growth in the economy is through government spending.
95. Which is a normative statement? a. The minimum wage has not kept pace with inflation. *b. The minimum wage is an important tool in fighting poverty and should be increased. c. The minimum wage can create higher unemployment for teens and unskilled workers. d. A higher minimum wage is expected to increase the price of a fast-food cheeseburger.
96. Which is a normative statement? a. International trade leads to expanded consumption opportunities. b. Higher expenditures on health care will reduce infant mortality rates. *c. To improve our economic security, we should reduce our dependence on oil imports. d. Increased defense spending will lead to higher budget deficits.
97. Which is a positive economic statement? a. Government has grown too large and should be reduced. *b. There has been an increase in the rate of inflation. c. Government should be subject to the same rules as all other institutions. d. Women should be paid as much as men for the same work.
98. An example of a positive statement is: *a. the rate of unemployment is 4%. b. a high rate of economic growth is the most important goal for the country. c. everyone in the country should be covered by national health insurance. d. baseball players should not be paid higher salaries than the president of the United States.
99. An example of a positive statement is: a. the rate of unemployment should be 4%. b. a high rate of economic growth is more important than a low rate of inflation. *c. the federal government spends half of its budget on national defense. d. everyone in the country should be covered by national health insurance.
100. Unemployment of 5% is too high. This is an example of a(n): *a. normative statement. b. positive statement. c. economic model. d. opportunity cost.
101. Which is a normative economic statement? *a. Government has grown too large and should be reduced. b. There has been an increase in the rate of inflation. c. Government is subject to the same rules as all other institutions. d. The money supply grew by 3% last year.
102. Which is an example of a positive statement?
*a. The poverty rate is 14%. b. A high rate of inflation is good for the country. c. Everyone in the country needs to save money for retirement. d. Basketball players should not be paid higher salaries than teachers.
103. Which is an example of a positive statement? a. The poverty rate should be 4%. b. A high rate of economic growth is a more important economic goal than a low rate of unemployment. *c. The federal government pays for 46% of U.S. health care costs. d. Everyone in the country should be covered by national health insurance.
104. Statements that make value judgments are: a. pecuniary. b. positive. c. nominal. *d. normative.
105. Which is an example of a normative statement? a. The rate of unemployment is 9%. *b. The price of gasoline should be less than $4 per gallon. c. The federal government spends half of its budget on national defense. d. Millions of Americans lack health insurance.
106. Which is an example of a normative statement? a. The rate of unemployment is 9%. b. A high rate of economic growth creates more jobs for the country. c. The federal government spends half of its budget on national defense. *d. Everyone in America deserves to be covered by national health insurance.
107. The current rate of unemployment of 9% is too high. This is a ________
statement. *a. normative b. ceteris paribus c. positive d. marginal
108. The current rate of unemployment is 9%. This statement: *a. is positive. b. is normative. c. involves a value judgment. d. is a personal reflection and has no value in economics.
109. Unemployment decreased to its lowest level in 10 years last month. This
statement is an example of a(n): a. opportunity cost. *b. positive economic statement. c. normative economic statement. d. value judgment.
110. A statement that says that the minimum wage should be increased is a(n): a. positive statement. *b. normative statement. c. example of an economic model. d. illustration of opportunity costs.
111. A normative statement deals with: a. the facts. b. what was, is, or will be. *c. what ought to be. d. the scientific method.
112. Economists who are asked to choose between two different government
policies may disagree because: a. they make the same value judgments about the desirability of the policies. *b. they base their conclusions on models that make different assumptions. c. as a matter of course, economists often take opposing points of view so that all sides of a question may be discussed. d. economists are trained ignore facts and focus on theory.
113. Economists may disagree about policies because they: a. may approach the issue using the same sets of values. *b. may use different economic models. c. enjoy disagreeing with each other.
d. only consider issues in positive economics.
114. Because the United States is a rich nation, free health care can be provided for all citizens without considering the issue of scarcity. a. True *b. False
115. The study of economics arises because of the necessity for choice, and the necessity for choice arises because of the fundamental problem of scarcity of resources. *a. True b. False
116. Opportunity cost means that if the United States spends $87 billion in the rebuilding of Iraq, we have to forgo the opportunity to spend $87 billion on some other program. *a. True b. False
117. In 2003, Congress passed a tax cut. Since taxes were reduced, the country did not incur any opportunity cost from this decision. a. True *b. False
118. Fiscal policy involves changes in the quantity of money or the interest rate. a. True *b. False
119. Monetary and fiscal policy are undertaken to reduce the severity of recessions. *a. True b. False
120. One type of macroeconomic policy is antitrust enforcement. a. True *b. False
121. Fiscal policy can be used to reduce the severity of recessions.
*a. True b. False
122. Economic models that make unrealistic assumptions may be useful in analyzing some economic problems. *a. True b. False
123. “Teachers in northern New Hampshire should earn more money” is a normative statement. *a. True b. False
124. Positive economics is the branch of economics that makes prescriptions about the way the economy should work. a. True *b. False
125. “Steel tariffs will prevent job losses in the steel industry” is a positive statement. *a. True b. False
126. “The unemployment rate should be higher” is a normative statement. *a. True b. False
127. “Many economists agree that income taxes should be increased for rich people” is a positive statement. a. True *b. False
128. Economists disagree more over normative economics than positive economics. *a. True b. False
129. A college student stays up late writing a history paper and as a result sleeps through her morning economics class. What is the cost of sleeping through the class? Correct Answer:
There is no monetary price, but there is most certainly a cost. She might have missed some very important information that was presented or discussed in the economics class. Failure to be present for this information might create difficulties for her on the next economics exam. Maybe the professor gave a pop quiz during the economics class and thus this sleepy student failed to earn any points on the quiz. Every decision has a cost, even if there is no money actually paid. 130. A college student waits in line for hours to purchase a ticket to the Rose Bowl, but an attorney does not. Rather than spend hours in line, he purchases a much more expensive ticket through a ticket broker. Why? Correct Answer:
For the attorney, the opportunity cost of waiting in line for a ticket is time that could be used to work for a client and earn maybe several hundred dollars for each hour of legal work. Because he worked during those hours, he was able to afford the higher price. The opportunity cost of the student's time is much lower. 131. What do economists mean by “Keynesian” policies? Correct Answer:
John Maynard Keynes advocated an active role for the government when the economy was in recession. He believed that economists and policy makers should engage in fiscal and monetary policy to stimulate a weak economy, rather than standing by and allowing the economy to self-correct. 132. You are reading an editorial in your local newspaper. The editorial says: “The United States had a trade deficit of $18.4 billion in February 2008. This is a clear indication to our leaders that we must renegotiate our trade agreements with China to make them fairer for the American worker.” What parts of this editorial are positive and what parts are normative economics? Correct Answer:
The statement of historical fact “trade deficit of $18.4 billion” is positive economics. It does not imply any value judgment. The second statement, “our leaders must renegotiate . . .” is normative economics. The editorial board is prescribing the way the economy, in this case trade with China, should work. There is a very clear value judgment that the trade deficit is unfair to American workers and we should therefore work to remedy the deficit.
133. When someone says resources are scarce, this suggests that:
a. lower-income individuals must be especially careful about the choices they make. *b. choices need to be made in order to utilize resources in the best manner possible. c. additional resources could be found if there were additional funds allocated to the effort. d. we have enough resources to meet all of our needs and wants.
134. One day, Martha wakes up and in frustration yells, “Decisions, decisions,
decisions! Why do I have to make decisions about everything?” Martha's frustrations stem from the fact that: *a. like all economic beings, she faces constraints and cannot have everything she wants. b. she doesn't realize she can have everything she wants. c. she is the only one who faces constraints in life. d. she really doesn't want anything.
135. Alison is offered two jobs: one pays a salary of $45,000 per year and offers
three weeks of vacation, while the other offer provides two weeks of vacation and a salary of $54,000. What is the opportunity cost for Alison if she chooses the job offer of $54,000? a. $45,000 plus the three weeks of vacation b. $45,000 per year *c. one week of vacation d. two weeks of vacation
136. Katherine has a physics exam tomorrow. However, a free lecture by one of her
favorite authors is taking place this evening. Katherine decides to attend the lecture instead of studying for her exam. Which is a correct statement? a. Katherine's opportunity cost is the time spent listening to the lecture. b. Katherine's opportunity cost is not relevant, since no money is involved. *c. Katherine's opportunity cost is the cost of getting to the lecture event itself plus the reduction in her physics exam grade by not studying tonight. d. Katherine's opportunity cost is the time spent getting to the lecture.
137. Fiscal and monetary policies: a. have no role in macroeconomic policies. b. have been used by the government for over 250 years. c. are most effective in microeconomic settings. *d. are used to correct for short-term economic fluctuations.
138. Fiscal policy involves: a. deliberate changes in the money supply. *b. deliberate changes in taxation and/or government spending. c. changes in interest rates in specific markets. d. changes which correct only recessionary problems.
139. Keynesians argue that low levels of spending: a. are irrelevant in an economy. *b. can lead to prolonged recessions. c. are not helped by monetary or fiscal policy efforts. d. are evident only during expansions.
140. Setting interest rates and the money supply in an effort to change overall
spending in an economy is called: a. fiscal policy. *b. monetary policy. c. investment. d. the stock market.
141. Setting government spending and taxes in an effort to change overall spending
in an economy is called: *a. fiscal policy. b. monetary policy. c. investment. d. the stock market.
142. During the Great Depression, unemployment rates reached as high as: *a. 25%. b. 50%. c. 10%. d. 60%.
143. Economists use models to explain real-life situations because: a. such models tend to be exactly what is occurring in each situation. b. assumptions found in such models tend to make the problem more difficult. *c. simplifications and assumptions often yield answers that can help to explain the more difficult real-life situations.
d. real-life situations are not relevant to the building of models.
144. Economic models often: *a. vary greatly in assumptions and simplifications. b. are correct. c. provide similar answers. d. fail to explain any of the real-life scenarios they are supposed to help solve.
145. “All other relevant factors remain unchanged” is another way of saying: *a. all other things equal. b. allow several variables to change in order to understand how those variables affect one variable held constant. c. allow all variables to change and attempt to understand how the variables interact with each other. d. no variables change.
146. Positive economics: a. describes opinions and perspectives on how the world should work. b. is based on opinion polls. *c. describes how the world does work. d. is the same as normative economics.
147. Of these statements, which reflect(s) a normative view?
I. The United States should increase the minimum wage to $10 per hour. II. There is a federal minimum wage in the United States. III. The federal minimum wage in the United States is less than $10 per hour. a. All are normative. b. None are normative. c. Statements I and II reflect a normative view. *d. Statement I reflects a normative view.
1. The production possibility frontier illustrates that: a. the economy will automatically end up at full employment. b. an economy's productive capacity increases proportionally with its population. *c. if all resources of an economy are being used efficiently, more of one good can be produced only if less of another good is produced. d. economic production possibilities have no limit.
2. A production possibility frontier illustrates the ________ facing an economy that
________ only two goods. a. prices; sells *b. trade-offs; produces c. trade-offs; consumes d. shortages; produces
3. Suppose the state of Oklahoma decides to produce only two goods, oil and
football helmets. According to the production possibility frontier, as oil production increases, the production of football helmets will: a. increase. b. not change. c. decrease at a decreasing rate. *d. decrease.
4. Consider a production possibility frontier for Iraq. If in 2014 Iraq's resources are
not being fully utilized, Iraq will be somewhere ________ of its production possibility frontier. *a. inside b. outside c. near the bottom d. near the top
5. All points inside the production possibility frontier represent: a. efficient production points. *b. inefficient production points. c. infeasible production points. d. economic growth.
6. The ________ illustrates the trade-offs facing an economy that produces only
two goods. *a. production possibility frontier
b. circular-flow diagram c. all else equal assumption d. income distribution
7. The production possibility frontier illustrates: *a. the maximum quantity of one good that can be produced given the quantity of the other good produced. b. that when markets don't achieve efficiency, government intervention can improve society's welfare. c. the inverse relation between price and quantity of a particular good. d. that people usually exploit opportunities to make themselves better off.
8. Assume an economy is operating on its production possibility frontier, which
shows the production of military and civilian goods. If the output of military goods is increased, the output of civilian goods: a. will increase too. b. will not change. *c. must decrease. d. may increase or decrease.
9. An economy is efficient if it is: a. possible to produce more of all goods and services. b. possible to produce more of one good without producing less of another. *c. not possible to produce more of one good without producing less of another good. d. producing a combination of goods.
10. If all of the opportunities to make someone better off (without making someone
else worse off) have been exploited, an economy is a. equitable. b. inefficient. c. marginally optimal. *d. efficient.
11. Economists say an economy is efficient when: a. the problem of scarcity is eliminated. b. output is distributed equitably. *c. all opportunities to make some people better off without making other people worse off have been taken.
d. all opportunities to make some people worse off without making other people better off have been taken.
12. If an economy has NOT achieved efficiency, there must exist ways to: a. increase opportunity costs. b. eliminate inequity. *c. make some people better off without making others worse off. d. increase the incentives for its citizens to follow their own self-interest.
13. Resources are being used efficiently when: a. scarcity is no longer an issue. b. they are also used equitably. *c. every opportunity to make people better off has been utilized. d. there are still gains from trade available.
14. An increase in efficiency means that an economy has: a. reduced its opportunity costs. b. increased the equity of its distribution of goods and services. *c. made some people better off without making others worse off. d. increased the incentives for its citizens to follow their own self-interest.
15. Economists define an efficient use of resources as a situation where: *a. one person can be made better off but only by making another person worse off. b. all persons can be made better off without making anyone worse off. c. all persons receive an equal share of the resources. d. all persons are made worse off when one person is made better off.
16. It is cheaper to produce corn in Kansas than in Death Valley, California because
corn needs a lot of water and moderate temperatures. This statement best represents this economic concept: a. Resources are scarce. b. Markets move toward equilibrium. *c. Resources should be used as efficiently as possible to achieve society's goals. d. Markets usually lead to efficiency.
17. In Thailand, the land, labor, and capital in society are all used to exploit all
opportunities to make everyone better off. This statement best represents this economic concept: a. Markets move toward equilibrium. *b. Resources should be used as efficiently as possible to achieve society's goals. c. Markets usually lead to efficiency. d. When markets don't achieve efficiency, government intervention can improve society's welfare.
18. If an economy is producing a level of output that is on its production possibility
frontier, the economy has: a. idle resources. b. idle resources but is using resources efficiently. c. no idle resources but is using resources inefficiently. *d. no idle resources and is using resources efficiently.
19. One of the controversies surrounding America's energy markets is the trade-off
between energy production and clean air. Assuming clean air has value, the United States will be on its production possibility frontier if and only if: a. resources used to produce clean air and energy are not being fully utilized. b. pollution is eliminated. c. the price of energy is relatively low. *d. resources used to produce clean air and energy are being fully utilized.
20. If an economy is producing at a point on its production possibilities frontier: a. it is efficient in production and allocation. *b. it is efficient in production but not necessarily in allocation. c. it is efficient in allocation but not necessarily in production. d. it is not necessarily efficient in production or allocation.
21. All points on the production possibility frontier are: *a. efficient production points. b. inefficient production points. c. infeasible production points. d. economic growth.
22. All points outside the production possibility frontier are: a. efficient production points. b. inefficient production points. *c. infeasible production points. d. economic growth.
23. In terms of the production possibility frontier, inefficient use of available
resources is shown by a(n): a. increase in the labor force growth rate. b. movement from one point to another along the production possibility frontier. c. inward shift of the production possibility frontier due to the lack of opportunity. *d. point inside the production possibility frontier.
24. Efficient production exists when the economy is: a. operating underneath its production possibility frontier. *b. operating on its production possibility frontier. c. operating outside its production possibility frontier. d. moving beyond its production possibility frontier.
25. If an economy has to sacrifice only one unit of good X for each unit of good Y
produced throughout the relevant range, then its production possibility frontier has a(n): a. zero slope. *b. constant, negative slope. c. increasing, negative slope. d. decreasing, negative slope.
26. A production possibility frontier that is a straight line sloping down from left to
right would suggest that: a. more of both goods could be produced moving along the frontier. b. the two products must have the same price. *c. the opportunity costs of the products are constant. d. there are no opportunity costs.
27. In movement along a production possibility frontier, the opportunity cost to
society of getting more of one good: a. is constant. b. is measured in dollar terms.
*c. is measured by the amount of the other good that must be given up. d. usually decreases.
28. If an economy has to sacrifice increasing amounts of good X for each unit of
good Y produced, then its production possibility frontier is: *a. bowed out from the origin. b. bowed in toward the origin. c. a straight line. d. a vertical line.
29. The fact that a society's production possibility frontier is bowed out or concave
to the origin of a graph demonstrates the law of: *a. increasing opportunity cost. b. decreasing opportunity cost. c. constant opportunity cost. d. concave opportunity cost.
30. The economy's factors of production are not equally suitable for producing
different types of goods. This principle generates: a. economic growth. b. technical efficiency. c. underuse of resources. *d. the law of increasing opportunity cost.
31. The production possibility frontier is bowed out from the origin because: *a. resources are not equally suited for the production of both goods. b. resources are scarce. c. economic growth leads to inefficiency. d. resources are inefficiently used.
32. The opportunity cost of production: a. is the price of a good. *b. is what you give up to produce the good. c. decreases as production increases. d. is what you gain by producing the good.
33. If Poland decides to increase the production of steel—and decrease the
production of vodka—the bowed-out production possibility frontier would suggest that there will be a(n) ________ opportunity cost of producing more steel.
*a. increasing b. decreasing c. nonexistent d. unchanged
34. Economists usually make the assumption that production is subject to
increasing opportunity costs because: a. higher production usually results in more inflation. *b. not all resources are equally suited to producing every good. c. individuals desire constantly increasing opportunities to make themselves better off. d. if production is efficient, it is not possible to increase the production of all goods simultaneously.
35. If the production possibility frontier is a straight line, which statement is true? *a. Opportunity costs are constant. b. The firm faces increasing costs. c. The firm faces decreasing costs. d. There is no trade-off between the two goods represented.
36.
Reference: Ref 2-1
(Table: Trade-off of Study Time and Leisure Time) Look at the Table: Trade-off of Study Time and Leisure Time. A student sleeps 8 hours per day and divides the remaining time between study time and leisure time. The table shows the combinations of study and leisure time that can be produced in the 16 waking hours of each day. If a student decides to consume one additional hour of leisure time, how many hours of study time must be given up? a. 4 b. 0.25 *c. 1 d. 16
37.
Reference: Ref 2-1
(Table: Trade-off of Study Time and Leisure Time) Look at the Table: Trade-off of Study Time and Leisure Time. A student sleeps 8 hours per day and divides the
remaining time between study and leisure time. Suppose this student is studying 4 hours and spending 10 hours doing leisure activities. What is true about this allocation of his scarce resources? a. This point is outside the production possibility frontier. *b. This point is inside the production possibility frontier. c. This point is on the production possibility frontier. d. This point is both efficient and feasible.
38.
Reference: Ref 2-1
(Table: Trade-off of Study Time and Leisure Time) Look at the Table: Trade-off of Study Time and Leisure Time. A student sleeps 8 hours per day and divides the remaining time between study time and leisure time. The table shows the combinations of study and leisure time that can be produced in the 16 waking hours of each day. Suppose the student completes a speed-reading course that allows him to do the same amount of studying in half as many hours. Which of the following is now true of his opportunity costs? a. The opportunity cost of leisure has increased. b. The opportunity cost of studying has increased. *c. The opportunity cost of leisure has decreased. d. There is no change in the opportunity costs.
39. If a production possibility frontier is a straight line, it tells us that the opportunity
cost of producing one more unit of good X is a(n): a. increasing amount of good Y. b. decreasing amount of good Y. c. equal to the inverse of the amount of good Y. *d. a constant amount of good Y.
40. If Farmer Sam MacDonald can produce 200 pounds of cabbages and no
potatoes, or no cabbages and 100 pounds of potatoes, and if he faces a linear production possibility frontier for his farm, the opportunity cost of producing an additional pound of potatoes is ________ pound(s) of cabbage. a. 1/2 *b. 2 c. 100 d. 200
41. If Farmer Sam MacDonald can produce 200 pounds of cabbages and no
potatoes, or no cabbages and 100 pounds of potatoes, and if he faces a linear production possibility frontier for his farm, the opportunity cost of producing an additional pound of cabbage is ________ pound(s) of potatoes. *a. 1/2
b. 2 c. 100 d. 200
42. The slope of a typical production possibility frontier is: a. 0. b. vertical. c. positive. *d. negative.
43. Figure: Sugar and Freight Trains
Reference: Ref 2-2
(Figure: Sugar and Freight Trains) Look at the Figure: Sugar and Freight Trains. Suppose the economy is operating at point B. The opportunity cost of producing the third freight train would be: a. 6 tons of sugar. b. 19 tons of sugar. *c. 45 tons of sugar. d. 80 tons of sugar.
44. Figure: Sugar and Freight Trains
Reference: Ref 2-2
(Figure: Sugar and Freight Trains) Look at the Figure: Sugar and Freight Trains. Suppose the economy is operating at point C. The opportunity cost of producing the fourth freight train would be: a. 19 tons of sugar. b. 45 tons of sugar. *c. 80 tons of sugar. d. 3 freight trains.
45. Figure: Consumer and Capital Goods
Reference: Ref 2-3
(Figure: Consumer and Capital Goods) Look at the Figure: Consumer and Capital Goods. The movement from Curve 1 to Curve 2 indicates: *a. economic growth. b. a change from unemployment to full employment. c. a decrease in the level of technology. d. instability.
46. Figure: Consumer and Capital Goods
Reference: Ref 2-3
(Figure: Consumer and Capital Goods) Look at the Figure: Consumer and Capital Goods. Point Z: *a. is unattainable, all other things unchanged. b. is attainable if the economy is able to reach full employment. c. is attainable if the quantity and/or quality of factors decreases. d. will be attained as soon as the economy becomes efficient and moves to curve 2.
47. Technological improvements will: a. leave the production possibility frontier unchanged. b. shift the production possibility frontier inward. *c. shift the production possibility frontier outward. d. necessarily lead to increased unemployment.
48. The production possibility frontier will shift outward for which reason? a. a decrease in the labor force b. an upgrade of capital to the best available technology *c. better technology that improves worker productivity d. a decrease in the unemployment rate
49. The production possibility frontier will shift outward for all of the following
reasons EXCEPT an:
*a. increase in the unemployment rate. b. increase in the labor force. c. improvement in technology. d. increase in worker productivity.
50. The effect of an increase in productive inputs such as labor and capital can be
shown by a(n): a. point inside of the production possibility frontier. *b. outward shift of the production possibility frontier. c. movement from one point to another along the production possibility frontier. d. inward shift of the production possibility frontier.
51. The effect of a tremendous natural disaster can be shown by a(n): a. point inside of the production possibility frontier. b. outward shift of the production possibility frontier. c. movement from one point to another along the production possibility frontier. *d. inward shift of the production possibility frontier.
52. An inward shift in the U.S. economy's production possibility frontier could
represent which? *a. U.S. workers moving to Canada b. U.S. workers moving from New Jersey to Massachusetts c. U.S. economic growth d. U.S. economic growth as workers move to different states
53. Suppose Indiana produces only steel and corn, with fixed amounts of land,
labor, and capital resources. Which of the following best creates potential economic growth? a. The unemployment rate in Indiana rises from 5% to 6%. b. The Midwestern United States has a devastating drought. *c. The percentage of Indiana residents with a college degree rises from 25% to 30%. d. The United States imports more and more low-cost steel from Asian countries.
54. The U.S. production possibility frontier would ________ if all computers using
Microsoft operating systems contracted a virus that deleted all information on those computers. *a. shift in
b. shift out c. not change d. cannot be determined from the information provided
55. The U.S. production possibility frontier will ________ if there is a large influx of
immigrants. a. shift in *b. shift out c. not change d. cannot be determined from the information provided
56. In Kessy's old kitchen, he could bake 10 cookies or mix 15 glasses of lemonade
in one day. Now Kessy has a larger oven and refrigerator. How does this affect his production possibility frontier? *a. It shifts out his production possibility frontier. b. It shifts in his production possibility frontier. c. He will not be efficient. d. He will not be able to produce as much as before.
57. Figure: Bicycles and Radishes II
Reference: Ref 2-4
(Figure: Bicycles and Radishes II) Look at the Figure: Bicycles and Radishes II. The country depicted in this figure is operating at point M. It could achieve production at point I only if it: a. used its resources more efficiently. b. devoted more resources to radish production. c. devoted more resources to bicycle production. *d. increased the quantities of capital, natural resources, or labor available or improved its technology.
58. The process observed when an economy's production possibility frontier is
shifted outward is: a. comparative advantage. *b. economic growth. c. full employment. d. specialization.
59. Increases in resources or improvements in technology will tend to cause a
society's production possibility frontier to: a. shift inward to the left. *b. shift outward to the right. c. remain unchanged. d. become vertical.
60. Technological improvements will: a. leave the production possibility frontier unchanged. b. shift the production possibility frontier inward. *c. shift the production possibility frontier outward. d. necessarily lead to increased unemployment.
61. Abe starts exercising regularly, and after a few months he can do twice as much
of everything—in a single day Abe can now make 10 hamburgers or 8 milkshakes rather than the 5 hamburgers and 4 milkshakes he made in the past. We now know that Abe's production possibility frontier has: *a. shifted right, but his opportunity costs of making milkshakes are unchanged. b. shifted right, but his opportunity costs of making milkshakes have decreased. c. not changed, but his opportunity costs of making milkshakes have increased. d. not changed, but his opportunity costs of making milkshakes have decreased.
62. When a nation experiences economic growth: *a. its production possibility frontier shifts outward. b. its production possibility frontier shifts inward. c. it has been able to reach full employment. d. it has moved to a more consumer-oriented position on its production possibility frontier.
63.
Reference:
Ref 2-5
(Table: Production Possibilities Schedule I) Look at the Table: Production Possibilities Schedule I. If the economy produces 2 units of consumer goods per period, it also can produce at most ________ units of capital goods per period.
a. 30 b. 28 *c. 24 d. 18
64.
Reference: Ref 2-5
(Table: Production Possibilities Schedule I) Look at the Table: Production Possibilities Schedule I. If the economy produces 10 units of capital goods per period, it also can produce at most ________ units of consumer goods per period. a. 5 *b. 4 c. 3 d. 2
65.
Reference: Ref 2-5
(Table: Production Possibilities Schedule I) Look at the Table: Production Possibilities Schedule I. The opportunity cost of producing the fourth unit of consumer goods is ________ units of capital goods. a. 2 b. 4 c. 6 *d. 8
66. Figure: Guns and Butter
Reference: Ref 2-6
(Figure: Guns and Butter) Look at the Figure: Guns and Butter. On this figure, points A, B, E, and F:
*a. indicate combinations of guns and butter that society can produce using all of its factors efficiently. b. show that the opportunity cost of more guns increases but that of more butter decreases. c. indicate that society wants butter more than it wants guns. d. indicate constant costs for guns and increasing costs for butter.
67. Figure: Guns and Butter
Reference: Ref 2-6
(Figure: Guns and Butter) Look at the Figure: Guns and Butter. This production possibility frontier is: *a. bowed out from the origin because of increasing opportunity costs. b. bowed in toward the origin because of increasing opportunity costs. c. bowed in toward the origin because of constant costs of guns and butter. d. linear because of constant costs.
68. Figure: Guns and Butter
Reference: Ref 2-6
(Figure: Guns and Butter) Look at the Figure: Guns and Butter. If the economy were operating at point B, producing 16 guns and 12 pounds of butter per period, a decision to move to point E and produce 18 pounds of butter: a. indicates you can have more butter and guns simultaneously. b. makes it clear that this economy experiences decreasing opportunity costs. *c. involves a loss of 8 guns per period. d. involves a loss of 4 guns per period.
69. Figure: Guns and Butter
Reference: Ref 2-6
(Figure: Guns and Butter) Look at the Figure: Guns and Butter. The combination of guns and butter at point H: a. can be attained but would cost too much. *b. cannot be attained, given the level of technology and the factors of production available.
c. has no meaning, since it does not relate to the preferences of consumers. d. is attainable but would increase unemployment.
70. Figure: Guns and Butter
Reference: Ref 2-6
(Figure: Guns and Butter) Look at the Figure: Guns and Butter. Suppose the economy produced 8 guns and 12 pounds of butter per period. *a. This is a possible choice but is inefficient. b. The notion of increasing opportunity cost is invalidated. c. The economy is still efficient but has made a decision not to buy as much as it could. d. Something must be done to reduce the amount of employment.
71.
Reference: Ref 2-7
(Table: Production Possibilities Schedule II) Look at the Table: Production Possibilities Schedule II. If the economy is producing at alternative X, the opportunity cost of producing at Y instead of X is ________ units of consumer goods per period. a. 0 *b. 6 c. 8 d. 14
72.
Reference: Ref 2-7
(Table: Production Possibilities Schedule II) Look at the Table: Production Possibilities Schedule II. If an economy is producing at alternative W, the opportunity cost of producing at X is ________ unit(s) of consumer goods per period. a. 0 b. 1 *c. 4 d. 18
73.
Reference: Ref 2-7
(Table: Production Possibilities Schedule II) Look at the Figure: Production Possibilities Schedule II. The production of 14 units of consumer goods and 1 unit of capital goods per period would:
a. result in full employment. b. result in no unused resources. *c. result in some unused or inefficiently used resources. d. increase economic growth.
74. Figure: Strawberries and Submarines
Reference: Ref 2-8
(Figure: Strawberries and Submarines) Look at the Figure: Strawberries and Submarines. Suppose the economy is operating at point G. This implies that: a. the economy can move to a point such as C only if it improves its technology. *b. the economy has unemployment and/or inefficiently allocates resources. c. the economy lacks the resources to achieve a combination such as C. d. people in this economy don't really like strawberries and submarines.
75. Figure: Strawberries and Submarines
Reference: Ref 2-8
(Figure: Strawberries and Submarines) Look at the Figure: Strawberries and Submarines. As the economy moves from point A toward point D, it will find that the opportunity cost of each additional submarine:
a. falls. *b. rises. c. remains unchanged. d. doubles.
76. Figure: Strawberries and Submarines
Reference: Ref 2-8
(Figure: Strawberries and Submarines) Look at the Figure: Strawberries and Submarines. Suppose the economy now operates at point C. Moving to point E would require that the economy: a. achieve full employment and an efficient allocation of resources. *b. eliminate its production of strawberries. c. reduce its production of submarines. d. improve its technology or increase the quantities of factors of production it has.
77. Figure: Production Possibility Frontier Curve for Tealand
Reference: Ref 2-9
(Figure: Production Possibility Frontier for Tealand) Look at the Figure: Production Possibility Frontier for Tealand. In the figure, if Tealand is producing 10 million scones and 10 million cups of tea (point A), we know that the economy: a. is using its resources efficiently. *b. is using its resources inefficiently. c. is fully employing its resources. d. has found new resources.
78. Figure: Production Possibility Frontier Curve for Tealand
Reference: Ref 2-9
(Figure: Production Possibility Frontier for Tealand) Look at the Figure: Production Possibility Frontier for Tealand. In the figure, Tealand is producing at point C on its production possibility frontier. What is the opportunity cost in Tealand of increasing the production of tea from 20 million cups to 30 million cups? a. 10 million cups of tea *b. 5 million scones c. 10 million scones d. The answer is impossible to determine from the information given. (per style guidelines, this type of answer is not allowed. Please rewrite).
79. Figure: Production Possibility Frontier Curve for Tealand
Reference: Ref 2-9
(Figure: Production Possibility Frontier for Tealand) Look at the Figure: Production Possibility Frontier for Tealand. In the figure, Tealand can produce at point E only if the government: a. eliminates unemployment. b. raises taxes. *c. permits more immigration. d. increases the cost of production by decreasing the use of technology.
80. Figure: Tom's Production Possibilities
Reference: Ref 2-10
(Figure: Tom's Production Possibilities) Look at the Figure: Tom's Production
Possibilities. In the figure, which point or points represent an efficient combination of coconuts and fish that Tom could choose to produce? a. A only *b. A and B c. B and C d. D only
81. Figure: Tom's Production Possibilities
Reference: Ref 2-10
(Figure: Tom's Production Possibilities) Look at the Figure: Tom's Production Possibilities. In the figure, which point or points would represent an inefficient combination of coconuts and fish for Tom to produce? a. A only b. A and B *c. C only d. B and D
82. Figure: Tom's Production Possibilities
Reference: Ref 2-10
(Figure: Tom's Production Possibilities) Look at the Figure: Tom's Production Possibilities. In the figure, which point or points represent a combination of coconuts and fish not feasible for Tom to produce at this time? a. A only b. A and B c. B and C *d. D only
83. Figure: Tom's Production Possibilities
Reference: Ref 2-10
(Figure: Tom's Production Possibilities) Look at the Figure: Tom's Production Possibilities. In the figure, which of the point or points represents the combination of coconuts and fish feasible for Tom to produce at this time? a. A only b. A and B *c. A, B, and C d. D only
84. Figure: Tom's Production Possibilities
Reference: Ref 2-10
(Figure: Tom's Production Possibilities) Look at the Figure: Tom's Production Possibilities. In the figure, the opportunity cost for Tom to move from point A on the curve to point B is: a. 10 coconuts. b. 10 fish. *c. 5 coconuts. d. 5 fish.
85. Figure: Tom's Production Possibilities
Reference: Ref 2-10
(Figure: Tom's Production Possibilities) Look at the Figure: Tom's Production Possibilities. In the figure, the opportunity cost for Tom to move from point B on the curve to point A is: a. 10 coconuts. *b. 10 fish. c. 5 coconuts. d. 5 fish.
86. Figure: Tom's Production Possibilities
Reference: Ref 2-10
(Figure: Tom's Production Possibilities) Look at the Figure: Tom's Production Possibilities. In the figure, the opportunity cost for Tom to move from point C on the curve to point A is: a. 10 coconuts. b. 30 fish. c. 5 coconuts. *d. There is no opportunity cost in terms of fish.
87. Figure: Wine and Wheat
Reference: Ref 2-11
(Figure: Wine and Wheat) Look at the Figure: Wine and Wheat. If this economy is producing 12 tons of wheat and 9,000 bottles of wine, we know the economy: *a. is using its resources efficiently. b. is using its resources inefficiently. c. is producing at an unattainable point. d. has unemployment.
88. Figure: Wine and Wheat
Reference: Ref 2-11
(Figure: Wine and Wheat) Look at the Figure: Wine and Wheat. If this economy is producing at point A, we know the economy is: a. using its resources efficiently. *b. using its resources inefficiently. c. producing at an unattainable point. d. trading with another country.
89. Figure: Wine and Wheat
Reference: Ref 2-11
(Figure: Wine and Wheat) Look at the Figure: Wine and Wheat. If this economy is producing at point A and it wants to produce at point B, it needs to:
a. trade with another country. b. increase its resources. c. decrease production. *d. use its existing resources efficiently.
90. Figure: Wine and Wheat
Reference: Ref 2-11
(Figure: Wine and Wheat) Look at the Figure: Wine and Wheat. What is the opportunity cost of moving from only producing wheat to only producing wine? a. 3 tons of wheat b. 6 tons of wheat c. 9 tons of wheat *d. 15 tons of wheat
91. Figure: Wine and Wheat
Reference: Ref 2-11
(Figure: Wine and Wheat) Look at the Figure: Wine and Wheat. What is the opportunity cost of moving from only producing wheat to producing at point D? *a. 3 tons of wheat b. 6 tons of wheat c. 9 tons of wheat d. 15 tons of wheat
92. Figure: Wine and Wheat
Reference: Ref 2-11
(Figure: Wine and Wheat) Look at the Figure: Wine and Wheat. If this economy is producing on the production possibility frontier, what would allow it to produce at point C? *a. an improvement in technology b. a decrease in resources c. a decrease in production d. the elimination of unemployment
93.
Reference:
Ref 2-12
(Table: Production Possibilities Schedule I) Look at the Table: Production Possibilities Schedule I. If the economy produces 4 units of consumer goods per period, it also can produce at most ________ units of capital goods per period. a. 30 b. 28 *c. 10 d. 18
94.
Reference: Ref 2-12
(Table: Production Possibilities Schedule I) Look at the Table: Production Possibilities Schedule I. If the economy produces 24 units of capital goods per period, it also can produce at most ________ units of consumer goods per period. a. 5 b. 4 c. 3 *d. 2
95.
Reference: Ref 2-12
(Table: Production Possibilities Schedule I) Look at the Table: Production Possibilities Schedule I. The opportunity cost of producing the third unit of consumer goods is ________ units of capital goods. a. 2 b. 4 *c. 6 d. 8
96. Figure: Production Possibility Frontier
Reference: Ref 2-13
(Figure: Production Possibility Frontier) Look at the Figure: Production Possibilities Frontier. Points A, B, E, and F: *a. indicate combinations of cars and computers that society can produce using all of its resources efficiently.
b. show that the opportunity cost of more cars increases, but that of more computers decreases. c. indicate that society wants computers more than cars. d. indicate constant costs for cars and increasing costs for computers.
97. Figure: Production Possibility Frontier
Reference: Ref 2-13
(Figure: Production Possibility Frontier) Look at the Figure: Production Possibilities Frontier. This production possibility frontier is: *a. bowed out from the origin because of increasing opportunity costs. b. bowed in toward the origin because of increasing opportunity costs. c. bowed in toward the origin because of constant cost of cars and computers. d. linear because of constant costs.
98. Figure: Production Possibility Frontier
Reference: Ref 2-13
(Figure: Production Possibility Frontier) Look at the Figure: Production Possibilities Frontier. If the economy is operating at point B, producing 16 cars and 12 computers per period, a decision to move to point E and produce 18 computers: a. indicates you can have more computers and cars simultaneously. b. makes it clear that this economy has decreasing opportunity costs. *c. involves a loss of 8 cars per period. d. involves a loss of 4 cars per period.
99. Figure: Production Possibility Frontier
Reference: Ref 2-13
(Figure: Production Possibility Frontier) Look at the Figure: Production Possibilities Frontier. The combination of cars and computers at point H: a. can be attained but would cost too much. *b. cannot be attained given the level of technology and the resources available. c. has no meaning, since it is not what consumers want. d. is attainable but would increase unemployment.
100. Figure: Production Possibility Frontier
Reference: Ref 2-13
(Figure: Production Possibility Frontier) Look at the Figure: Production Possibilities Frontier. If the economy is producing 8 cars and 12 computers per period: *a. this is an attainable choice but involves unemployment or inefficiency. b. the notion of increasing opportunity cost is invalidated. c. the economy is still efficient but has made a decision not to buy as much as it could. d. something must be done to reduce the amount of employment.
101. Figure: Production Possibility Frontier
Reference: Ref 2-13
(Figure: Production Possibility Frontier) Look at the Figure: Production Possibilities Frontier. A movement from producing 12 cars and 16 computers per period to point B means a: *a. loss of 4 computers and a gain of 4 cars per period. b. gain of 2 cars and a loss of 4 computers per period. c. gain of 4 cars and a loss of 6 computers per period. d. loss of 2 cars and a gain of 4 computers per period.
102. Figure: Production Possibility Frontier
Reference: Ref 2-13
(Figure: Production Possibility Frontier) Look at the Figure: Production Possibilities Frontier. Which of the following is not the maximum amounts of cars and computers this economy can produce? a. 18 cars and 0 computers per period b. 0 cars and 20 computers per period c. 16 cars and 12 computers per period *d. 0 cars and 18 computers per period
103.
Reference: Ref 2-14
(Table: Production Possibilities Schedule II) Look at the Table: Production Possibilities Schedule II. If the economy is producing at alternative Y, the opportunity cost to it of producing at Z is ________ units of consumer goods per period. a. 1 b. 6 *c. 8 d. 14
104.
Reference: Ref 2-14
(Table: Production Possibilities Schedule II) Look at the Table: Production Possibilities Schedule II. If an economy is producing at alternative X, the opportunity cost to it of producing at Y is ________ units of consumer goods per period. a. 2 b. 1 *c. 6 d. 18
105.
Reference: Ref 2-14
(Table: Production Possibilities Schedule II) Look at the Table: Production Possibilities Schedule II. The production of 8 units of consumer goods and 2 units of capital goods per period would: a. result in full employment. b. result in no unused resources. *c. result in some unused or inefficiently used resources. d. increase economic growth.
106. Figure: Bicycles and Radishes I
Reference: Ref 2-15
(Figure: Bicycles and Radishes I) Look at the Figure: Bicycles and Radishes I. It shows the production possibility frontiers for two countries that produce only radishes and bicycles. The axes of both graphs are measured in equivalent units.
Country A is now operating at point M, and Country B is now operating at point N. The opportunity cost of producing an additional ton of radishes would be greater in: a. Country A. *b. Country B. c. neither; the opportunity cost would be the same in both countries. d. It is not possible to determine the opportunity costs because it is impossible to determine the slope of the nonlinear production possibility frontiers.
107. Figure: Bicycles and Radishes I
Reference: Ref 2-15
(Figure: Bicycles and Radishes I) Look at the Figure: Bicycles and Radishes I. It shows production possibility frontiers for two countries that produce only radishes and bicycles. The axes of both graphs are measured in equivalent units. Country A is now operating at point M, and Country B is now operating at point N. Suppose country A discovered a new technology that greatly increased its ability to produce bicycles. This would: a. lower the opportunity cost of producing radishes in Country A. *b. increase the opportunity cost of producing radishes in Country A. c. have no effect on the opportunity cost of producing radishes in Country A. d. increase the opportunity cost of producing radishes in Country B.
108. Figure: Strawberries and Submarines II
Reference: Ref 2-16
(Figure: Strawberries and Submarines II) Look at the Figure: Strawberries and Submarines II. Point F is: *a. unattainable, all other things unchanged. b. attainable if the quantity and/or quality of factors decreases. c. attainable if the economy is able to reach full employment. d. feasible but not efficient.
109. Figure: Strawberries and Submarines II
Reference: Ref 2-16
(Figure: Strawberries and Submarines II) Look at the Figure: Strawberries and Submarines II. Suppose the economy is now operating at point A. The first submarine, which is achieved at point B, would have an opportunity cost of ________ million tons of strawberries. *a. 50 b. 150 c. 400 d. 950
110. Figure: Strawberries and Submarines II
Reference: Ref 2-16
(Figure: Strawberries and Submarines II) Look at the Figure: Strawberries and Submarines II. Assume that the economy is now operating at point A. The opportunity cost of moving to point C is equal to ________ million tons of strawberries: a. 800 *b. 200 c. 2 d. 50
111. Figure: Strawberries and Submarines II
Reference: Ref 2-16
(Figure: Strawberries and Submarines II) Look at the Figure: Strawberries and Submarines II. The downward slope of the production possibility frontier implies that resources: a. must be used efficiently. *b. are scarce. c. should not be wasted. d. should be allocated so that approximately equal amounts of both goods are produced.
112. Figure: Strawberries and Submarines II
Reference: Ref 2-16
(Figure: Strawberries and Submarines II) Look at the Figure: Strawberries and Submarines II. Suppose the economy is now operating at point B. Achieving production at point F would require that the economy: a. achieve full employment and an efficient allocation of resources. b. reduce its production of strawberries. c. reduce its production of submarines. *d. improve its technology or increase the amount of resources it has.
113. Figure: Consumer and Capital Goods
Reference: Ref 2-17
(Figure: Consumer and Capital Goods) Look at the Figure: Consumer and Capital Goods. If the economy is operating at point Y and its relevant production possibility frontier is Curve 1, this means that: *a. the economy is at full employment and is efficient. b. the economy is less than fully employed. c. the economy is not efficient. d. economic growth is not possible in the future.
114. Figure: Consumer and Capital Goods
Reference: Ref 2-17
(Figure: Consumer and Capital Goods) Look at the Figure: Consumer and Capital Goods. The movement from Curve 1 to Curve 2 indicates: *a. a growing ability of the economy to produce capital and consumer goods. b. going from unemployment to full employment. c. a decrease in the factors of production. d. a shift of the production possibility frontier toward producing fewer goods.
115. Figure: Consumer and Capital Goods
Reference: Ref 2-17
(Figure: Consumer and Capital Goods) Look at the Figure: Consumer and Capital Goods. Technological improvements will likely: a. shift the production possibility frontier inward to Curve 1. *b. shift the production possibility frontier outward to Curve 2. c. lead to increased unemployment. d. leave the production possibility frontier unchanged.
116. On any given production possibility frontier, we see the minimum quantity of one good that can be produced for any given production of the other. a. True *b. False
117. A typical, bowed-out production possibility frontier between two goods—guns and butter—shows that the opportunity cost of butter in terms of guns increases as more butter is produced. This implies that the opportunity cost of guns in terms of butter decreases as more guns are produced. a. True *b. False
118. Suppose residents of Montana operate on their production possibility frontier and want to see increased wheat production as well as an increase in the production of fly-fishing rods. According to the production possibility frontier, this cannot happen without new resources or technological improvement. *a. True b. False
119. Consider a point within a production possibility frontier for a simple economy that produces only two goods, X and Y. Why is this point described as feasible but not efficient? Correct Answer:
Any point that lies within the frontier is feasible. This simply means that the economy has the resources and technology to produce this combination of goods. However, it is not efficient because more of one good could be produced without sacrificing any of the other good. In fact, more of both goods could be produced by moving to a point on the frontier. 120. Explain why economists believe that in reality, production possibility frontiers have a bowed-out curvature rather than a straight line.
Correct Answer:
As an economy produces more and more of one good, the opportunity cost begins to rise. One reason for this principle is that resources (land, labor, capital) are not perfectly substitutable for producing all goods. Because some resources are better suited to producing good X (and ill-suited to producing good Y), they will be the first employed in the production of the first unit of good X. This creates a large increase in production of good X at a cost of very little lost production of good Y. However, as the production of good X increases, it is necessary to use resources that were very well-suited to producing good Y and not very productive in producing good X. This creates a very small increase in production of good X but at a very large cost in the loss of production of good Y. 121. Leaders of a small town are tired of looking at a vacant and dilapidated warehouse that sits on a prime piece of real estate. The town finds an investor who purchases the warehouse and promises to renovate the old building and build condominiums. Is this economic growth? Correct Answer:
A politician would probably tell you that it is economic growth, but an economist might disagree. The land and building are currently unproductive. You might imagine that this indicates the town is operating inside the production possibility frontier. When the land is purchased and made productive again, the town moves out toward the frontier, but the frontier itself does not move outward. Simply put, this is not economic growth, but it is a more efficient use of idle resources. 122. Explain how technological progress is a source for economic growth. Correct Answer:
Suppose a nation's factors of production (land, labor, capital, and human capital) are fixed, but our collective technology improves. This means that we can produce more goods and services with a fixed quantity of our economic resources. If we can produce more with the same amount of resources, our production possibility frontier must increase, or shift outward.
123. Reference: Ref 2-18 (Table: Crab and Cake Production in Chesapeake) Look at the Table: Crab and Cake Production in Chesapeake. What is the opportunity cost of
increasing the production of crabs from zero to 100? What is the opportunity cost of increasing the production of crabs from 400 to 500? Explain the difference in your answers. Correct Answer:
When the nation increased production from zero to 100 crabs, the cost was only 50 cakes. But when Chesapeake increased crab production from 400 to 500, the cost was a much larger 250 cakes. In other words, the opportunity cost of crab production rose as more crabs were produced. The reason is that resources (labor, land, capital, and human capital) are not perfectly substituted between crab production and cake production. A unit of capital like a boat is very good at producing crabs but terrible at producing cakes. A square mile of ocean is very good at producing crabs but useless at producing cakes. Because resources can't easily be switched between productive uses, opportunity cost rises. 124. Reference: Ref 2-18 (Table: Crab and Cake Production in Chesapeake) Look at the Table: Crab and Cake Production in Chesapeake. The table shows the maximum annual output combinations of crabs and cakes. Given the scarce resources and limited technology, as Chesapeake uses more resources to produce cakes, fewer resources are available to produce crabs. Can this nation produce 200 crabs and 500 cakes? Is this efficient? Explain. Correct Answer:
Yes, Chesapeake can produce 200 crabs and 500 cakes. We know this because it can produce 200 crabs and 600 cakes. This is not efficient. If it produces only 500 cakes, there must be idle resources in the economy, and the nation is operating inside the production possibility frontier. Without losing any crab production, the nation could produce 100 more cakes and move out to the production possibility frontier.
125. Smallville has a linear production possibility frontier in the production of good X
and good Y. It can produce 6 of X per hour or 8 of Y per hour. Suppose it has 240 hours of labor and divides labor hours equally between good X production and good Y production. What is the maximum amount of good Y it can produce? *a. 960 Y b. 30 of Y c. 14 of Y d. 6 of Y
126. If an economy is efficient, this means: a. all goods are produced at their maximum quantities. *b. all opportunities to make people better off without making other people worse off have been taken. c. more resources have been used to produce specific consumer goods than producer goods. d. prices are the lowest they can possibly be.
127. After a great holiday season when it opened its doors for business regularly at
6 A.M., a local retail store decides to continue to open at 6 A.M., even though many customers plan on arriving later to do their shopping. Such a plan by the retail store is: a. efficient, since it worked previously. *b. inefficient, since most customers will revert to their normal shopping behavior after the holidays are over. c. efficient, since it means that workers do not have to change their hours. d. most likely to lead to lower operating costs for the store.
128. If an economy produces the desired mix of goods from its available resources,
then this mix of goods is: *a. allocatively efficient. b. both productively and allocatively efficient. c. productively efficient. d. neither productively nor allocatively efficient.
129. Alison has a linear production possibility frontier in the production of bracelets
and necklaces. In one hour, she can produce 5 bracelets or 10 necklaces. What is the opportunity cost for her to make one necklace? a. 5 bracelets b. 10 necklaces *c. 1/2 a bracelet d. 2 necklaces
130. Alexander has a straight-line, or linear, production possibility frontier when he
produces soybeans and corn. If he uses all of his resources to grow soybeans, he can produce 200 bushels of soybeans; if he uses all of his resources for corn production, he can produce 400 bushels of corn. Which of the following combinations of corn and soybeans are NOT possible for him to produce? a. 200 bushels of soybeans and zero bushels of corn *b. 600 bushels of corn and 200 bushels of soybeans c. 400 bushels of corn and zero bushels of soybeans d. 100 bushels of soybeans and 200 bushels of corn
131. Frances has a linear production possibility frontier when she produces
tomatoes and green beans. If she uses all of her resources, she can produce 400 bushels of tomatoes or 800 bushels of green beans. Which of the following combinations is NOT efficient for Frances?
a. 400 bushels of tomatoes and zero bushels of green beans b. 200 bushels of tomatoes and 400 bushels of green beans *c. 200 bushels of tomatoes and 200 bushels of green beans d. 800 bushels of green beans and zero bushels of tomatoes
132. Scenario: Linear Production Possibility Frontier
Largetown has a linear production possibility frontier, and it produces socks and shirts with 80 hours of labor. The table shows the number of hours of labor necessary to produce one sock or one shirt.
Reference: Ref 2-19
(Scenario: Linear Production Possibility Frontier) Look at the Scenario: Linear Production Possibility Frontier. What is the maximum number of socks Largetown can produce? *a. 40 socks b. 20 socks c. 2 socks d. 4 socks
133. Scenario: Linear Production Possibility Frontier
Largetown has a linear production possibility frontier, and it produces socks and shirts with 80 hours of labor. The table shows the number of hours of labor necessary to produce one sock or one shirt.
Reference: Ref 2-19
(Scenario: Linear Production Possibility Frontier) Look at the Scenario: Linear Production Possibility Frontier. If Largetown decides to devote half of its labor time to the production of socks and half of the time to the production of shirts, what is the maximum number of socks and shirts it can produce? *a. 10 shirts and 20 socks b. 20 shirts and 10 socks c. 30 socks and 30 shirts d. 30 socks and zero shirts
134. Scenario: Linear Production Possibility Frontier
Largetown has a linear production possibility frontier, and it produces socks and shirts with 80 hours of labor. The table shows the number of hours of labor necessary to produce one sock or one shirt.
Reference: Ref 2-19
(Scenario: Linear Production Possibility Frontier) Look at the Scenario:Linear Production Possibility Frontier. What happens to the opportunity cost of producing shirts in Largetown if its labor resource decreases by 40 hours? a. The opportunity cost of producing shirts increases. b. The opportunity cost of producing shirts decreases. *c. The opportunity cost of producing shirts does not change. d. The opportunity cost may or may not change depending upon the number of units of socks it wishes to produce.
135. Scenario: Linear Production Possibility Frontier
Largetown has a linear production possibility frontier, and it produces socks and shirts with 80 hours of labor. The table shows the number of hours of labor necessary to produce one sock or one shirt.
Reference: Ref 2-19
(Scenario: Linear Production Possibility Frontier) Look at the Scenario: Linear Production Possibility Frontier. Which of the following combinations of shirts and socks is NOT a feasible option for Largetown to produce? a. 20 shirts and zero socks *b. 40 shirts and 40 socks c. 40 socks and zero shirts d. 10 shirts and 20 socks
136.
Reference: Ref 2-20
(Table: Production of Good Z and Good X in Urbanville) Look at the Table: Production of Good Z and Good X in Urbanville. If this represents the production possibility frontier and Urbanville is producing 5 of Z and 50 of X, then this combination is: *a. feasible but inefficient. b. feasible and efficient.
c. not feasible but efficient. d. neither feasible nor efficient.
137.
Reference: Ref 2-20
(Table: Production of Good Z and Good X in Urbanville) Look at the Table: Production of Good Z and Good X in Urbanville. Suppose this represents the production possibility frontier and Urbanville is currently producing 15 of Z and 45 of X. This combination is: a. both allocatively and productively efficient. *b. productively efficient. c. allocatively efficient. d. neither productively nor allocatively efficient.
138.
Reference: Ref 2-20
(Table: Production of Good Z and Good X in Urbanville) Look at the Table: Production of Good Z and Good X in Urbanville. If this represents the production possibility frontier and Urbanville is producing at combination C and moves to combination D, what is its opportunity cost of this move? *a. 15 of X b. 5 of Z c. 15 of Z d. 45 of X
139.
Reference: Ref 2-20
(Table: Production of Good Z and Good X in Urbanville) Look at the Table: Production of Good Z and Good X in Urbanville. If this represents the production possibility frontier and Urbanville is currently producing at combination F, what is the opportunity cost of a move to combination E? *a. 5 of Z b. 20 of Z c. 25 of X d. 0 of X
1. Specialization and trade usually lead to: a. lower economic growth. *b. the exchange of goods and services in markets. c. lower living standards. d. higher prices.
2. Which book illustrates the advantages of specialization using an eighteenth-
century pin factory? a. Free to Choose, by Milton Friedman *b. An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith c. Das Kapital, by Karl Marx d. The General Theory, by John Maynard Keynes
3. Who wrote An Inquiry into the Nature and Causes of the Wealth of Nations, a
book that many credit with establishing economics as a discipline? Change question? Correct answer is shown in preceding question. a. Karl Marx b. David Ricardo *c. Adam Smith d. John Maynard Keynes
4. Increases in total output realized when individuals specialize in particular tasks
and trade are known as: *a. the gains from trade. b. the profits obtained from sales of a good or service. c. marginal analysis. d. a trade-off.
5. Gains from trade arise because of: *a. specialization in production. b. specialization in consumption. c. marginal analysis. d. individual choice.
6. Gains from trade exist for: a. individuals only. b. states only. c. countries only. *d. individuals, states, and countries.
7. When the United States and Mexico trade: a. the United States will be worse off because wages in Mexico are so low. b. Mexico will be worse off because the United States is a stronger economic power. *c. both Mexico and the United States will be better off. d. both Mexico and the United States will be worse off.
8. If every individual were required to be self-sufficient: *a. living standards would fall. b. living standards for some individuals would fall, but for others they would rise. c. living standards would rise. d. the gains from trade would increase.
9. Specialization and trade should lead to all of the following EXCEPT: a. individuals learning specific skills and earning a salary. *b. a decrease in total economic output. c. higher living standards. d. the exchange of goods and services in markets.
10. The phrase “gains from trade” refers to the: a. profits obtained from sales of a good or service. *b. increase in total output that is realized when individuals specialize in particular tasks and trade with each other. c. gains that one obtains by taking advantage of an uninformed buyer and selling at a higher than average price. d. gains that one obtains by taking advantage of a temporary discount or “sale” price.
11. Individuals gain from trade because: *a. of specialization in production. b. they can sell at a lower price than they can buy at. c. self-sufficiency is efficient. d. of the principle of absolute advantage.
12. Specialization in production was the starting point for what book in economics
that many regard as the beginning of economics? *a. An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith
b. The General Theory, by John Maynard Keynes c. Das Kapital, by Karl Marx d. Free to Choose, by Milton Friedman
13. Two neighbors, Molly and Sandy, are separated by a white picket fence. Each
neighbor has a garden that grows tomatoes and peppers. How could Molly and Sandy gain from trade? a. Molly could trade tomatoes to Sandy in exchange for peppers if Molly was the more efficient grower of peppers. b. Sandy could trade tomatoes to Molly in exchange for peppers if Sandy was the more efficient grower of peppers. c. Sandy could trade peppers to Molly in exchange for tomatoes if Molly was the more efficient grower of peppers. *d. Molly could trade peppers to Sandy in exchange for tomatoes if Molly was the more efficient grower of peppers.
14. One parent picks up the child from day care while the other parent goes to the
grocery store and begins to make dinner. This is an example of which principle at work? a. Markets move toward equilibrium. b. Government policies can change spending. *c. There are gains from trade. d. Markets usually lead to efficiency.
15. Lena and Jess are roommates. Lena hates to clean the bathroom. Jess will
agree to clean the bathroom only if Lena vacuums the living room. This statement best represents this economic concept: a. The real cost of something is what you must give up to get it. b. “How much” is a decision at the margin. c. People usually exploit opportunities to make themselves better off. *d. There are gains from trade.
16. Nate and Dylan are brothers. They have to mow the lawn and clean their rooms
before they can go to the high school football game. Nate mows the lawn and Dylan picks up the rooms, and they make it to the football game on time. This statement best represents this economic concept: a. People usually exploit opportunities to make themselves better off. *b. There are gains from trade. c. Markets usually lead to efficiency. d. One person's spending is another person's income.
17. As long as people have different ________, everyone has a comparative
advantage in something. a. direct costs b. benefits c. utilities *d. opportunity costs
18. Because of trade, a country may: *a. consume outside its production possibility frontier. b. consume inside its production possibility frontier. c. find that its production possibility frontier will shift outward. d. avoid opportunity costs.
19. An economy is said to have a comparative advantage if it: a. can produce more of all goods than another economy. b. can produce less of all goods than another economy. c. has the highest cost for producing a particular good. *d. has the lowest cost for producing a particular good.
20. The economy that has the lowest cost for producing a particular good is said to
have a(n): a. technological advantage. *b. comparative advantage. c. production possibility frontier. d. increasing opportunity cost.
21. An economy is said to have a comparative advantage in the production of a
good if it can produce that good: a. with more resources than another economy. b. with a higher opportunity cost than another economy. c. outside its production possibilities curve. *d. at a lower opportunity cost than another economy.
22.
Reference: Ref 3-1
(Table: Fish and Coconut Production Possibilities) Look at the Table: Fish and
Coconut Production Possibilities. The table shows the maximum amount of fish and coconuts that Tom and Hank can produce if they produce only one good. Tom produces and consumes 9 fish and 2 coconuts, and Hank produces and consumes 3 fish and 2 coconuts. Now they decide to engage in trade. Which of the following statements is INCORRECT? *a. For both to become better off, each should specialize in the production of some good. However, since Hank is equally productive in both goods, it doesn't matter in which good each specializes. b. For both to become better off, each should specialize completely in the production of the good in which he has a comparative advantage. c. After trade it is possible for Tom to consume 9 fish and 2.5 coconuts and for Hank to consume 3 fish and 2.5 coconuts. d. For each individual, the consumption point after trade will lie outside that individual's production possibility frontier.
23. In one hour, the United States can produce 25 tons of steel or 250 automobiles.
In one hour, Japan can produce 30 tons of steel or 275 automobiles. This information implies that: a. Japan has a comparative advantage in the production of automobiles. b. the United States has an absolute advantage in the production of steel. c. Japan has a comparative advantage in the production of both goods. *d. the United States has a comparative advantage in the production of automobiles.
24.
Reference: Ref 3-2
(Table: Coffee and Salmon Production Possibilities) Look at the Table: Coffee and Salmon Production Possibilities. The table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. The opportunity cost of producing 1 unit of coffee for Brazil is: a. 2 salmon. b. 1/4 salmon. c. 1 salmon. *d. 1/2 salmon.
25.
Reference: Ref 3-2
(Table: Coffee and Salmon Production Possibilities) Look at the Table: Coffee and
Salmon Production Possibilities. The table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. Which of the statements is true? *a. Brazil has an absolute advantage in producing both coffee and salmon. b. Alaska has an absolute advantage in producing coffee only. c. Alaska has a comparative advantage in producing coffee. d. Brazil has a comparative advantage in producing salmon.
26.
Reference: Ref 3-2
(Table: Coffee and Salmon Production Possibilities) Look at the Table: Coffee and Salmon Production Possibilities. The table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. If each country specializes according to comparative advantage, total production of coffee will be _____ units, and total production of salmon will be ______ units. a. 10; 20 *b. 40; 10 c. 50; 30 d. 60; 20
27.
Reference: Ref 3-2
(Table: Coffee and Salmon Production Possibilities) Look at the Table: Coffee and Salmon Production Possibilities. The table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. Which of the following terms of trade would benefit both countries? a. 1 unit of salmon for 0.25 units of coffee b. 1 unit of salmon for 0.5 units of coffee *c. 1 unit of salmon for 1.5 units of coffee d. 1 unit of salmon for 2 units of coffee
28.
Reference: Ref 3-2
(Table: Coffee and Salmon Production Possibilities) Look at the Table: Coffee and Salmon Production Possibilities. The table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. The opportunity cost of producing 1 unit of salmon for Alaska is: a. 2 coffees. b. 1/4 coffee. *c. 1 coffee. d. 1/2 coffee.
29. Free trade between countries: a. should be based on absolute advantage.
b. will allow wealthy countries to exploit less developed nations. c. will shift the domestic production possibility frontier to the right. *d. will allow for greater levels of consumption than without trade.
30. If they spend all night writing computer programs, Laurence can write 10
programs while Carrie Anne can write 5. If they spend all night making sunglasses, Laurence can make 6 while Carrie Anne can make 4. Given this information and supposing Laurence and Carrie Anne have constant opportunity costs, we know that: a. Laurence has an absolute advantage in programs but not in sunglasses. *b. Laurence has an absolute advantage in both programs and sunglasses. c. Carrie Anne has an absolute advantage in programs but not in sunglasses. d. Carrie Anne has an absolute advantage in both programs and sunglasses.
31. If they spend all night writing computer programs, Laurence can write 10
programs while Carrie Anne can write 5. If they spend all night making sunglasses, Laurence can make 6 while Carrie Anne can make 4. We know that: *a. Laurence's opportunity cost of writing programs is less than that of Carrie Anne. b. Laurence's opportunity cost of writing programs and of making sunglasses is less than that of Carrie Anne. c. Carrie Anne's opportunity cost of writing programs and of making sunglasses is less than that of Laurence. d. Carrie Anne's opportunity cost of writing programs is less than that of Laurence.
32. If they spend all night writing computer programs, Laurence can write 10
programs while Carrie Anne can write 5. If they spend all night making sunglasses, Laurence can make 6 while Carrie Anne can make 4. We know that: *a. Laurence has a comparative advantage in programs. b. Laurence has a comparative advantage in both programs and sunglasses. c. Carrie Anne has a comparative advantage in programs. d. Carrie Anne has a comparative advantage in both programs and sunglasses.
33. Which statement is true?
a. Some very talented people have a comparative advantage in everything they do. b. Some very untalented people have a comparative advantage in nothing they do. c. Some very talented people have a very low opportunity cost in everything they do. *d. It is possible to have an absolute disadvantage in doing something but still have a comparative advantage in the same thing.
34. In a single day, Sarah can produce 10 hamburgers while Abe can produce 5
hamburgers. We then know that: a. Sarah has a comparative advantage in making hamburgers. *b. Sarah has an absolute advantage in making hamburgers. c. Abe has a comparative advantage in making hamburgers. d. Abe has an absolute advantage in making hamburgers.
35. If they produce only hamburgers, in a single day Sarah can produce 10
hamburgers while Abe can produce 5 hamburgers. If they make milkshakes only, in a single day Sarah can produce 10 milkshakes while Abe can produce 4 milkshakes. We know that: a. Sarah has an absolute advantage and a comparative advantage in making hamburgers. *b. Sarah has an absolute advantage and a comparative advantage in making milkshakes. c. Abe has an absolute advantage and a comparative advantage in making hamburgers. d. Abe has an absolute advantage and a comparative advantage in making milkshakes.
36. Roommates Sarah and Zoe are hosting a Halloween party and have to make
food for their guests and costumes for themselves. To finish both tasks as quickly as possible, Sarah and Zoe know that each of them should focus on just one task, but they don't know who should do what. To decide which roommate should do the cooking, Sarah and Zoe should determine which roommate: a. has the absolute advantage in cooking. *b. has the comparative advantage in cooking. c. has the largest production possibility frontier in cooking. d. can complete the cooking in the least amount of time.
37. Economists generally believe that a country should specialize in the production
of a good or service if the: a. production possibility frontier is larger than that of any other country.
b. production possibility frontier is smaller than that of any other country. c. country can produce the product using more resources than any other country. *d. country can produce the product while forgoing fewer alternative products than any other country.
38.
Reference: Ref 3-3
(Table: Coffee and Salmon Production Possibilities II) Look at the Table: Coffee and Salmon Production Possibilities II. This table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. Brazil has an absolute advantage in producing: *a. coffee only. b. salmon only. c. both coffee and salmon. d. neither coffee nor salmon.
39.
Reference: Ref 3-3
(Table: Coffee and Salmon Production Possibilities II) Look at the Table: Coffee and Salmon Production Possibilities II. This table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. Alaska has an absolute advantage in producing: a. coffee only. b. salmon only. c. both coffee and salmon. *d. neither coffee nor salmon.
40.
Reference: Ref 3-3
(Table: Coffee and Salmon Production Possibilities II) Look at the Table: Coffee and Salmon Production Possibilities II. This table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. Brazil has a comparative advantage in producing: *a. coffee only. b. salmon only. c. both coffee and salmon. d. neither coffee nor salmon
41. An economy is said to have a comparative advantage in the production of one
good if it:
a. can produce more of all goods than another economy. b. can produce less of all goods than another economy. c. has the highest opportunity cost for producing a particular good. *d. has the lowest opportunity cost for producing a particular good.
42. An economy that has the lowest opportunity cost for producing a particular good
is said to have a(n): a. absolute advantage. *b. comparative advantage. c. production possibility frontier. d. increasing opportunity cost.
43. The concept of comparative advantage is based upon: a. absolute labor productivity. b. relative labor costs. c. dollar prices of labor. *d. relative opportunity costs.
44. An economy is said to have a comparative advantage in the production of a
good if it can produce that good: a. with more resources than another economy. b. with a higher opportunity cost than another economy. c. outside its production possibility frontier. *d. at a lower opportunity cost than another economy.
45. If the opportunity cost of manufacturing machinery is lower in the United States
than in Britain and the opportunity cost of manufacturing sweaters is higher in the United States than in Britain, then the United States will: a. export both sweaters and machinery to Britain. b. import both sweaters and machinery from Britain. c. export sweaters to Britain and import machinery from Britain. *d. import sweaters from Britain and export machinery to Britain.
46. If the opportunity cost of manufacturing machinery is higher in the United States
than in Britain and the opportunity cost of manufacturing sweaters is lower in the United States than in Britain, then the United States will: a. export both sweaters and machinery to Britain. b. import both sweaters and machinery from Britain. *c. export sweaters to Britain and import machinery from Britain.
d. import sweaters from Britain and export machinery to Britain.
47. Trade can be beneficial to an economy because: a. it results in a more efficient use of the combined resources of some of the trading countries, even though it reduces efficiency in others. *b. more goods and services can be obtained at lower opportunity cost. c. it prevents specialization in those activities in which countries have a comparative advantage. d. it prevents unemployment.
48. If Brazil gives up 3 automobiles for each ton of coffee it produces, while Peru
gives up 7 automobiles for each ton of coffee it produces, then: a. Brazil has a comparative advantage in automobile production and should specialize in coffee. b. Brazil has a comparative advantage in coffee production and should specialize in the production of automobiles. *c. Brazil has a comparative advantage in coffee production and should specialize in coffee production. d. Brazil has a comparative advantage in automobile production and should specialize in automobile production.
49. If countries engage in international trade: a. they give up the ability to specialize in production. b. worldwide levels of production are lower. c. they will be consuming inside their production possibility frontiers. *d. they will be consuming outside their production possibility frontiers.
50.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. Sweden has an absolute advantage in producing: a. cell phones only. *b. herring only.
c. both cell phones and herring. d. neither cell phones nor herring.
51.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. Finland has an absolute advantage in producing: a. cell phones only. b. herring only. c. both cell phones and herring. *d. neither cell phones nor herring.
52.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. Sweden has a comparative advantage in producing: a. cell phones only. *b. herring only. c. both cell phones and herring. d. neither cell phones nor herring.
53.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. Finland has a comparative advantage in producing: *a. cell phones only. b. herring only. c. both cell phones and herring. d. neither cell phones nor herring.
54.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. The opportunity cost of producing 1 box of cell phones for Sweden is: *a. 10 boxes of herring. b. 0.2 box of herring. c. 5 boxes of herring. d. 0.1 box of herring.
55.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. The opportunity cost of producing 1 box of cell phones for Finland is: a. 10 boxes of herring. b. 0.5 boxes of herring. *c. 5 boxes of herring. d. 0.1 boxes of herring.
56.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. The opportunity cost of producing 1 box of herring for Sweden is: a. 10 boxes of cell phones. b. 0.5 box of cell phones. c. 5 boxes of cell phones. *d. 0.1 box of cell phones.
57.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. The opportunity cost of producing 1 box of herring for Finland is: a. 10 boxes of cell phones. *b. 0.5 boxes of cell phones. c. 5 boxes of cell phones. d. 0.1 cell phone.
58.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. If each country specializes according to comparative advantage, the total production of herring will be ______ boxes, and the total production of cell phones will be _______. a. 100,000; 50,000 b. 150,000; 0 c. 10,000; 10,000 *d. 100,000; 10,000
59.
Reference: Ref 3-4
(Table: Comparative Advantage I) Look at the Table: Comparative Advantage I. Which of the following terms of trade would benefit both countries? *a. 1 cell phone for 8 boxes of herring b. 1 cell phone for 1/8 box of herring c. 1 cell phone for 4 boxes of herring d. 1 cell phone for 12 boxes of herring
60. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. Eastland has an absolute advantage in producing: *a. oranges only. b. peaches only. c. both oranges and peaches. d. neither oranges nor peaches.
61. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. Westland has an absolute advantage in producing: a. oranges only. *b. peaches only. c. both oranges and peaches. d. neither oranges or peaches.
62. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. The opportunity cost of producing 1 box of oranges for Eastland is: *a. 1 box of peaches. b. 1/4 box of peaches. c. 4 boxes of peaches. d. 10 boxes of peaches.
63. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of
oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. The opportunity cost of producing 1 box of oranges for Westland is: a. 1 box of peaches. b. 1/4 box of peaches. *c. 4 boxes of peaches. d. 10 boxes of peaches.
64. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. The opportunity cost of producing 1 box of peaches for Eastland is: *a. 1 box of oranges. b. 1/4 box of oranges. c. 4 boxes of oranges. d. 10 boxes of oranges.
65. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. The opportunity cost of producing 1 box of peaches for Westland is: a. 1 box of oranges. *b. 1/4 box of oranges. c. 4 boxes of oranges. d. 10 boxes of oranges.
66. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the
two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. Eastland has a comparative advantage in producing: *a. oranges only. b. peaches only. c. both oranges and peaches. d. neither oranges nor peaches.
67. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Figure: Comparative Advantage) Look at the Figure: Comparative Advantage. Westland has a comparative advantage in producing: a. oranges only. *b. peaches only. c. both oranges and peaches. d. neither oranges nor peaches.
68. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Table: Comparative Advantage) Look at the Table: Comparative Advantage. If each country specializes according to comparative advantage, the total production of oranges will be ______ boxes, and the total production of peaches will be ______ boxes. a. 100; 50 *b. 100; 200 c. 0; 200 d. 150; 300
69. Figure: Comparative Advantage
Eastland and Westland produce only two goods, boxes of peaches and boxes of
oranges, and this figure shows each nation's production possibility frontier for the two goods.
Reference: Ref 3-5
(Table: Comparative Advantage) Look at the Table: Comparative Advantage. Which of the following terms of trade would benefit both countries? a. 1 box of oranges for 0.25 boxes of peaches b. 1 box of oranges for 0.5 boxes of peaches *c. 1 box of oranges for 1.5 boxes of peaches d. 1 box of oranges for 200 boxes of peaches
70. Which statement is true? a. Most wealthy people may have a comparative advantage in everything they do. *b. Very untalented people have a comparative advantage in something they do. c. Very wealthy people have an absolute advantage in everything they do. d. Very untalented people have a very high opportunity cost in everything they do.
71. In a single day, George can bake 10 cakes and Greta can bake 5 cakes. We
know that: a. George has a comparative advantage in baking cakes. *b. George has an absolute advantage in baking cakes. c. Greta has a comparative advantage in baking cakes. d. Greta has an absolute advantage in baking cakes.
72. If they bake only cakes, in a single day George can bake 10 cakes and Greta
can bake 5 cakes. If they make only pies, in a single day George can bake 10 pies while Greta can bake 4 pies. We know that: a. George has an absolute advantage and a comparative advantage in making cakes. *b. George has an absolute advantage and a comparative advantage in making pies. c. Greta has an absolute advantage and a comparative advantage in making cakes. d. Greta has an absolute advantage and a comparative advantage in making pies.
73. Greta starts using a new baking technique and she can now do twice as much
of everything—in a single day Greta can now make 10 cakes or 8 pies, rather than
the 5 cakes and 4 pies she could previously bake. We now know that Greta's production possibility frontier: *a. has shifted right, but her opportunity costs of making pies are unchanged. b. has shifted right, but her opportunity costs of making pies have decreased. c. has not changed, but her opportunity costs of making pies have increased. d. has not changed, but her opportunity costs of making pies have decreased.
74. Coworkers Yvonne and Rodney are trying to finish cleaning the store by
washing dishes and sweeping the floors. To finish both tasks as quickly as possible, they know that each of them should focus on just one task, but they don't know who should do what. To decide which coworker should wash dishes, Yvonne and Rodney should determine which one: a. has the absolute advantage in dishwashing. *b. has the comparative advantage in dishwashing. c. has the largest production possibility frontier in dishwashing. d. can complete the dishwashing in the least amount of time.
75. To achieve the gains from trade, each nation should specialize in the production
of a good or service if: a. its production possibility frontier is larger than that of any other country. b. its production possibility frontier is smaller than that of any other country. c. the country can make the product using fewer resources than any other country. *d. the country can make the product while forgoing fewer alternative products than any other country.
76. Dr. Coleman is a dentist who employs an assistant, Ms. Chris. If Dr. Coleman
worked all day at the front desk, she could answer 40 phone calls. If she worked all day with patients, she could clean the teeth of 40 patients. If Ms. Chris worked all day at the front desk, she could answer 60 phone calls. If she worked all day with patients, she could clean the teeth of 20 patients. Which of the following is true? a. Dr. Coleman has an absolute advantage in answering phones. *b. Ms. Chris has a comparative advantage in answering phones. c. Ms. Chris has an absolute advantage in cleaning patients' teeth. d. Dr. Coleman has a comparative advantage in answering phones.
77.
Reference: Ref 3-6
(Table: Wheat and Aluminum) Look at the Table: Wheat and Aluminum. The United States and Germany can produce both wheat and aluminum. The table shows, in tonnage, the maximum annual output combinations of wheat and aluminum that can be produced. Which of the following choices would represent a possible trade based upon specialization and comparative advantage? a. Germany would trade 2 tons of wheat to the United States for 1 ton of aluminum. b. Germany would trade 2 tons of aluminum to the United States for 0.5 tons of wheat. c. The United States would trade 1 ton of wheat to Germany for 1 ton of aluminum. *d. The United States would trade 1 ton of wheat to Germany for 1.5 tons of aluminum.
78.
Reference: Ref 3-6
(Table: Wheat and Aluminum) Look at the Table: Wheat and Aluminum. The United States and Germany can produce both wheat and aluminum. The table shows the maximum annual output combinations of wheat and aluminum that can be produced. Based on the table: *a. the United States has a comparative advantage in wheat and an absolute advantage in wheat. b. Germany has an absolute advantage in aluminum and a comparative advantage in wheat. c. the United States has a comparative advantage in both aluminum and wheat. d. Germany has a comparative advantage in aluminum and an absolute advantage in aluminum.
79. In one day, Kessy can bake 10 cookies or mix 15 glasses of lemonade. His
friend, Ava, can make 10 cookies or 10 glasses of lemonade. His other friend, Ian, can make 10 cookies or 20 glasses of lemonade. Who has the lowest opportunity cost in cookie production? a. Kessy *b. Ava c. Ian
d. Kessy and Ava have the same opportunity cost in cookie production.
80. Because Casey can type reports faster and more accurately than Ahmet, Casey
has a(n) ________ in typing reports. a. comparative advantage *b. absolute advantage c. opportunity cost d. specialization
81. Mark and Julie are going to sell brownies and cookies for their third annual
fundraiser bake sale. In one day, Mark can make 40 brownies or 20 cookies, and Julie can make 15 brownies or 15 cookies. Based on this information, ________ has the comparative advantage in making brownies and ________ has the comparative advantage in making cookies. *a. Mark; Julie b. Mark; Mark c. Julie; Mark d. Julie; Julie
82. Mark and Julie are going to sell brownies and cookies for their third annual
fundraiser bake sale. In one day, Mark can make 40 brownies or 20 cookies, and Julie can make 15 brownies or 15 cookies. What is Mark's opportunity cost to produce one brownie? a. 1 cookie b. 1 brownie *c. 1/2 cookie d. 1/2 brownie
83. Mark and Julie are going to sell brownies and cookies for their third annual
fundraiser bake sale. In one day, Mark can make 40 brownies or 20 cookies, and Julie can make 15 brownies or 15 cookies. With specialization, how many brownies and cookies will be made in one day for the bake sale? a. 15 brownies and 20 cookies b. 40 brownies and 20 cookies *c. 40 brownies and 15 cookies d. 55 brownies and 35 cookies
84. Mark and Julie are going to sell brownies and cookies for their third annual
fundraiser bake sale. In one day, Mark can make 40 brownies or 20 cookies, and Julie can make 15 brownies or 15 cookies. Based on this information, ________ has
the absolute advantage in making brownies and ________ has the absolute advantage in making cookies. a. Mark; Julie *b. Mark; Mark c. Julie; Mark d. Mark; neither Mark nor Julie
85.
Reference: Ref 3-7
(Table: Bongos and Frisbees) Look at the Table: Bongos and Frisbees. Bill and Mickey make bongos and Frisbees. Who has the comparative advantage in producing Frisbees? a. Bill *b. Mickey c. both d. neither
86.
Reference: Ref 3-7
(Table: Bongos and Frisbees) Look at the Table: Bongos and Frisbees. Bill and Mickey make bongos and Frisbees. Who should specialize in the production of bongos? *a. Bill b. Mickey c. both d. neither
87. If the opportunity cost of manufacturing automobiles is lower in the United
States than in Britain and the opportunity cost of manufacturing airplanes is higher in the United States than in Britain, then the United States will: a. export both airplanes and automobiles to Britain. b. import both airplanes and automobiles from Britain. c. export airplanes to Britain and import automobiles from Britain. *d. import airplanes from Britain and export automobiles to Britain.
88. If the opportunity cost of manufacturing automobiles is higher in the United
States than in Britain and the opportunity cost of manufacturing airplanes is lower in the United States than in Britain, then the United States will: a. export both airplanes and automobiles to Britain. b. import both airplanes and automobiles from Britain. *c. export airplanes to Britain and import automobiles from Britain. d. import airplanes from Britain and export automobiles to Britain.
89. Assume that Colombia gives up three motorcycles for each ton of coffee it
produces, while Bolivia gives up seven motorcycles for each ton of coffee it produces. a. Colombia has a comparative advantage in motorcycle production and should specialize in coffee. b. Colombia has a comparative advantage in coffee production and should specialize in the production of motorcycles. *c. Colombia has a comparative advantage in coffee production and should specialize in coffee production. d. Colombia has a comparative advantage in motorcycle production and should specialize in motorcycle production.
90. To determine whether you have a comparative advantage creating smart-phone
apps, we would have to know *a. whether you can create an app at a lower opportunity cost than anyone else. b. what you would charge for selling the app. c. how long it takes you to create an app. d. how many people would purchase your app.
91. Figure: Sam and Dimitiri's Production Possibilities
Reference: Ref 3-8
(Figure: Sam and Dimitri's Production Possibilities) The figure Sam and Dimitiri's Production Possibilities depicts production possibilities frontiers for Sam and Dimitri, both of whom can mow lawns and wash cars. According to the figure, what is Sam's opportunity cost of each lawn mowed? a. One car washed *b. Two cars washed c. One-half of a car washed d. 30 cars washed
92. Figure: Sam and Dimitiri's Production Possibilities
Reference: Ref 3-8
(Figure: Sam and Dimitri's Production Possibilities) The figure Sam and Dimitiri's Production Possibilities depicts production possibilities frontiers for Sam and Dimitri, both of whom can mow lawns and wash cars. According to the figure Sam and Dimitiri's Production Possibilities, what is Dimitri's opportunity cost of each lawn mowed? *a. One car washed b. Two cars washed c. One-half of a car washed d. 30 cars washed
93. Figure: Sam and Dimitiri's Production Possibilities
Reference: Ref 3-8
(Figure: Sam and Dimitri's Production Possibilities) The figure Sam and Dimitiri's Production Possibilities depicts production possibilities frontiers for Sam and Dimitri, both of whom can mow lawns and wash cars. According to the figure, which of the following statements is true? a. Sam has a comparative advantage in mowing lawns. *b. Dimitri has a comparative advantage in mowing lawns. c. Both Sam and Dimitri have a comparative advantage in mowing lawns. d. Neither Sam nor Dimitri has a comparative advantage in mowing lawns.
94. Figure: Sam and Dimitiri's Production Possibilities
Reference: Ref 3-8
(Figure: Sam and Dimitri's Production Possibilities) The figure Sam and Dimitiri's Production Possibilities depicts production possibilities frontiers for Sam and Dimitri, both of whom can mow lawns and wash cars. According to the figure, which of the following statements is true? a. If Sam specializes only in mowing lawns, he can mow a maximum of 45 lawns. b. If Dimitri specializes only in mowing lawns, he can mow a maximum of 24 lawns. *c. If Sam specializes only in washing cars, he can wash a maximum of 30 cars. d. If Dimitri specializes only in washing cars, he can wash a maximum of 24 cars.
95. Figure: Sam and Dimitiri's Production Possibilities
Reference: Ref 3-8
(Figure: Sam and Dimitri's Production Possibilities) The figure Sam and Dimitiri's Production Possibilities depicts production possibilities frontiers for Sam and Dimitri, both of whom can mow lawns and wash cars. According to the figure, which of the following statements is true? a. Dimitri has an absolute advantage in both washing cars and mowing lawns.
*b. Sam has an absolute advantage in both washing cars and mowing lawns. c. Sam has a comparative advantage in mowing lawns. d. Dimitri has a comparative advantage in washing cars.
96. When countries specialize according to their comparative advantage, and then
trade with one another, *a. there will be mutual gains from trade. b. they both will be worse off than if they were self-sufficient. c. one country will gain and the other will lose. d. one country will become richer and the other will become poorer.
97. In order to have a comparative advantage in the production of clothing, a
country must a. also have an absolute advantage in producing clothing. b. be able to produce more clothes than anyone else. *c. be able to produce clothing at a lower opportunity cost than anyone else. d. be able to produce clothing faster than anyone else.
98. Economists are generally in support of: a. government restrictions on trade. *b. free international trade. c. tariffs to restrict trade. d. subsidizing exports.
99. Saudi Arabia has a tremendous comparative advantage in petroleum. Which is
a source of this comparative advantage? a. mild temperatures *b. large reserves of crude oil c. no opportunity cost associated with oil production d. high tariffs on oil from other nations
100. Bangladesh exports shirts, the making of which is labor-intensive, to the United
States. The likely source of Bangladesh's comparative advantage in shirts is: a. a hotter climate, which makes it possible to produce shirts outdoors, eliminating the need for factory buildings and hence reducing costs. b. superior production technology. *c. that in comparison with the United States, Bangladesh is a labor-abundant country.
d. the higher labor productivity in Bangladesh.
101. An urbanized country has 100 million workers living on 100 square miles of
land. A country that is principally rural has 1 million workers living on 10 square miles of land. From this information we know that the urbanized country is ________ relative to the rural country. a. land-abundant *b. labor-abundant c. land-intensive d. labor-intensive
102. If the ________ differ(s) between two countries, this suggests the possibility
for mutually advantageous trade. a. currency *b. factor endowments c. exchange rate d. level of government spending for defense
103. Which of the following is a source of this comparative advantage? a. mild temperatures *b. large deposits of copper ore c. no opportunity cost associated with copper production d. high tariffs on copper from other nations
104. Mexico is relatively labor-abundant when compared with the United States.
Therefore, Mexico has a comparative advantage in ________ compared with the United States. a. all goods *b. goods that are labor-intensive in production c. goods that are capital-intensive in production d. goods that are land-intensive in production
105. Sri Lanka's comparative advantage over the United States in textiles can be
explained by its: *a. labor abundance. b. mild climate. c. advanced technology. d. increasing returns.
106. Japan's comparative advantage in automobiles can be attributed to:
a. climate. b. factor endowments. *c. technology. d. exchange rates.
107. Both the United States and Canada produce automobiles and their
components; however, each particular model or component is produced in only one of the two countries. Which of the following explains this pattern of production and trade? a. differences in climate b. differences in factor endowments c. differences in technology *d. the role of increasing returns
108. When people in Brazil engage in trade with people in Germany, the citizens of each nation are made worse off. a. True *b. False
109. As long as individuals know that they can find the goods and services that they want in the market, they are willing to forgo being self-sufficient and are willing to specialize. *a. True b. False
110. Trade allows people to get more of what they want. *a. True b. False
111. If the United States is more productive than Mexico in all lines of production, then the United States cannot benefit from trade with Mexico. a. True *b. False
112. Bangladesh produces much of the clothing we wear because it is more productive in producing clothes than we are in the United States. a. True *b. False
113. Nations can gain from trade with other nations even if they are less productive in all industries than the nations with which they trade. *a. True b. False
114. Reference: Ref 3-9 (Table: Fish and Coconut Production Possibilities) Look at the Table: Fish and Coconut Production Possibilities. The table shows the maximum amount of fish or coconuts that Tom and Hank can produce when each produces only one of the goods. The table implies that Hank has an absolute advantage in the production of both goods. a. True *b. False
115. Reference: Ref 3-9 (Table: Fish and Coconut Production Possibilities) Look at the Table: Fish and Coconut Production Possibilities. The table shows the maximum amount of fish or coconuts that Tom and Hank can produce when each produces only one of the goods. The table implies that Tom has a comparative advantage in the production of both goods. a. True *b. False
116. Absolute advantage is the basis for gains from trade. a. True *b. False
117. The principle of comparative advantage suggests that if New York and Florida exchange taxi parts for oranges, each state will be made worse off. a. True *b. False
118. Most economists agree that the U.S. should produce goods for domestic consumption here in the U.S. rather than buy them from foreign countries.
a. True *b. False
119. If countries specialize according to comparative advantage, they can produce more than they could if they didn't specialize and trade. a. True *b. False
120. If countries specialize according to comparative advantage, they can consume more than they could if they didn't specialize and trade. *a. True b. False
121. Since the production of clothing is labor-intensive relative to the production of wheat, and China is labor-abundant relative to most countries, we would expect China to export clothing. *a. True b. False
122. You and your roommate are taking the same economics class. When it comes to doing homework assignments, your roommate draws beautifully precise graphs, while you are an extremely fast typist. Therefore, you and your roommate work on the assignments together. Which economic concept is at work here? Correct Answer:
There are gains from trade. When you specialize in these tasks, you and your roommate can produce the assignment more efficiently and probably earn a better grade than if you had not specialized.
123. Reference: Ref 3-10 (Table: Wheat and Aluminum) Look at the Table: Wheat and Aluminum that shows the maximum possible production (in tons) of wheat and aluminum
for both the United States and Germany. Are gains from trade possible between these nations? Explain. Correct Answer:
Yes. The United States has a comparative advantage in the production of wheat because the opportunity cost of producing wheat is only 1 ton of aluminum, but in Germany the opportunity cost of 1 ton of wheat is 2 tons of aluminum. The United States should specialize in wheat production. Germany has a comparative advantage in the production of aluminum because the opportunity cost of producing 1 ton of aluminum is only 1/2 ton of wheat, while in the United States the opportunity cost of 1 ton of aluminum is 1 ton of wheat. Germany should therefore specialize in aluminum production. The United States would trade wheat to Germany in exchange for aluminum. 124. Consider a nation with a large economy like the United States and a nation with a small economy like the Dominican Republic. How can the United States, with absolute advantage in production of almost all goods, benefit from trade with the Dominican Republic? Correct Answer:
The answer lies not in absolute advantage but in comparative advantage. Any time two nations have different opportunity costs, one nation can produce a good more cheaply than the other. Each nation has a comparative advantage in something and a comparative disadvantage in something.
125. Beth and Alice decide to trade services. Beth promises to do Alice's taxes, and
in exchange, Alice will create several spreadsheets for Beth's household budget. This mutual agreement of trade will most likely: *a. be beneficial to both individuals. b. hurt both individuals. c. help Beth but hurt Alice. d. help Alice but hurt Beth.
126. Overall, trade between China and the United States will: a. benefit the United States more than China. b. benefit China more than the United States. *c. benefit both countries. d. hurt both countries.
127. Scenario: Countries A and B
Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear production possibility frontier in both goods. If country A spends all of its available resources to produce wheat, it can produce 500 tons of wheat and zero tons of steel. If it uses all of its resources to produce steel, it can produce 250 tons of steel and zero tons of wheat. If country B spends all of its available resources
producing wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the production of steel, it can produce 400 tons of steel. Reference: Ref 3-11
(Scenario: Countries A and B) Look at the Scenario: Countries A and B. Given this information, country ________ has a comparative advantage in the production of wheat and country ________ has a comparative advantage in the production of steel. a. A; A *b. A; B c. B; B d. B; A
128. Scenario: Countries A and B
Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear production possibility frontier in both goods. If country A spends all of its available resources to produce wheat, it can produce 500 tons of wheat and zero tons of steel. If it uses all of its resources to produce steel, it can produce 250 tons of steel and zero tons of wheat. If country B spends all of its available resources producing wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the production of steel, it can produce 400 tons of steel. Reference: Ref 3-11
(Scenario: Countries A and B) Look at the Scenario: Countries A and B. If each country devotes half of its resources to the production of wheat and half to the production of steel, then their total production of wheat would be ________ and their total production of steel would be ________. *a. 450; 325 b. 900; 650 c. 500; 250 d. 400; 400
129. Scenario: Countries A and B
Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear production possibility frontier in both goods. If country A spends all of its available resources to produce wheat, it can produce 500 tons of wheat and zero tons of steel. If it uses all of its resources to produce steel, it can produce 250 tons of steel and zero tons of wheat. If country B spends all of its available resources producing wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the production of steel, it can produce 400 tons of steel. Reference: Ref 3-11
(Scenario: Countries A and B) Look at the Scenario: Countries A and B. If country B produces 300 tons of steel, how many tons of wheat can it produce? *a. 100 b. 200
c. 300 d. 400
130. Scenario: Countries A and B
Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear production possibility frontier in both goods. If country A spends all of its available resources to produce wheat, it can produce 500 tons of wheat and zero tons of steel. If it uses all of its resources to produce steel, it can produce 250 tons of steel and zero tons of wheat. If country B spends all of its available resources producing wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the production of steel, it can produce 400 tons of steel. Reference: Ref 3-11
(Scenario: Countries A and B) Look at the Scenario: Countries A and B. If countries A and B both specialize and trade: a. only country A will gain. b. only country B will gain. *c. country A and country B will gain if they specialize in their comparatively advantaged good. d. neither country will gain.
131. Scenario: Countries A and B
Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear production possibility frontier in both goods. If country A spends all of its available resources to produce wheat, it can produce 500 tons of wheat and zero tons of steel. If it uses all of its resources to produce steel, it can produce 250 tons of steel and zero tons of wheat. If country B spends all of its available resources producing wheat, it can produce 400 tons of wheat, and if it spends all of its resources on the production of steel, it can produce 400 tons of steel. Reference: Ref 3-11
(Scenario: Countries A and B) Look at the Scenario: Countries A and B. Given this information, the country that has the absolute advantage in wheat is ________, and the country that has the absolute advantage in steel is ________. a. A; A *b. A; B c. B; B d. B; A
132. Comparative advantage arises from: *a. differences in climate, factor endowments, and technology. b. absolute advantage. c. countries engaging in autarkic behavior. d. an emphasis on export production.
1. The market for corn in Kansas is considered to be competitive. This means there
are _____ buyers and _____ sellers of corn in Kansas. a. many; few b. few; many *c. many; many d. few; few
2. A competitive market is: *a. a market in which there are many buyers and sellers of the same good or service. b. a market in which everyone negotiates his or her own price. c. a market that is supplied by local producers. d. a market that is supplied by foreign producers.
3. A demand schedule is: a. a timetable indicating when purchases will be made. b. a timetable of household expenditures. *c. a table showing how much of a good consumers will buy at different prices. d. a table showing how much of a good producers will sell at different prices.
4. Along a given demand curve, an increase in price of the product will: a. increase the demand. b. decrease the demand. c. increase the quantity demanded. *d. decrease the quantity demanded.
5. When the demand curve slopes downward, it means that: a. higher prices are associated with higher quantities demanded. *b. higher prices are associated with lower quantities demanded. c. lower prices are associated with lower quantities demanded. d. a higher demand.
6. The law of demand states that other things equal: a. as the price increases, the quantity demanded will increase. b. as the price decreases, the demand curve will shift to the right. c. as the price increases, the demand will decrease. *d. as the price increases, the quantity demanded will decrease.
7. A negative relationship between the quantity demanded of a good and its price is
called the law of: *a. demand. b. increasing returns. c. market clearing. d. supply.
8. Which example illustrates the law of demand? a. An increase in tuition encourages more students to enroll in college because the quality of education has risen. *b. Consumers buy more personal computers because prices have fallen. c. Oil companies drill for new sources of oil because oil prices are higher. d. Fewer people play golf because incomes are lower.
9. _____ illustrates an inverse relationship between price and quantity. *a. A demand curve b. A supply curve c. A production possibility frontier d. Equilibrium
10. A negative relationship between the quantity demanded of a good and its price
is called the law of _____. *a. demand b. marginality c. efficiency d. supply
11. The law of demand is illustrated by a demand curve that is: a. horizontal. *b. downward sloping. c. vertical. d. upward sloping.
12. The law of demand implies that: a. consumers are not responsive to price changes. *b. consumers will buy more at lower prices. c. sellers will offer more on the market at higher prices. d. the demand curve is upward sloping.
13. A decrease in the price of a good will result in: a. an increase in demand. b. a decrease in quantity demanded. *c. an increase in the quantity demanded. d. a decrease in demand.
14. A rightward shift of the demand curve shows that: a. something has happened to cause a lower quantity demanded at every given price. *b. something has happened to cause a higher quantity demanded at every given price. c. the price of the product has increased. d. the price of the product has decreased.
15. A leftward shift of the demand curve shows that: *a. something has happened to cause a lower quantity demanded at every given price. b. something has happened to cause a higher quantity demanded at every given price. c. the price of the product has increased. d. the price of the product has decreased.
16. Which factor will result solely in a movement along the demand curve for a
particular good? a. a change in the prices of related goods *b. a change in the price of that good c. a change in the size of the population d. both a change in the price of that good and a change in the size of the population
17. A decrease in the price of eggs will result in an increase in: a. the demand for eggs. b. the supply of eggs. c. the quantity of eggs supplied. *d. the quantity of eggs demanded.
18. Which statement best describes the law of demand? a. As income taxes rise, fewer new cars are purchased. b. As the price of corn rises, more acres of corn are planted.
*c. As the price of a DVD rental rises, fewer DVDs are rented. d. As the population rises, more electricity is consumed.
19. Which statement is correct? a. A change in demand is a movement along the demand curve, and a change in quantity demanded is a shift of the demand curve. b. Both a change in quantity demanded and a change in demand are movements along the demand curve, only in different directions. c. Both a change in quantity demanded and a change in demand are shifts of the demand curve, only in different directions. *d. A change in quantity demanded is a movement along the demand curve, and a change in demand is a shift of the demand curve.
20. In much of the country, homeowners choose to heat their houses with either
natural gas or home-heating oil. Which statement would cause a change in the demand for natural gas? a. a change in the price of home-heating oil b. a change in income c. an increase in consumer tastes for natural gas as an energy source *d. a change in the price of home-heating oil, a change in income, and an increase in consumer tastes for natural gas as an energy source
21. Raclette is a popular wintertime dish in Switzerland. It is essentially melted
Raclette cheese over boiled new potatoes. If the price of Raclette cheese decreased, there should be: a. an increase in demand for Raclette cheese. *b. an increase in demand for new potatoes. c. no effect on the demand for either of the Raclette ingredients, because this is a traditional dish and its consumption does not depend on the prices of the ingredients. d. an increase in demand for Raclette cheese and for new potatoes.
22. When the economy suffers a downturn and the incomes of many people
decrease, vacationers are more likely to take car trips than to fly. Which statement provides a possible explanation for this phenomenon? a. Air travel and vacation travel by car are complementary goods. b. Air travel and vacation travel by car are both normal goods. *c. Air travel is a normal good and vacation travel by car is an inferior good. d. Air travel is an inferior good and vacation travel by car is a normal good.
23. Assuming that ice cream is a normal good, which statement could cause an
increase in the demand for ice cream? a. A decrease in incomes b. A sudden spell of unexpectedly cold weather c. An increase in the price of complements for ice cream, such as cherries and flavored toppings *d. An increase in the price of substitutes for ice cream, such as frozen yogurt
24. Suppose that, as incomes in a community increase, the demand for taxi service
increases and the demand for bus service decreases. From this, it can be concluded that: a. Both taxi service and bus service are inferior goods. b. Both taxi service and bus service are normal goods. *c. Taxi service is a normal good; bus service is an inferior good. d. Taxi service is an inferior good; bus service is a normal good.
25. If there is a widely held expectation that prices of cotton will be higher next year,
then: *a. the demand for cotton will increase today. b. the demand for cotton will decrease today. c. the demand for cotton will shift to the left today. d. there will be no change in the current demand.
26. In recent years, stainless steel kitchen appliances have become more popular.
This change has caused: a. a decrease in demand for stainless steel appliances. *b. an increase in demand for stainless steel appliances. c. a leftward shift in the demand for stainless steel appliances. d. no change in the demand for stainless steel appliances.
27. Assuming that hardcover books are a normal good, which statement could
cause a decrease in demand for hardcover books? a. An increase in incomes *b. A decrease in incomes c. A higher price for paperback books d. A higher price for e-Books
28. Assuming that paperback books are an inferior good, which statement could
cause a decrease in demand for paperback books? *a. An increase in incomes b. A decrease in incomes c. A higher price for hardcover books d. A higher price for e-Books
29. Assuming that pretzels are a substitute for popcorn, which statement would
cause a decrease in the demand for pretzels? *a. A higher price of popcorn b. A lower price of popcorn c. A lower price of pretzels d. An increase in the number of people shopping for snack foods
30. Assuming that yarn and knitting needles are complements, which statement
would cause an increase in the demand for yarn? a. A higher price of knitting needles *b. A lower price of knitting needles c. A higher price of yarn d. A decrease in the number of people who are interested in knitting
31. As the population of a city grows, this will cause a(n) _____ in the demand for
pizza, and the demand for pizza will shift to the _____. a. decrease; left b. decrease; right c. increase; left *d. increase; right
32. A shift of the demand curve for thin-crust pizza would NOT be caused by a
change in: a. buyers' incomes. *b. the price of thin-crust pizza. c. the price of thick-crust pizza. d. the popularity of thin-crust pizza.
33. If goods A and B are substitutes, a decrease in the price of good B will: a. increase the demand for good A. b. increase the demand for good B. *c. decrease the demand for good A.
d. increase the demand for good B and decrease the demand for good A.
34. If goods A and Z are complements, an increase in the price of good Z will: a. increase the demand for good A. *b. decrease the demand for good A. c. decrease the demand for good Z. d. decrease the demand for both good A and good Z.
35. Over the past several years, consumers have had an increasing interest in
getting tattoos. This means that the _____ for tattoos has _____. a. quantity demanded; increased b. demand; decreased *c. demand; increased d. quantity demanded; decreased
36. Which statement will NOT cause an increase in demand for good X? a. a decrease in income if good X is an inferior good b. an increase in income if good X is a normal good *c. a decrease in the price of good X d. an increase in consumers' taste for good X
37. A good is normal if which statement is true? a. When income increases, the demand remains unchanged. b. When income increases, the demand decreases. *c. When income increases, the demand increases. d. Income and demand are unrelated.
38. A good is inferior if which statement is true? a. When income increases, the demand remains unchanged. *b. When income increases, the demand decreases. c. When income increases, the demand increases. d. Income and demand are unrelated.
39. The demand curve for videos has shifted to the right. What could have caused
it? a. a fall in the price of videos b. an increase in the price of videos c. an increase in the supply of videos *d. an increase in the incomes of buyers
40. Which statement best describes demand? a. A change in demand is a movement along the demand curve, and a change in quantity demanded is a shift in the demand curve. *b. A change in quantity demanded is a movement along the demand curve, and a change in demand is a shift in the demand curve. c. Both a change in quantity demanded and a change in demand are shifts in the demand curve, only in different directions. d. Both a change in quantity demanded and a change in demand are movements along the demand curve, only in different directions.
41. If people demand more of product A when the price of B falls, then A and B are: a. not related. b. substitutes. *c. complements. d. inferior goods.
42. If the demand for tires goes down when the price of gas goes up, then tires and
gas are: a. substitutes. *b. complements. c. both expensive. d. both inexpensive.
43. An increase in the price of hamburger would probably result in _____ in the
demand for hamburger buns. *a. a decrease b. an increase c. no change d. random fluctuations
44. An announcement that smoking will harm the ability to think clearly will most
likely result in: a. an increase in the quantity of cigarettes demanded. *b. a decrease in the demand for cigarettes. c. no change in smoking habits. d. an increase in the price of cigarettes.
45. If steak and potatoes are complements, when the price of steak goes up, the
demand curve for potatoes:
a. shifts to the right. *b. shifts to the left. c. stays the same. d. shifts to the right and then moves back.
46. If chicken and beef are substitutes, then a fall in the price of chicken will bring
about: a. an increase in the demand for beef. *b. a decrease in the demand for beef. c. an increase in the quantity demanded of beef. d. no change in the demand for beef.
47. All else equal, purchases of most goods tend to rise with increases in buyers'
incomes and to fall with decreases in buyers' incomes. Such goods are known as: a. inferior goods. b. direct goods. *c. normal goods. d. indirect goods.
48. An inferior good is one for which _____ in buyers' income causes _____. a. an increase; an increase in demand b. an increase; an increase in quantity demanded *c. an increase; a decrease in demand d. a decrease; a decrease in demand
49. Pizza is a normal good. All else equal, if students' incomes increase, the effect
on pizza would be: *a. an increase in the demand. b. a decrease in the quantity demanded. c. a decrease in the demand. d. no change in the demand.
50. After graduation from college, Jill might have an increase in her income from a
new job. If, as a result, she decides that she will purchase more T-bone steak and less hamburger, then for her hamburger would be considered: a. a normal good. b. a substitute good. c. a complementary good. *d. an inferior good.
51. An increase in the demand for gasoline today caused by concerns that gasoline
prices will be higher tomorrow is most likely attributable to a change in: a. income. *b. consumer expectations. c. consumer preferences. d. prices of other goods.
52. Which statement would shift the demand curve for new textbooks to the right? a. a decrease in the price of paper b. a fall in the price of used textbooks *c. an increase in college enrollment d. a fall in the price of new textbooks
53. Which change is likely to cause a rightward shift in the demand for home-
delivered pizza? a. a lower price of pizza b. a lower price of fast-food hamburgers c. a higher price of pepperoni *d. a larger population
54. Which statement describes two goods that are most likely substitutes in
consumption? a. loaves of bread and sticks of butter b. loaves of bread and toasters *c. loaves of bread and hamburger buns d. loaves of bread and gasoline
55. The demand for meals at a local Applebee's will shift to the left if: *a. the Olive Garden offers a 10% discount coupon in the local newspaper. b. the price of a meal at Applebee's rises. c. local incomes increase and Applebee's is a normal good. d. the price of gasoline falls in the local area.
56. Which will NOT increase demand for laptop computers? a. an increase in the incomes of computer users b. cool new computer games *c. Dell Computers going out of business d. the price of notebook computers increasing
57. What will happen in the market for canned pinto beans if incomes increase? a. Demand will increase if pinto beans are an inferior good. *b. Demand will increase if pinto beans are a normal good. c. Supply will increase if pinto beans are an inferior good. d. Supply will increase if pinto beans are a normal good.
58. When the price of gas goes down, the demand for tires goes up. A likely
possibility is that tires and gas are: a. substitutes. *b. complements. c. both expensive. d. both inexpensive.
59. If the price of hamburger decreased, it would probably result in _____ in the
demand for hamburger buns. a. a decrease *b. an increase c. no change d. random fluctuations
60. The demand curve for running shoes has shifted to the right. What could have
caused it? a. a fall in the price of running shoes b. an increase in the price of running shoes c. an increase in the supply of running shoes *d. an increase in the income of buyers of running shoes
61. Figure: Demand for Coconuts
Reference: Ref 5-1
(Figure: Demand for Coconuts) Examine the figure Demand for Coconuts. If coconuts are a normal good and the price of coconuts increases, it would be represented in the figure as a movement from: a. A to B. *b. B to A. c. C to A. d. E to B.
62. Figure: Demand for Coconuts Reference: Ref 5-1
(Figure: Demand for Coconuts) Examine the figure Demand for Coconuts. If fish is a substitute good for coconuts and the price of fish increases, it will be represented in the figure as a movement from: *a. A to C. b. B to A. c. C to A. d. B to E.
63. Figure: Demand for Coconuts Reference: Ref 5-1
(Figure: Demand for Coconuts) Examine the figure Demand for Coconuts. If
coconuts are a normal good and the income level of consumers falls, it will be represented in the figure as a movement from: a. A to C. b. B to A. *c. C to A. d. E to B.
64. Figure: Demand for Coconuts Reference: Ref 5-1
(Figure: Demand for Coconuts) Examine the figure Demand for Coconuts. If there is an increase in preference for coconuts, it will be represented in the figure as a movement from: *a. A to C. b. B to A. c. C to A. d. B to E.
65. Figure: Demand for Coconuts Reference: Ref 5-1
(Figure: Demand for Coconuts) Examine the figure Demand for Coconuts. If coconuts are a normal good and consumers believe that the price of coconuts will rise significantly in the near future, it will be represented in the figure as a movement from: a. C to A. b. A to B. c. B to E. *d. E to B.
66.
Reference: Ref 5-2
(Table: The Demand for Chocolate-Covered Peanuts) Examine the table The Demand for Chocolate-Covered Peanuts. If the price of chocolate-covered peanuts is $0.60, the quantity demanded by George is _____ bags per month. a. 10 b. 15 *c. 25 d. 30
67.
Reference: Ref 5-2
(Table: The Demand for Chocolate-Covered Peanuts) Examine the table The Demand for Chocolate-Covered Peanuts. Barbara demands 20 bags of chocolatecovered peanuts when the price of each bag is: a. $0.90. b. $0.80. *c. $0.70. d. $0.60.
68.
Reference: Ref 5-2
(Table: The Demand for Chocolate-Covered Peanuts) Examine the table The Demand for Chocolate-Covered Peanuts. If George, Barbara, and Dan are the only three buyers in the market and the price of a bag of chocolate-covered peanuts is $0.80, the total market quantity demanded is _____ bags per month. a. 70 b. 80 *c. 105 d. 280
69.
Reference: Ref 5-2
(Table: The Demand for Chocolate-Covered Peanuts) Examine the table The Demand for Chocolate-Covered Peanuts. If George, Barbara, and Dan are the only three buyers in the market and the price of a bag of chocolate-covered peanuts is $0.50, the total market quantity demanded is _____ bags per month. a. 80 b. 105 *c. 210 d. 280
70. Figure: Demand for DVDs
Reference: Ref 5-3
(Figure: Demand for DVDs) Examine the figure Demand for DVDs. A decrease in the rental price of DVDs would result in a change illustrated by: a. the move from f to g in panel A. b. the move from h to i in panel B. *c. the move from j to k in panel C. d. the move from l to m in panel D.
71. Figure: Demand for DVDs Reference: Ref 5-3
(Figure: Demand for DVDs) Examine the figure Demand for DVDs. A decrease in the price of DVD players (a complement to DVDs) would result in a change illustrated by: a. the move from f to g in panel A. *b. the move from h to i in panel B. c. the move from j to k in panel C. d. the move from l to m in panel D.
72. Figure: Demand for DVDs Reference: Ref 5-3
(Figure: Demand for DVDs) Examine the figure Demand for DVDs. A decrease in the price of movie tickets (a substitute to DVDs) would result in a change illustrated by: *a. the move from f to g in panel A. b. the move from h to i in panel B. c. the move from j to k in panel C. d. the move from l to m in panel D.
73. A competitive market occurs when there are many buyers and sellers of the same good. *a. True b. False
74. The demand curve for season tickets for the Miami Dolphins is the graphical representation of how many season tickets consumers want to buy at any given price. *a. True b. False
75. An increase in demand for good X could be caused by a decrease in the price of X. a. True *b. False
76. The terms decrease in demand and decrease in quantity demanded can be used interchangeably.
a. True *b. False
77. According to the law of demand, if the price of steak increases in Rhode Island, the demand for steak will decrease in Rhode Island. a. True *b. False
78. An increase in income will always shift the demand curve to the right. a. True *b. False
79. If coffee and tea are viewed as substitutes in consumption, then an increase in the price of coffee will increase the demand for tea. *a. True b. False
80. After graduation many students' demand for used cars decreases. This could be because used cars are considered a normal good to college graduates. a. True *b. False
81. Apple and Samsung are both large corporations that produce smartphones, iPhone and Galaxy, respectively. They are constantly trying to convince customers to buy their brand through expensive advertising and product innovations. Is the smart phone market a competitive market in the economic sense defined in Module 5? Why or why not? Correct Answer:
Although Apple and Samsung compete with each other in trying to win customers from the other brand with advertising and introducing new features for their devices, the market for smartphones is not a competitive market as defined in Module 5. In the economic sense, a competitive market has many buyers and sellers so that no single buyer or seller can influence price. In a competitive market, then, each producer accounts for a very small share of the total output, which is not the case in the market for smart phones. In addition, the product in a competitive market is exactly the same, regardless of who produces it. Galaxy and iPhones are similar, but they have different operating systems and other features, so the product is not identical from one producer to the next.
82. Explain the law of demand. What does it describe about the shape of a demand curve? Correct Answer:
The law of demand states that when all other variables are held constant, a higher price of a good will tend to decrease the quantity demanded of that good. Graphically, this is seen as a downward-sloping demand curve. 83. Why are economists so particular about the difference between an increase in “quantity demanded” and an increase in “demand”? Aren't they the same thing? Correct Answer:
No, they are not the same thing. Failure to distinguish between a change in demand and a change in quantity demanded can lead to faulty economic analysis. An increase in the quantity demanded implies a downward movement along a given demand curve. The price has fallen and the quantity demanded has increased. An increase in demand implies that the entire demand curve has shifted rightward. This means that at all prices the quantity demanded has increased. 84. A small private college increases tuition while a large public university in the same state does not. All else equal what will likely happen to the demand (enrollment) for both schools? Correct Answer:
The small college is likely to see a decrease in the quantity demanded for college education at the school. This would be seen as a movement upward along the demand curve. If students see the two schools as substitutes, the demand curve would shift rightward for the large public university. 85. How would each event affect the demand for new textbooks? a) The price of a used textbook rises. b) The price of college tuition rises. c) More high school graduates decide to attend college. Correct Answer:
a) A used textbook is a substitute for a new textbook. When the used book becomes more expensive, the demand for a new book increases. b) A college course is a complement with a new textbook. If the price of attending college is rising, the demand for a new textbook decreases. c) More students in college implies there is an increase in the number of consumers for new textbooks. This increases the demand for books (both new and used). 86. In the following cases, explain what happens to demand or quantity demanded and how the change would be shown on a graph of the demand schedule. a) Assuming that tickets to an NFL game are normal goods, what is the
effect of an increase in the incomes of NFL fans? b) Assuming that Direct TV and Dish satellite are substitutes, what happens if the price of a Direct TV subscription increases? c) Assuming that data plans and cell phones are complements, what happens if the price of data plans decreases? Correct Answer:
a) If the fans' incomes increase and tickets are a normal good, the demand for tickets will increase, shown by a shift of the demand curve for tickets to the right. b) If subscriptions to Direct TV and Dish are substitutes, an increase in the price of a Direct TV subscription will decrease the quantity demanded of Direct TV subscriptions, shown by a movement up to the left on the demand schedule for Direct TV subscriptions. The demand for Dish subscriptions, the substitute, will increase, represented by a shift of the demand curve for Dish subscriptions to the right. c) If the price of data plans decreases, the quantity demanded of data plans will increase, shown by a movement down and to the right on the data plan demand schedule. The demand for cell phones will increase, shown by a shift to the right of the cell phone demand curve.
87. Markets that are characterized by many buyers and many sellers are referred to
as: a. inefficient. *b. competitive. c. foreign. d. monopolies.
88. Alice goes to the local supermarket to purchase one package of her favorite
taco shells. She often pays $1.50 for a package, but she finds they are on sale for $1 each. According to the law of demand, one can expect Alice to: a. purchase an alternative good. *b. purchase more than one package of taco shells. c. decide not to purchase taco shells on this visit. d. buy only one package of taco shells.
89. When the price of a good increases and the quantity demanded decreases, this
is often referred to as: a. efficiency. *b. the law of demand. c. the demand schedule. d. the production possibilities frontier.
90. Recent research suggests that certain plastic containers may have cancer-
causing elements in them. As a result of this research, one would expect that:
*a. the demand for such containers would decrease. b. the quantity demanded for such containers might increase. c. no impact would be observed in this market. d. the price of the containers would change due to a movement along the demand curve.
91. Good X and good Y are related goods. If the price of good X increases and the
demand curve for good Y shifts left, these goods are: *a. complements. b. substitutes. c. inferior. d. normal.
92. Suppose oranges and clementines are considered to be substitutes. Holding
everything else constant, if the price of oranges increases, then the: *a. demand for clementines will increase. b. demand for clementines will decrease. c. demand for oranges will increase. d. demand for oranges will decrease.
93. Good X and good Y are related goods. Holding everything else constant, if the
price of X decreases and the demand for Y increases, then this most likely means that X and Y are: *a. complements. b. substitutes. c. inferior. d. normal.
94. Good X and good Y are substitutes. Holding all other things constant, this
means that when the price of good X increases, the: a. demand for good X will increase. *b. demand for good Y will increase. c. demand for both good X and good Y will increase. d. demand for good Y will decrease.
95. Holding all other things constant, if ramen noodles are an inferior good to
Vanessa, then as her income increases, her demand curve for ramen noodles: *a. will shift left. b. will shift right. c. will not shift at all. d. may shift left or right, but unable to determine by how much.
96. If Benjamin considers sushi to be a normal good and if his income increases by
20%, his purchases of sushi will: a. decrease by 20%. *b. increase. c. decrease. d. not change.
97. The demand for a good will increase if: a. there is a decrease in the price of the good. b. the price of inputs needed in the production of the good decrease. *c. there is an increase in the number of consumers in this market. d. the price of a complementary good increases.
98. A market is composed of three individuals, Nicholas, Benjamin, and Alexander.
Their individual demand schedules are given below and are as follows:
Based on this information, which market demand schedule accurately portrays this market? a.
b.
*c.
d.
1. _____ illustrates a direct relationship between price and quantity. a. A demand curve *b. A supply curve c. A production possibility frontier d. Equilibrium
2. The typical supply curve illustrates that: a. other things equal, the quantity supplied for a good is inversely related to the price of a good. b. other things equal, the supply of the good creates its own demand for the good. *c. other things equal, the quantity supplied for a good is positively related to the price of a good. d. price and quantity supplied are unrelated.
3. When the price of lamps increases, the: a. supply increases. *b. quantity supplied increases. c. supply decreases. d. quantity supplied decreases.
4. When the price of armchairs increases, the: *a. quantity supplied increases. b. supply increases. c. quantity supplied decreases. d. supply decreases.
5. A decrease in supply means: *a. a shift to the left of the entire supply curve. b. a movement down the supply curve as prices go down. c. that less will be demanded at every price. d. that more will be supplied at every price.
6. The primary difference between a change in supply and a change in the quantity
supplied is that: *a. a change in quantity supplied is a movement along the supply curve, whereas a change in supply is a shift in the supply curve. b. both a change in quantity supplied and a change in supply are movements along the supply curve, only in different directions. c. a change in supply is related to the supply curve, whereas a change in quantity supplied is related to shifts in the demand curve that elicit a change in supply.
d. a change in supply is a movement along the supply curve, whereas a change in quantity supplied is a shift in the supply curve.
7. If the price of a commodity increases, you would expect its: a. supply to increase. *b. quantity supplied to increase. c. quantity supplied to decrease. d. supply curve to shift to the right.
8. In the market for beef tacos, each of these shifts the supply curve to the left
EXCEPT: a. an increase in the price of beef. b. an increase in the wages of taco shop workers. c. fewer taco shops. *d. a decrease in the price of tacos.
9. In the local market for coffee, what would happen if Joyce's Java and Everyday
Joe's coffee shops go out of business? a. The supply curve shifts to the right. b. The demand curve shifts to the left. *c. The supply curve shifts to the left. d. The demand curve shifts to the right.
10. Which of these is NOT a determinant of supply? a. expectations regarding future prices b. the technology of production c. the cost of production *d. consumer tastes
11. Which influence does NOT shift the supply curve? *a. people deciding that they want to buy more of the product b. a decrease in the price firms expect to receive in the future c. a rise in the wages paid to workers d. the development of a new production technology
12. Which will NOT cause an increase in the supply of good X? a. an improvement in the technology used to produce good X b. a decrease in the price of good Y, a substitute in production *c. an increase in the price of inputs used to produce good X
d. a decrease in the price of inputs used to produce good X
13. Consider the supply curve for cotton shirts. An increase in the price of cotton
will: a. increase the supply of cotton shirts. *b. decrease the supply of cotton shirts. c. increase the quantity supplied of cotton shirts. d. decrease the demand for cotton shirts.
14. Over the past few years, the technology associated with producing flat-panel
televisions has improved. This has led to a(n) _____ in the _____ flat-panel televisions. *a. increase; supply of b. increase; demand for c. decrease; supply of d. decrease; quantity supplied of
15. A technological advance in the production of automobiles will: a. increase the demand for automobiles. *b. increase the supply of automobiles. c. decrease the demand for automobiles. d. decrease the supply of automobiles.
16. An increase in supply of a good can result from: a. input prices rising. b. a fall in the price of the good. *c. an increase in the number of sellers. d. expectations of future price increases.
17. An increase in supply can result from: a. an increase in input prices. b. suppliers' expectations of higher prices in the future. c. an increase in the price of the good. *d. a decrease in the price of goods that are used in production.
18. A decrease in supply can result from: *a. an increase in the price of goods that are used in production. b. suppliers' expectations of lower prices in the future. c. an advancement in the technology for producing the good.
d. an increase in the number of producers.
19. If the price of mozzarella cheese (an ingredient in pizza) declines, there would
be: a. a decrease in the supply of pizza. *b. an increase in the supply of pizza. c. a decrease in the quantity of pizza supplied. d. no change in the supply of pizza.
20. An increase in supply can result from: a. an increase in input prices. b. a decrease in the number of sellers in the market. c. suppliers' expectations of higher prices in the future. *d. an advancement in the technology for producing the good.
21. A decrease in supply can result from: a. a decrease in input prices. b. an increase in the number of sellers in the market. *c. suppliers' expectations of higher prices in the future. d. an advancement in the technology for producing the good.
22. Which statement would NOT cause the supply curve to shift? a. a change in the production technology b. a change in factor costs *c. a change in the price of the good d. a change in suppliers' expectations of future prices
23. A shift to the left of a supply curve can result from: a. an increase in the number of sellers. b. a technological improvement in production. *c. an increase in the cost of an input. d. an increase in the number of buyers.
24. Which statement is most likely to shift the supply of milk to the right? a. a tax on each gallon of milk produced b. an increase in household income and milk is a normal good *c. a decrease in the price of feed given to dairy cows d. the bankruptcy of many small dairy farms
25. In the market for wheat, what would happen if the price of ethanol (which is
made from corn, a substitute in production) increases dramatically? a. an increase in supply of wheat *b. a decrease in supply of wheat c. an increase in demand for wheat d. a decrease in demand for wheat
26. Which statement will NOT cause an increase in the supply of cornflakes? *a. an increase in the price of cornflakes b. a cost-saving improvement in the technology of corn production c. a reduction in the price of corn d. the expectation by producers that the price of cornflakes will fall in the future
27. Figure: Supply of Coconuts
Reference: Ref 6-1
(Figure: Supply of Coconuts) Examine the figure Supply of Coconuts. If the price of coconuts decreased, it would be represented in the figure as a movement from: *a. A to B. b. B to A. c. C to A. d. E to B.
28. Figure: Supply of Coconuts Reference: Ref 6-1
(Figure: Supply of Coconuts) Examine the figure Supply of Coconuts. If the prices of inputs (e.g., labor, fertilizer, and fuel) used to produce and transport coconuts increased, it would be represented in the figure as a movement from: a. A to B. b. B to A. *c. C to A. d. E to B.
29. Figure: Supply of Coconuts Reference: Ref 6-1
(Figure: Supply of Coconuts) Examine the figure Supply of Coconuts. If the prices of inputs (e.g., labor, fertilizer, and fuel) used to produce and transport coconuts decreased, it would be represented in the figure as a movement from: a. A to B. b. B to A. c. C to A. *d. E to B.
30. Figure: Supply of Coconuts Reference: Ref 6-1
(Figure: Supply of Coconuts) Examine the figure Supply of Coconuts. An improvement in the technology used to harvest coconuts (e.g., a faster, less expensive coconut picker) would be represented in the figure as a movement from: *a. A to C. b. B to A. c. C to A. d. B to E.
31. Figure: Supply of Coconuts Reference: Ref 6-1
(Figure: Supply of Coconuts) Examine the figure Supply of Coconuts. An expectation on the part of coconut suppliers that the price of coconuts will be significantly higher in the very near future would be represented in the figure as a movement from: a. A to B. b. B to A.
c. A to C. *d. B to E.
32. Figure: The Supply of DVD Rentals
Reference: Ref 6-2
(Figure: The Supply of DVD Rentals) Examine the figure The Supply of DVD
Rentals. A decrease in the price of DVD rentals would result in a change illustrated by the move from: a. n to o in panel A. b. p to q in panel B. c. s to t in panel C. *d. u to v in panel D.
33. Figure: The Supply of DVD Rentals Reference: Ref 6-2
(Figure: The Supply of DVD Rentals) Examine the figure The Supply of DVD Rentals. A decrease in the price of DVDs sold by movie producers to rental stores would result in a change illustrated by the move from: *a. n to o in panel A. b. p to q in panel B. c. s to t in panel C. d. u to v in panel D.
34.
Reference: Ref 6-3
(Table: Supply of Lemonade) Examine the table Supply of Lemonade. When the price of lemonade is $1 per cup, the quantity of lemonade supplied by Eli will be: *a. 40 cups. b. 90 cups. c. 10 cups. d. 25 cups.
35.
Reference: Ref 6-3
(Table: Supply of Lemonade) Examine the table Supply of Lemonade. If the price of lemonade is $1 per cup, the total quantity of lemonade supplied will be: a. 50 cups. b. 80 cups. c. 25 cups. *d. 90 cups.
36. If the market for buffalo meat is in equilibrium, the price of buffalo meat will
probably _____ in the near future. a. increase *b. not change c. decrease d. increase considerably
37. Market equilibrium occurs when: a. there is no incentive for prices to change in the market. b. quantity demanded equals quantity supplied. c. the market clears. *d. there is no incentive for prices to change in the market, quantity demanded equals quantity supplied, and the market clears.
38. The market equilibrium is found at the: a. price where quantity demanded exceeds quantity supplied. *b. price where quantity demanded equals quantity supplied. c. price where quantity supplied exceeds quantity demanded. d. highest price the market will bear.
39. Suppose the equilibrium price of good Y is $5 and the equilibrium quantity is
150 units. If the price of good Y is $12: a. the quantity demanded will be greater than 150 units. b. the quantity supplied will be less than 150 units. c. there will be an excess demand for good Y. *d. there will be an excess supply of good Y.
40. Excess supply occurs when: *a. the price is above the equilibrium price. b. the quantity demanded exceeds the quantity supplied. c. the price is below the equilibrium price. d. the quantity demanded exceeds the quantity supplied and when the price is below the equilibrium price.
41. If the quantity supplied in a market exceeds the quantity demanded in a market,
prices would be expected to: a. stay the same. b. rise. *c. fall.
d. rise in order to clear the market.
42. If the quantity of housing supplied in a community is greater than the quantity of
houses demanded, the existing price: *a. is above the market equilibrium price. b. will rise to clear the market. c. will either rise or remain unchanged. d. is below the market equilibrium price.
43. If the supply and demand curves intersect at a price of $47, then any price
above that would result in: a. a shortage. *b. a surplus. c. equilibrium. d. an increase in demand.
44. If the supply and demand curves intersect at a price of $14, then any price
below that would result in: *a. a shortage. b. a surplus. c. equilibrium. d. an increase in demand.
45. Suppose the equilibrium price of good X is $25 and the equilibrium quantity is
124 units. If the price of good X is $2: *a. there will be excess demand for good X. b. there will be an excess supply of good X. c. the market will clear. d. the quantity demanded of good X will be less than 124 units.
46. Figure: Demand and Supply of Gasoline
Reference: Ref 6-4
(Figure: Demand and Supply of Gasoline) Examine the figure Demand and Supply of Gasoline. The initial equilibrium price and quantity (at intersection of S1 and D) of gasoline are: a. $2.00 and 450 gallons. b. $1.50 and 400 gallons. c. $2.00 and 200 gallons. *d. $2.50 and 300 gallons.
47. Figure: Demand and Supply of Gasoline Reference: Ref 6-4
(Figure: Demand and Supply of Gasoline) Examine the figure Demand and Supply of Gasoline. A factor that may have changed supply from S1 to S2 is: *a. better technology in the production of gasoline. b. increased demand. c. lower labor productivity in gasoline production. d. increased prices of substitutes in production for gasoline.
48. Figure: Demand and Supply of Gasoline Reference: Ref 6-4
(Figure: Demand and Supply of Gasoline) Examine the figure Demand and Supply of Gasoline. Given the initial equilibrium of S1 and D, any price lower than _____ will create pressure for the price to _____. a. $2.00; fall *b. $2.50; rise c. $3.00; rise d. $2.50; fall
49. A competitive market with flexible prices and many buyers and sellers will: a. eliminate surpluses. b. eliminate shortages. c. reach equilibrium. *d. eliminate surpluses and shortages and reach equilibrium.
50.
Reference: Ref 6-5
(Table: The Market for Chocolate-Covered Peanuts) Examine the table The Market for Chocolate-Covered Peanuts. If the price of chocolate-covered peanuts is $0.60, the price will: *a. not change. b. fall to $0.30. c. fall to $0.50. d. rise to $0.70.
51.
Reference: Ref 6-5
(Table: The Market for Chocolate-Covered Peanuts) Examine the table The Market for Chocolate-Covered Peanuts. The equilibrium quantity and the equilibrium price are _____ bags and _____.
a. 140; $0.40 *b. 175; $0.60 c. 175; $0.80 d. 210; $0.50
52.
Reference: Ref 6-5
(Table: The Market for Chocolate-Covered Peanuts) Examine the table The Market for Chocolate-Covered Peanuts. If the price of chocolate-covered peanuts is $0.80, there is: *a. a surplus of 140 bags per month. b. a shortage of 140 bags per month. c. a surplus of 70 bags per month. d. a shortage of 70 bags per month.
53.
Reference: Ref 6-5
(Table: The Market for Chocolate-Covered Peanuts) Examine the table The Market for Chocolate-Covered Peanuts. A surplus of 210 bags of chocolate-covered peanuts exists if the price is _____ per bag. *a. $0.90 b. $0.80 c. $0.60 d. $0.40
54.
Reference: Ref 6-5
(Table: The Market for Chocolate-Covered Peanuts) Examine the table The Market for Chocolate-Covered Peanuts. If the price of chocolate-covered peanuts is $0.50, there is: a. a surplus of 35 bags per month. b. a shortage of 35 bags per month. c. a surplus of 70 bags per month. *d. a shortage of 70 bags per month.
55.
Reference: Ref 6-5
(Table: The Market for Chocolate-Covered Peanuts) Examine the table The Market for Chocolate-Covered Peanuts. A shortage of 210 bags of chocolate-covered peanuts exists if the price is _____ per bag. a. $0.80 b. $0.60 c. $0.40 *d. $0.30
56. What is the difference between a shortage and scarcity?
*a. Scarcity will almost always exist, but a shortage will exist only if the price is kept below the equilibrium level. b. Scarcity is a result of two or more alternative uses and the adjustment of quantity supplied and quantity demanded will create shortages. c. A shortage will exist when a good is scarce. d. They are the same thing.
57. Figure: The Demand and Supply of Wheat
Reference: Ref 6-6
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. What is the equilibrium price in this wheat market? *a. $6 b. $4 c. $2 d. $8
58. Figure: The Demand and Supply of Wheat Reference: Ref 6-6
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. If a price of $10 temporarily exists in this market: a. a shortage of 10,000 bushels will result. b. a shortage of 8,000 bushels will result. *c. a surplus of 8,000 bushels will result. d. a surplus of 4,000 bushels will result.
59. Figure: The Demand and Supply of Wheat Reference: Ref 6-6
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. A price of _____ will result in a _____. a. $6; shortage *b. $8; surplus c. $8; shortage d. $4; surplus
60. Figure: The Demand and Supply of Wheat Reference: Ref 6-6
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. A temporary price of $2 in this market would result in: a. a surplus of 4,000 bushels. *b. a shortage of 8,000 bushels. c. a shortage of 10,000 bushels. d. a surplus of 10,000 bushels.
61. Figure: The Demand and Supply of Wheat Reference: Ref 6-6
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. What is the equilibrium quantity in this wheat market? a. 12,000 bushels b. 2,000 bushels c. 10,000 bushels *d. 6,000 bushels
62. Figure: The Demand and Supply of Wheat Reference: Ref 6-6
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. If a price of $8 temporarily exists in this market: a. a shortage of 2,000 bushels will result. *b. a surplus of 4,000 bushels will result. c. a shortage of 4,000 bushels will result. d. a surplus of 6,000 bushels will result.
63. Figure: The Demand and Supply of Wheat Reference: Ref 6-6
(Figure: The Demand and Supply of Wheat) Look at the figure The Demand and Supply of Wheat. A temporary price of $4 in this market would result in: a. a surplus of 4,000 bushels. b. a shortage of 2,000 bushels. *c. a shortage of 4,000 bushels. d. a surplus of 2,000 bushels.
64.
Reference: Ref 6-7
(Table: The Lemonade Market) Examine the table The Lemonade Market. If the price of a cup of lemonade is $1.00, there will be _____ in the market. a. equilibrium b. a shortage of 150 cups *c. a shortage of 75 cups d. a surplus of 75 cups
65.
Reference: Ref 6-7
(Table: The Lemonade Market) Examine the table The Lemonade Market. If the price of lemonade is $1.25 per cup, expect to see: a. a rising price to eliminate the shortage. b. a rising price to eliminate the surplus.
c. a falling price to eliminate the shortage. *d. a market in equilibrium.
66. Figure: The DVD Rental Market
Reference: Ref 6-8
(Figure: The DVD Rental Market) Examine the figure The DVD Rental Market. The figure shows the weekend rental market for DVDs in Collegetown. The equilibrium price for DVD rentals is _____ and the equilibrium quantity is _____. *a. $5; 50 b. $3; 30 c. $9; 90 d. $6; 40
67. Figure: The DVD Rental Market Reference: Ref 6-8
(Figure: The DVD Rental Market) Examine the figure The DVD Rental Market. If the rental price of DVDs rises from $5 per rental to $7 per rental, then: a. demand will decrease from 50 to 30 rentals per weekend. *b. the quantity demanded will decrease from 50 rentals per weekend to 30 rentals per weekend. c. supply will increase from 50 to 70 rentals per weekend. d. the quantity supplied will increase from 50 to 60 rentals per weekend.
68. Figure: The DVD Rental Market Reference: Ref 6-8
(Figure: The DVD Rental Market) Examine the figure The DVD Rental Market. At a rental price of $3, there will be a. equilibrium in the rental market for DVDs. b. an increase in demand. c. an excess supply of 40 DVD rentals. *d. an excess demand of 40 DVD rentals.
69. Figure: The DVD Rental Market Reference: Ref 6-8
(Figure: The DVD Rental Market) Examine the figure The DVD Rental Market. At a rental price of $6, there will be: a. equilibrium in the rental market for DVDs. b. a decrease in demand. *c. an excess supply of 20 DVD rentals. d. an excess demand of 20 DVD rentals.
70. The supply curve for apartments in Oregon reflects how many apartments landlords are willing and able to offer for rent at a specific price. *a. True b. False
71. An increase in the price of contact lenses will increase the supply of contact lenses. a. True *b. False
72. A major input into vanilla ice cream is cream. An increase in the price of cream will reduce the quantity of vanilla ice cream supplied, but it will not reduce the supply of vanilla ice cream. a. True *b. False
73. If the input costs associated with supplying gasoline increases in Wisconsin, the supply of gasoline will decrease in Wisconsin. *a. True
b. False
74. If there is an excess supply of a good, the problem of scarcity does not apply to that good. a. True *b. False
75. Figure: Supply, Demand, and Equilibrium
Reference: Ref 6-9 (Figure: Supply, Demand, and Equilibrium) Examine the figure Supply, Demand, and Equilibrium. In the figure, there will be an excess supply of the good at a price of P1. a. True *b. False
76. Figure: Supply, Demand, and Equilibrium Reference: Ref 6-9 (Figure: Supply, Demand, and Equilibrium) Examine the figure Supply, Demand, and Equilibrium. In the figure, there will be an excess demand of the good at a price of P3. a. True *b. False
77. Suppose there is an excess supply of chemical engineers in India. Over time, the salaries for chemical engineers will fall in India. *a. True b. False
78. Suppose there is an excess demand for water in Florida. This means that the price of water can be expected to increase over time in Florida. *a. True b. False
79. Suppose the supply curve for soap bubbles has a slope of +1 and intersects the vertical axis at a price of $2 per bottle. Interpret the meaning of both the y-intercept and the slope. Correct Answer:
The y-intercept at $2 illustrates that there will be zero bottles supplied at prices of $2 and below. In other words, the price must rise above $2 for any bottles to be supplied. The slope of +1 illustrates that if the price rises $1, one more bottle of soap bubbles will be supplied. 80. How would each event affect the supply of compact cars? a) The price of steel rises. b) The production technology for car manufacturing improves. c) The price of sport utility vehicles falls. Correct Answer:
a) Steel is an important input in car production. Higher steel prices would shift the supply curve to the left. b) Better production technology would shift the supply curve to the right. c) Producers would see less profit in producing sport utility vehicles, so the supply of compact cars would shift to the right. 81. Why do many clothing stores have big after-Christmas sales on their merchandise? Correct Answer:
After the holidays, demand for clothing (and all items that make for good gifts) falls. At the pre-Christmas price, there is now a surplus of clothing. Whenever there is a surplus in any market, you see suppliers (or retailers in this case) with unsold inventory. In order to clear the surplus, the price is lowered. More shoppers are enticed by the lower price and the surplus is eliminated.
82. Milk is an important ingredient in the production of ice cream. If the price of milk
increases, then one would expect, holding all other things constant: *a. the supply curve for ice cream to shift left. b. the supply curve for ice cream to shift right. c. no change in the supply curve for ice cream. d. a movement along the supply curve for ice cream curve, resulting in more ice cream supplied.
83. All of these would result in an increase in the supply of a good EXCEPT: a. a decrease in input prices. b. a beneficial technological change. c. an increase in the number of suppliers. *d. an increase in input prices.
84. A farmer finds that when he produces more corn, he also has more corn stalks
that he can sell as decorations. To the farmer, corn and corn stalks are: *a. complements in production. b. substitutes in production. c. unrelated goods. d. inferior goods.
85. The concept of substitutes in production suggests that a producer with a fixed
set of resources initially will need to reduce production of one good when the producer: a. produces less of the other good. *b. produces more of the other good. c. experiences an increase in resources. d. produces more of the other good and when the producer experiences an increase in resources.
86. Researchers find a new strain of genetically modified seeds that results in a
higher yield for corn producers. Holding all other things constant, this research will: a. shift the supply curve for corn left. b. increase the quantity supplied of corn. c. decrease the quantity supplied of corn. *d. shift the supply curve for corn to the right.
87. If suppliers expect prices for their product to rise next year, then one would
expect: a. that this will shift the demand curve for the product right this year. b. an increase in the quantity demanded this year. *c. that this will shift the supply curve for the product to the left this year. d. a shift in the supply curve for the product to the right this year.
88. The market for good Y, a perfectly competitive good, is made up of 15
producers who each produce the same amount of good Y. If the price of good Y is
currently $100 and the total quantity supplied is 150, how many units of good Y is each producer supplying? *a. 10 b. 150 c. 100 d. 15
89. When a market is in equilibrium, one will find that the: a. quantity demanded is equal to zero. *b. quantity demanded is equal to quantity supplied. c. quantity demanded is greater than quantity supplied. d. quantity supplied is zero.
90.
Reference: Ref 6-10
(Table: Competitive Market for Good Z) Examine the table Competitive Market for Good Z. If the current price of good Z is $15, there will be: a. excess demand of 25 units. *b. excess supply of 25 units. c. a shortage of 20 units. d. a surplus of 45 units.
91.
Reference: Ref 6-10
(Table: Competitive Market for Good Z) Examine the table Competitive Market for Good Z. A surplus of the good will occur at a price of _____. a. $0 b. $5 c. $10 *d. $15
92.
Reference: Ref 6-10
(Table: Competitive Market for Good Z) Examine the table Competitive Market for Good Z. The equilibrium price and quantity in this market are, respectively: a. $5 and 40 units.
b. $20 and 60 units. *c. $10 and 30 units. d. $15 and 20 units.
93.
Reference: Ref 6-10
(Table: Competitive Market for Good Z) Examine the table Competitive Market for Good Z. If the demand curve for good Z is linear, it can be expressed as: a. Qd = 3P. *b. Qd = 50 − 2P. c. Qd = Qs. d. Qd = 100 − 2P.
94.
Reference: Ref 6-10
(Table: Competitive Market for Good Z) Examine the table Competitive Market for Good Z. If the supply curve for good Z is linear, it can be expressed as: *a. Qs = 3P. b. Qs = 50 − 2P. c. Qs = 100 − 2P. d. Qs = Qd.
95. Figure: The Market for Candy
Reference: Ref 6-11
(Figure: The Market for Candy) Examine the figure The Market for Candy. Equilibrium occurs at a price of _____, and the equilibrium quantity is equal to _____. a. P1; Q5 *b. P2; Q3
c. P3; Q2 d. P1; Q3
96. Figure: The Market for Candy Reference: Ref 6-11
(Figure: The Market for Candy) Examine the figure The Market for Candy. A surplus of the good will exist at a price of: *a. P1. b. P2. c. P3. d. There are no surpluses in this market.
1. Which statement ALWAYS results in an increase in price and quantity? a. an increase in supply and a decrease in demand *b. an increase in demand with no change in supply c. an increase in supply with no change in demand d. a decrease in demand and supply
2. The market price of airline flights increased recently. Some economists suggest
that the price increased because there has been an increase in the number of business travelers. They believe that in the market for flights: a. supply increased. b. supply decreased. *c. demand increased. d. demand decreased.
3. If tortilla chips are a normal good, what happens to equilibrium price and quantity
when there is an increase in income? a. Equilibrium price decreases and equilibrium quantity increases. b. Equilibrium price decreases and equilibrium quantity decreases. *c. Equilibrium price increases and equilibrium quantity increases. d. Equilibrium price increases and equilibrium quantity decreases.
4. In the market for tacos, you observe that the equilibrium price and quantity have
increased. This can be caused only by: a. an increase in the price of beef. b. an increase in the wages of taco shop workers. c. fewer taco shops. *d. an increase in the incomes of people who eat tacos.
5. If peanut butter is an inferior good, what would happen to the price and quantity
sold of peanut butter as incomes fall during an economic recession? a. The price would increase and the quantity would decrease. *b. The price and quantity would both increase. c. The price and quantity would both decrease. d. The price would decrease and the quantity would increase.
6. A newspaper story recently reported that the price of new cars, a normal good,
has decreased and the quantity of new cars sold has dropped. The new price and quantity could have been caused by:
*a. a decrease in buyers' incomes. b. an increase in buyers' incomes. c. an increase in production costs. d. a decrease in production costs.
7. A shift of a demand curve to the right, all other things unchanged, will: *a. increase equilibrium price and quantity. b. decrease equilibrium price and quantity. c. decrease equilibrium quantity and increase equilibrium price. d. increase equilibrium quantity and decrease equilibrium price.
8. For consumers, pizza and hamburgers are substitutes. A rise in the price of a
pizza causes a _____ in the equilibrium price of a hamburger and a _____ in the equilibrium quantity of hamburgers. *a. rise; rise b. rise; fall c. fall; rise d. fall; fall
9. If the economy booms and peoples' incomes rise, then the demand curve for a
normal good such as new houses will _____ and the equilibrium quantity of new houses produced will _____. *a. shift to the right; increase b. not shift; not change c. not shift; increase d. shift to the left; decrease
10. A new wonder diet that results in a dramatic weight loss sweeps through
America. The key to the diet is to eat unlimited amounts of red meat (beef) but no poultry or carbohydrate-rich foods. As millions of Americans switch to the new diet, one would expect to see: *a. an increase in the demand for beef, leading to a shift to the right in the demand curve for beef and higher beef prices. b. an increase in the demand for beef, leading to a shift to the right in the demand curve for beef and lower beef prices. c. a decrease in the supply of beef, leading to a shift to the left in the supply curve for beef and higher beef prices. d. a decrease in the demand for beef, leading to a shift to the left in the demand curve for beef and higher beef prices.
11. A new wonder diet that results in a dramatic weight loss sweeps through
America. The key to the diet is to eat unlimited amounts of red meat (beef) but no
poultry or carbohydrate-rich foods. As millions of Americans switch to the new diet, one would expect to see: a. a decrease in the supply of poultry, leading to a shift to the left in the supply curve for poultry and higher poultry prices. b. an increase in the supply of poultry, leading to a shift to the right in the supply curve for poultry and higher poultry prices. c. a decrease in the demand for poultry, leading to a shift to the right in the demand curve for poultry and lower beef prices. *d. a decrease in the demand for poultry, leading to a shift to the left in the demand curve for poultry and lower poultry prices.
12. Consider two competing motorcycle manufacturers: Harley-Davidson and
Honda. If Harley-Davidson raises the price of its motorcycles, one would expect to see: a. a shift to the right in the supply curve of Hondas and lower prices for Hondas. b. a shift to the left in the supply curve of Hondas and higher prices for Hondas. *c. a shift to the right in the demand curve for Hondas and higher prices for Hondas. d. a shift to the left in the demand curve for Hondas and lower prices for Hondas.
13. An increase in demand with no change in supply will lead to a(n) _____ in
equilibrium quantity and a(n) _____ in equilibrium price. *a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease
14. French fries and hamburgers are complements. Suppose the cost of the
ingredients used to make hamburgers rises, so that the price of a hamburger rises. Then the equilibrium relative price of french fries _____ and the equilibrium quantity _____. a. rises; rises b. rises; falls c. falls; rises *d. falls; falls
15. A decrease in demand, with no change in supply, will lead to a(n) _____ in
equilibrium quantity and a(n) _____ in equilibrium price.
a. increase; increase b. increase; decrease c. decrease; increase *d. decrease; decrease
16. Given a supply curve that is positively sloped and a demand curve for a normal
good that is negatively sloped, an increase in income will most likely result in: *a. an increase in equilibrium price and quantity. b. a decrease in equilibrium price and an increase in equilibrium quantity. c. a decrease in both equilibrium price and quantity. d. an increase in equilibrium price and a decrease in equilibrium quantity.
17. An increase in demand, all other things unchanged, will result in a(n) _____ in
equilibrium price and a(n) _____ in equilibrium quantity. *a. increase; increase b. decrease; decrease c. decrease; increase d. increase; decrease
18. A decrease in supply, with no change in demand, will lead to a(n) _____ in
equilibrium quantity and a(n) _____ in equilibrium price. a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease
19. An increase in supply, with no change in demand, will lead to a(n) _____ in
equilibrium quantity and a(n) _____ in equilibrium price. a. increase; increase *b. increase; decrease c. decrease; increase d. decrease; decrease
20. When the price of DVD players falls, the quantity of DVD players sold increases.
This set of observations can be the result of the: a. demand for DVD players shifting to the right. b. demand for DVD players shifting to the left. *c. supply of DVD players shifting to the right. d. supply of DVD players shifting to the left.
21. In the market for corn tortilla chips, what would cause a price increase? a. Doctors tell their patients that tortilla chips are unhealthy. b. There is a technological advancement in the tortilla chip production process. *c. A fungus kills much of the corn crop in Nebraska. d. The price of salsa triples.
22. The market price of airline flights increased recently. Some economists suggest
that the price increased because several airlines went out of business. They believe that in the market for flights: a. supply increased. *b. supply decreased. c. demand increased. d. demand decreased.
23. The market price of airline flights increased recently. Some economists suggest
that the price increased because jet fuel is much more expensive than before. They believe that in the market for flights: a. supply increased. *b. supply decreased. c. demand increased. d. demand decreased.
24. In the market for grass-fed beef, what would cause a price increase? a. The price of chicken decreases. b. Doctors tell patients that beef is full of saturated fat that causes heart attacks. *c. The prices of grass and corn increase. d. There is a movement in the United States toward vegetarianism.
25. The market for corn is in equilibrium. Which statement is most likely to increase
the equilibrium price of corn? a. a bountiful harvest *b. increasing production of corn-based ethanol c. decreasing household incomes and corn is a normal good d. a decrease in the price of wheat, a substitute in consumption
26. The market for lemonade is in equilibrium, and the price of lemons rises. How
will this affect the lemonade market?
a. Demand will decrease, decreasing the price and decreasing the quantity. b. Demand will decrease, increasing the price and decreasing the quantity. c. Supply will increase, decreasing the price and increasing the quantity. *d. Supply will decrease, increasing the price and decreasing the quantity.
27. Suppose the input costs associated with manufacturing hair replacement
treatments decreases over time. This would lead to: *a. an increase in the supply of such treatments, lower prices, and an increase in the equilibrium quantity. b. a decrease in quantity supplied and lower prices. c. an increase in demand and higher prices. d. a decrease in the supply of such treatments, higher prices, and a decrease in the equilibrium quantity.
28. The price of microchips used to produce computers falls. As a result, the
equilibrium price of computers _____ and the equilibrium quantity ______. a. rises; increases b. rises; decreases c. falls; decreases *d. falls; increases
29. If the price of DVD players falls and the quantity of DVD players sold increases,
which statement may have caused this change? a. Demand for DVD players shifts to the right. b. Demand for DVD players shifts to the left. *c. Supply of DVD players shifts to the right. d. Supply of DVD players shifts to the left.
30. If the United States increases tariffs on imports of lumber from Canada (which
causes the price of lumber to increase in the United States), the equilibrium price of new homes in the United States will _____ and the equilibrium quantity of new homes in the United States will _____. a. increase; increase *b. increase; decrease c. decrease; increase d. decrease; decrease
31. Consider gas stations where customers pay inside before they pump gasoline. If
they introduce a new technology where customers pay at the pump, thus decreasing production costs, there will be: *a. a shift to the right in the supply curve and lower gas prices. b. a shift to the left in the supply curve and higher gas prices. c. a shift to the right in the demand curve and higher gas prices. d. a shift to the left in the demand curve and lower gas prices.
32. Many public utilities burn oil to generate electricity. If the price of oil increases,
one would expect there to be: a. a shift to the right in the supply curve of electricity and a lower price for electricity. *b. a shift to the left in the supply curve of electricity and a higher price for electricity. c. a shift to the right in the demand curve for oil and a higher price for electricity. d. a shift to the left in the demand curve for oil and a lower price for electricity.
33. The market for milk is initially in equilibrium. Milk producers engage in an
advertising program to encourage milk drinking, which succeeds in shifting consumer tastes toward drinking milk. At the same time, more milk producers enter the market. Standard demand and supply analysis states that: a. the equilibrium price and quantity of milk will rise. b. the equilibrium price and quantity of milk will fall. *c. the equilibrium quantity of milk will rise, but one cannot determine how the equilibrium price will be affected. d. the equilibrium price of milk will rise, but one cannot determine how the equilibrium quantity will be affected.
34. Consider the market for iPods. What happens if a popular new alternative MP3
player is developed and at the same time a boat carrying a large shipment of iPods is attacked by pirates and sunk? a. Price decreases and quantity increases. b. Price increases and quantity increases. *c. The change in price is indeterminate and quantity decreases. d. Price increases and the change in quantity is indeterminate.
35. Consider the market for corn. What happens if there is an increased demand for
corn tortillas and at the same time a new corn seed becomes available that dramatically increases the per-acre yield?
a. Price and quantity decrease. b. The change in price is indeterminate; quantity decreases. *c. The change in price is indeterminate; quantity increases. d. Price increases; the change in quantity is indeterminate.
36. In the market for local coffee, a normal good, the price will _____ and the
quantity will _____ if new coffee shops open and consumers' incomes decrease due to a recession. a. increase; be indeterminate *b. decrease; be indeterminate c. be indeterminate; increase d. be indeterminate; decrease
37. Suppose the local real estate market is in equilibrium. A recession causes local
household incomes to decline. At the same time, construction of a large subdivision of new homes has just been completed. Given these two changes and assuming that real estate is a normal good, one can predict the price of real estate will _____ and the quantity of real estate bought and sold will _____. a. fall; fall b. fall; rise *c. fall; rise or fall d. rise; fall or rise
38. Suppose the market for gasoline is in equilibrium. The price of crude oil is falling
because of new oil discoveries. Also, the number of car and truck drivers is steadily rising. Knowing this, it could be predicted that the price of gasoline will _____ and the quantity of gasoline bought and sold will _____. a. rise; rise b. rise; fall *c. rise or fall; rise d. rise or fall; fall
39. A recent news story reported that OPEC is expected to decrease their supply of
oil next summer. Summer is traditionally a time of increased demand for oil because of the many families driving and flying to vacation sites. What would be the combined effect of these two events on the summer market for gasoline? a. an increase in the price and the quantity *b. an increase in the price and an unpredictable change in the quantity c. an unpredictable change in both the price and the quantity d. an unpredictable change in the price and a decrease in the quantity
40. Suppose that more police and security workers become aware that wearing
bulletproof vests can protect them from injury and decide to start wearing bulletproof vests. At the same time, the price of ceramics used to produce the vests falls. The equilibrium price of bulletproof vests _____ and the equilibrium quantity produced _____. a. increases; increases b. decreases; decreases c. probably changes, but in an ambiguous direction; probably changes, but in an ambiguous direction *d. probably changes, but in an ambiguous direction; increases
41. An increase in the price and an ambiguous change in quantity are most likely
caused by: a. a shift to the left in demand and no shift in supply. b. a shift to the left in supply and no shift in demand. c. a shift to the right in supply and a shift to the left in demand. *d. a shift to the left in supply and a shift to the right in demand.
42. Suppose that supply increases and demand decreases. What is the most likely
effect on price and quantity? a. The price will increase, but quantity may increase, decrease, or stay the same. *b. The price will decrease, but quantity may increase, decrease, or stay the same. c. The price will decrease and quantity will decrease. d. The price will increase and quantity will increase.
43. An ambiguous change in price and a decrease in quantity are most likely
caused by: a. no shift in supply and a shift to the left in demand. *b. a shift to the left in supply and a shift to the left in demand. c. a shift to the right in supply and a shift to the left in demand. d. a shift to the left in supply and a shift to the right in demand.
44. Figure: Demand and Supply of Gasoline
Reference: Ref 7-1
(Figure: Demand and Supply of Gasoline) Examine the figure Demand and Supply of Gasoline. Given the initial equilibrium of S1 and D, any price lower than _____ will create pressure for the price to _____. a. $2.00; fall *b. $2.50; rise c. $3.00; rise d. $2.50; fall
45. The cost of sensors used in making digital cameras falls, while a successful ad
campaign makes digital cameras more fashionable. As a result, the equilibrium price of digital cameras _____ and the equilibrium quantity _____. a. increases; increases b. increases; may increase, decrease, or stay the same *c. may increase, decrease, or stay the same; increases d. decreases; increases
46. A decrease in demand and a decrease in supply will lead to a(n) _____ in
equilibrium quantity and a(n) _____ in equilibrium price. *a. decrease; indeterminate change b. indeterminate change; increase c. indeterminate change; decrease d. increase; indeterminate change
47. An increase in demand and a decrease in supply will lead to a(n) _____ in
equilibrium quantity and a(n) _____ in equilibrium price. a. decrease; decrease *b. indeterminate change; increase c. indeterminate change; decrease d. increase; indeterminate change
48. It is certain that the equilibrium price will fall when: a. the supply curve and the demand curve both shift to the right. *b. the supply curve shifts to the right and the demand curve shifts to the left. c. supply and demand both increase. d. supply decreases and demand stays the same.
49. It is certain that the equilibrium price will rise when: a. the supply curve and the demand curve both shift to the right. b. the supply curve shifts to the right and the demand curve shifts to the left. c. supply and demand both shift to the left. *d. the supply curve shifts to the left and the demand curve shifts to the right.
50. It is certain that the equilibrium quantity will fall when: a. the supply curve and the demand curve both shift to the right. b. the supply curve shifts to the right and the demand curve shifts to the left. c. supply curve shifts to the left and demand shifts to the right. *d. supply shifts to the left and demand stays the same.
51. It is certain that the equilibrium quantity will rise when: *a. the supply curve and the demand curve both shift to the right.
b. the supply curve shifts to the right and the demand curve shifts to the left. c. supply and demand both shift to the left. d. supply shifts to the left and demand stays the same.
52. Equilibrium quantity will always increase if: *a. supply and demand both increase. b. supply increases and demand decreases. c. supply and demand both decrease. d. supply decreases and demand remains unchanged.
53. Figure: Demand and Supply of Gasoline
Reference: Ref 7-1
(Figure: Demand and Supply of Gasoline) Examine the figure Demand and Supply of Gasoline. Given the resulting equilibrium after a change in supply from S1 to S2: *a. at the old price of $2.50, there will be pressure for the price to fall. b. the new price will be $2.00. c. the new quantity will be 600. d. the price will remain constant.
54. Figure: Demand and Supply of Gasoline Reference: Ref 7-1
(Figure: Demand and Supply of Gasoline) Examine the figure Demand and Supply of Gasoline. When the supply curve shifts from S1 to S2, the new intersection of supply and demand has a price of _____ and quantity of 400. This supply shift could have resulted from _____. a. $1.50; an increase in consumers' income *b. $1.50; an improvement in refining technology c. $2.00; an increase in the number of buyers d. $2.00; an increase in consumers' income
55. Figure: The Demand and Supply of Wheat
Reference: Ref 7-3
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. If there were an increase in demand of 2,000 bushels at each
price, the resulting equilibrium price and quantity would be _____ and _____ bushels, respectively. a. $5; 5,000 b. $6; 7,000 *c. $7; 7,000 d. $8; 8,000
56. Figure: The Demand and Supply of Wheat Reference: Ref 7-3
(Figure: The Demand and Supply of Wheat) Examine the figure The Demand and Supply of Wheat. If there were a decrease in supply of 2,000 bushels at each price, the resulting equilibrium price and quantity would be _____ and _____ bushels, respectively. a. $5; 5,000 *b. $7; 5,000 c. $6; 4,000 d. $8; 6,000
57. The _____ tomatoes will decrease if fertilizer prices rise. a. demand for b. quantity demanded of *c. supply of d. equilibrium price of
58. Which statement will result in an increased price of milk? a. a shift to the right of the supply curve for milk *b. a shift to the right of the demand curve for milk c. an increase in the number of milk suppliers d. a decrease in the number of milk buyers
59. Figure: Four Markets for DVDs
Reference: Ref 7-4
(Figure: Four Markets for DVDs) Examine the figure Four Markets for DVDs. If D1 or S1 is the original curve and D2 or S2 is the new curve, which of the graphs shows a change that results in an increase in the quantity demanded of DVDs? a. A b. B c. C *d. D
60. Figure: Four Markets for DVDs Reference: Ref 7-4
(Figure: Four Markets for DVDs) Examine the figure Four Markets for DVDs. If D1 or S1 is the original curve and D2 or S2 is the new curve, which of the graphs illustrates what may happen in the market for DVDs if there is an increase in the cost of a movie ticket at the local theater? *a. A b. B c. C d. D
61. Figure: Four Markets for DVDs Reference: Ref 7-4
(Figure: Four Markets for DVDs) Examine the figure Four Markets for DVDs. If D1 or S1 is the original curve and D2 or S2 is the new curve, which of the graphs shows a change that results in a decrease in the quantity of DVDs supplied? a. A b. B *c. C d. D
62. Figure: Four Markets for DVDs Reference: Ref 7-4
(Figure: Four Markets for DVDs) Examine the figure Four Markets for DVDs. If D1 or S1 is the original curve and D2 or S2 is the new curve, which of the graphs illustrates what may happen in the market for DVDs if the cost of producing DVDs falls? a. A b. B c. C *d. D
63. Figure: Four Markets for DVDs Reference: Ref 7-4
(Figure: Four Markets for DVDs) Examine the figure Four Markets for DVDs. If D1 or S1 is the original curve and D2 or S2 is the new curve, which of the graphs shows
what may happen in the market for DVDs if the cost of producing DVD players increases? a. A *b. B c. C d. D
64. Figure: Four Markets for DVDs Reference: Ref 7-4
(Figure: Four Markets for DVDs) Examine the figure Four Markets for DVDs. If D1 or S1 is the original curve and D2 or S2 is the new curve, which of the graphs shows what may happen if some of the stores that rent DVDs close? a. A *b. B c. C d. D
65. Figure: Shifts in Demand and Supply I
Reference: Ref 7-5
(Figure: Shifts in Demand and Supply I) Examine the figure Shifts in Demand and Supply I. The figure shows how supply and demand might shift in response to specific events. Suppose consumer incomes increase. Which panel best describes how this will affect the market for used furniture, an inferior good? a. panel A b. panel B c. panel C *d. panel D
66. Figure: Shifts in Demand and Supply I
Reference: Ref 7-5
(Figure: Shifts in Demand and Supply I) Examine the figure Shifts in Demand and Supply I. The figure shows how supply and demand might shift in response to specific events. Suppose scientists discover that eating a tomato a day prevents the effects of aging. Which panel best describes how this will affect the market for tomatoes? a. panel A b. panel B *c. panel C d. panel D
67. Figure: Shifts in Demand and Supply I
Reference: Ref 7-5
(Figure: Shifts in Demand and Supply I) Examine the figure Shifts in Demand and Supply. The figure shows how supply and demand might shift in response to specific events. Suppose a fall frost destroys one-third of the nation's orange crop. Which panel best describes how this will affect the market for oranges? a. panel A *b. panel B c. panel C d. panel D
68. Figure: Shifts in Demand and Supply I
Reference: Ref 7-5
(Figure: Shifts in Demand and Supply I) Examine the figure Shifts in Demand and Supply I. The figure shows how supply and demand might shift in response to
specific events. Suppose a fall frost destroys one-third of the nation's orange crop. Which panel best describes how this will affect the market for vitamin C tablets, which are a substitute in consumption for oranges? a. panel A b. panel B *c. panel C d. panel D
69. Figure: Shifts in Demand and Supply I
Reference: Ref 7-5
(Figure: Shifts in Demand and Supply I) Examine the figure Shifts in Demand and Supply I. The figure shows how supply and demand might shift in response to specific events. Suppose the population increases. Which panel best describes how this will affect the market for apples? a. panel A b. panel B *c. panel C d. panel D
70. Figure: Shifts in Demand and Supply I
Reference: Ref 7-5
(Figure: Shifts in Demand and Supply I) Examine the figure Shifts in Demand and Supply I. The graph shows how supply and demand might shift in response to specific events. Suppose a new machine is developed that allows restaurants and fast-food outlets to produce french fries at a lower cost. Which panel best describes how this will affect the market for french fries? *a. panel A b. panel B c. panel C d. panel D
71. Figure: Shifts in Demand and Supply II
Reference: Ref 7-6
(Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose consumer incomes decrease. Which panel best describes how this will affect the market for used clothing, an inferior good? *a. panel A b. panel B c. panel C d. panel D
72. Figure: Shifts in Demand and Supply II
Reference: Ref 7-6
(Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose scientists discover that eating pomegranates cause wrinkles. Which panel best describes how this will affect the market for pomegranates? a. panel A
*b. panel B c. panel C d. panel D
73. Figure: Shifts in Demand and Supply II
Reference: Ref 7-6
(Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose a drought destroys one-third of the nation's peanut crop. Which panel best describes how this will affect the market for peanuts? a. panel A b. panel B *c. panel C d. panel D
74. Figure: Shifts in Demand and Supply II
Reference: Ref 7-6
(Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose a fall frost destroys one-third of the nation's grapefruit crop. Which panel best describes how this will affect the market for vitamin B12 tablets, which are a substitute in consumption for grapefruit? *a. panel A b. panel B c. panel C d. panel D
75. Figure: Shifts in Demand and Supply II
Reference: Ref 7-6
(Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The figure shows how supply and demand might shift in response to specific events. Suppose the birth rate (the number of babies per woman of childbearing age) decreases. Which panel best describes how this will affect the market for diapers? a. panel A *b. panel B c. panel C
d. panel D
76. Figure: Shifts in Demand and Supply II
Reference: Ref 7-6
(Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The figure shows how supply and demand might shift in response to specific events. Suppose that vast new oilfields are discovered offshore of California, and thus gasoline prices fall. Which panel best describes how this will affect the market for sport utility vehicles, a complement in consumption to gasoline? *a. panel A b. panel B c. panel C d. panel D
77. Figure: Shifts in Demand and Supply II
Reference: Ref 7-6
(Figure: Shifts in Demand and Supply II) Examine the figure Shifts in Demand and Supply II. The figure shows how supply and demand might shift in response to specific events. Suppose the technology for producing ethanol fuel improves. Which panel best describes how this will affect the market for ethanol? a. panel A b. panel B c. panel C *d. panel D
78. Figure: Shifts in Demand and Supply III
Reference: Ref 7-7
(Figure: Shifts in Demand and Supply III) Examine the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose consumer incomes increase. Which panel best describes how this will affect the market for designer boots, a normal good? *a. panel A b. panel B c. panel C d. panel D
79. Figure: Shifts in Demand and Supply III
Reference: Ref 7-7
(Figure: Shifts in Demand and Supply III) Examine the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose scientists discover that eating asparagus slows down the aging process. Which panel best describes how this will affect the market for asparagus? *a. panel A b. panel B
c. panel C d. panel D
80. Figure: Shifts in Demand and Supply III
Reference: Ref 7-7
(Figure: Shifts in Demand and Supply III) Examine the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose a wet and sunny year increases the nation's corn crop by 20%. Which panel best describes how this will affect the market for corn? a. panel A *b. panel B c. panel C d. panel D
81. Figure: Shifts in Demand and Supply III
Reference: Ref 7-7
(Figure: Shifts in Demand and Supply III) Examine the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose a spring frost destroys one-third of the nation's artichoke crop. Which panel best describes how this will affect the market for mayonnaise, which is a complement in consumption to artichokes? a. panel A b. panel B c. panel C *d. panel D
82. Figure: Shifts in Demand and Supply III
Reference: Ref 7-7
(Figure: Shifts in Demand and Supply III) Examine the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose the technology for producing snowboards improves. Which panel best describes how this will affect the market for winter parkas, a complement in consumption of snowboards? *a. panel A b. panel B c. panel C d. panel D
83. Figure: Shifts in Demand and Supply IV
Reference: Ref 7-8
(Figure: Shifts in Demand and Supply IV) Examine the figure Shifts in Demand and Supply IV. The figure shows how supply and demand might shift in response to specific events. Suppose consumer incomes increase. Which panel best describes how this will affect the market for big-screen televisions, a normal good? a. panel A *b. panel B c. panel C d. panel D
84. Figure: Shifts in Demand and Supply IV Reference: Ref 7-8
(Figure: Shifts in Demand and Supply IV) Examine the figure Shifts in Demand and Supply IV. The figure shows how supply and demand might shift in response to specific events. Suppose the Surgeon General announces that eating chocolate prevents heart disease. Which panel best describes how this will affect the market for chocolate? a. panel A *b. panel B
c. panel C d. panel D
85. Figure: Shifts in Demand and Supply IV Reference: Ref 7-8
(Figure: Shifts in Demand and Supply IV) Examine the figure Shifts in Demand and Supply IV. The figure shows how supply and demand might shift in response to specific events. Suppose the price of lumber falls dramatically. Which panel best describes how this will affect the market for new houses? a. panel A b. panel B *c. panel C d. panel D
86. Figure: Shifts in Demand and Supply IV Reference: Ref 7-8
(Figure: Shifts in Demand and Supply IV) Examine the figure Shifts in Demand and Supply IV. The figure shows how supply and demand might shift in response to specific events. Suppose oil becomes more expensive. Which panel best describes how this will affect the market for gasoline, which is made from oil? a. panel A b. panel B c. panel C *d. panel D
87. Figure: Shifts in Demand and Supply IV Reference: Ref 7-8
(Figure: Shifts in Demand and Supply IV) Examine the figure Shifts in Demand and Supply IV. The figure shows how supply and demand might shift in response to specific events. Suppose half of the people in San Diego move to Colorado Springs. Which panel best describes how this will affect the market for houses in Colorado Springs? a. panel A *b. panel B c. panel C d. panel D
88. Figure: Shifts in Demand and Supply IV
Reference: Ref 7-8
(Figure: Shifts in Demand and Supply IV) Examine the figure Shifts in Demand and Supply IV. The figure shows how supply and demand might shift in response to specific events. Suppose half of the people in San Diego pack up and move to Colorado Springs. Which panel best describes how this will affect the supply of houses in San Diego? *a. panel A b. panel B c. panel C d. panel D
89. Figure: Supply and Demand in the Orange Juice Market
Reference: Ref 7-9
(Figure: Supply and Demand in the Orange Juice Market) Examine the figure Supply and Demand in the Orange Juice Market. The market is currently in equilibrium at point C. Suppose a hurricane hits Florida, where oranges are grown. What will be the most likely new equilibrium point in the orange juice market? *a. A b. B c. D d. E
90. Figure: Supply and Demand in the Orange Juice Market
Reference: Ref 7-9
(Figure: Supply and Demand in the Orange Juice Market) Examine the figure Supply and Demand in the Orange Juice Market. The market is currently in equilibrium at point C. Suppose most people drink orange juice only with champagne. What will be the new equilibrium point in the orange juice market if a law banning alcohol passes?
a. A b. B *c. D d. E
91. Figure: Supply and Demand in the Orange Juice Market
Reference: Ref 7-9
(Figure: Supply and Demand in the Orange Juice Market) Examine the figure Supply and Demand in the Orange Juice Market. The market is currently in equilibrium at point C. A reputable scientist asserts in a major scientific publication that drinking orange juice will increase your life span. What will be the most likely new equilibrium point in the orange juice market? a. A *b. B c. D d. E
92. When milk prices increased in 2008, one milk consumer stated that the reason
he cut down on milk consumption is so that he could drive his car. This action represents a: *a. movement along the demand curve for milk. b. movement along the supply curve for milk. c. shift of the demand curve for milk. d. shift of the supply curve for milk.
93. A decrease in the price of eggs will result in: a. an increase in the demand for eggs. b. an increase in the supply of eggs. c. a shift in the supply curve for eggs. *d. a movement along the demand curve for eggs.
94. A decrease in the price of a good will result in: a. an increase in demand. b. an increase in supply. *c. an increase in the quantity demanded. d. an increase in the quantity supplied.
95. If the price of corn rises, one would expect: a. the quantity of corn demanded to rise.
*b. the quantity of corn supplied to rise. c. the demand for corn to shift inward. d. the supply of corn to shift outward.
96. Assume that corn is an input in the production of beef but not in the production
of pork. Further, beef and pork are substitutes in consumption. A decrease in the price of corn will: a. increase the supply of beef and increase the demand for pork. b. decrease the supply of beef and increase the demand for pork. c. decrease the supply of beef and decrease the demand for pork. *d. increase the supply of beef and decrease the demand for pork.
97. The market for soybeans is initially in equilibrium. Because of mad cow disease,
producers decide to replace bone meal with soybeans in cattle feed. The likely effect is that: *a. the equilibrium price and quantity of soybeans will rise. b. the equilibrium price and quantity of soybeans will fall. c. the equilibrium quantity of soybeans will rise, but it cannot be determined what will happen to the equilibrium price. d. the equilibrium price of soybeans will rise, but it cannot be determined what will happen to the equilibrium quantity.
98. An increase in which determinant of demand will have an ambiguous (uncertain)
effect on price? a. tastes and preferences b. price of a substitute c. price of a complement *d. income
99. Which statement would result in a movement along the demand curve? a. a change in preferences b. an increase in the number of buyers *c. an increase in the number of suppliers d. a decrease in income
100. If consumer tastes for electric cars increase over the next 10 years, there will be an increase in the demand for electric cars, higher electric car prices, and an increase in the equilibrium quantity of electric cars. *a. True b. False
101. “In 2008, air travel decreased substantially despite significant reductions in ticket prices.” If this information is correct, it indicates that the law of demand did not apply to air travel in 2008. a. True *b. False
102. If demand decreases and supply increases, the direction of change in the equilibrium quantity is unpredictable unless the relative magnitudes of the demand and supply changes are known. *a. True b. False
103. College tuition is rising every year, and yet more students attend college every year. Isn't this a violation of the law of demand? Correct Answer:
Probably not. Rising tuition and rising college attendance can likely be explained by a series of rightward shifts in the demand curve for college education. If the supply curve is steady, shifting demand along the unchanged supply curve would explain this trend. 104. In the Midwestern United States, the price of an ear of corn is always lowest in the summer. This seems odd, because consumers really enjoy eating ears of corn in the summer. How can this be explained? Correct Answer:
Even with greater demand for corn in the summer, the supply is quite large. If the price is low in the summer, it must be the case that the supply shift to the right is larger than the demand shift to the right. 105. In August 2005, Hurricane Katrina damaged or destroyed oil platforms in the Gulf of Mexico, refineries along the Gulf Coast, and the pipeline infrastructure that transports natural gas to customers across the eastern United States. The winter of 2005 was also unusually cold in many parts of the country. How did these events affect the market for natural gas? Correct Answer:
The supply of natural gas was severely decreased by Katrina. When the cold winter came, demand for natural gas to heat homes sharply increased. The combination of supply falling and demand rising created a big increase in the equilibrium price of natural gas. The change in equilibrium quantity is uncertain because the relative size of each shift is not known.
106. High-fructose corn syrup, which is derived from corn, is an important ingredient
in the production of many soft drinks. If the price of corn increases, one would expect the: *a. supply curve for soft drinks to shift left. b. quantity supplied of soft drinks to increase. c. demand for soft drinks to increase. d. supply curve for soft drinks to shift right.
107. Suppose the demand curve for good Z is downward sloping. If the price of
good Z decreases because of a shift in the supply of good Z, this will cause: a. an increase in the demand for good Z. *b. a movement along the demand curve of good Z. c. no effect on the quantity demanded of good Z. d. fewer people to purchase good Z.
108. Suppose people expect the price of MP3 players to rise next year. As a result
of this expectation, people will most likely: a. purchase fewer MP3 players this year. *b. observe higher prices for MP3 players this year. c. purchase the same amount of MP3 players, because this expectation will have no effect on consumers this year. d. decide to wait and purchase the MP3 players next year.
109. An increase in the price of sugar (an ingredient for soft drinks) and an
increased concern about tooth decay caused by the consumption of soft drinks will result in which change in the soft drink market? a. There will be an increase in both the equilibrium price and quantity. *b. Equilibrium quantity will decrease, but equilibrium price may decrease, increase, or stay the same. c. There will be a decrease in both equilibrium price and quantity. d. Equilibrium quantity will increase, but equilibrium price may decrease, increase, or stay the same.
110. An increase in the price of wheat, an important ingredient in the production of
bread, combined with an increase in the number of people consuming bread, will result in which change in the bread market? a. Both the equilibrium price and quantity will increase. b. Equilibrium quantity will decrease, but equilibrium price may decrease, increase, or stay the same. c. Both the equilibrium price and quantity will decrease.
*d. Equilibrium price will increase, but equilibrium quantity may decrease, increase, or stay the same.
111. Gasoline, a derivative of oil, is a large part of transportation costs for many
producers. If the price of oil increases at the same time that incomes fall for many consumers, one would expect the equilibrium price of many normal goods to _____, while their equilibrium quantities would _____. a. fall; rise *b. fall, rise, or stay the same; decrease c. decrease; fall, rise, or stay the same d. fall; fall
112. Rice and potatoes are substitutes in consumption. If the price of rice rises and
there is a bumper crop of potatoes, in the market for potatoes one would expect the: *a. equilibrium price to rise, fall, or stay the same and equilibrium quantity to rise. b. equilibrium price to rise and the equilibrium quantity to fall. c. equilibrium price and quantity both to fall. d. equilibrium price to rise and the equilibrium quantity to fall, rise, or stay the same.
113. A beneficial technological change enhances the production of cranberries. At
the same time, scientists discover the health benefits of cranberries. This will result in a(n): a. increase in both the equilibrium price and quantity in the cranberry market. *b. increase in the equilibrium quantity and an uncertain impact on the equilibrium price of cranberries. c. decrease in both the equilibrium price and quantity in the cranberry market. d. decrease in the equilibrium price and an uncertain impact on the equilibrium quantity of cranberries.
114. The market demand for singing dolls is initially made up of 50 buyers. Suppose
the number of buyers decreases by 10. Holding everything else constant, one would expect the: a. supply curve to shift left. b. quantity supplied to increase. c. supply curve to shift right. *d. quantity supplied to decrease.
1. A price control is: a. when a firm controls the price of the good it produces. *b. a legal restriction on how high or low a price in a market may go. c. an upper limit on the quantity of some good that can be bought or sold. d. a tax placed on the sale of a good which controls the market price.
2. A binding price ceiling is designed to: *a. keep prices below the equilibrium level. b. increase the quality of the good. c. prevent shortages. d. increase efficiency.
3. Rapidly increasing health costs have been a major political concern since at least
1992. Suppose the government sets the maximum price for a normal doctor's visit at $20 to control rising health costs but the current market price is $40. What will happen? *a. More people will try to visit the doctor, but there will be fewer doctors willing to see patients at that price. b. The same number of people will try to visit the doctor, and the same number of doctors are willing to see patients at that price. c. More people will be able to see the doctor, since the price is lower. d. Fewer people will try to see the doctor, and fewer doctors are willing to see patients at that price.
4. The government decides to impose a price ceiling on a good because it thinks
the market-determined price is “too high.” If the government imposes the price ceiling below the equilibrium price: *a. consumers will respond to the lower price and wish to purchase more of the good than at the equilibrium price. b. producers will respond to the lower price and offer more units for sale. c. consumers will be able to purchase more of the good after the price ceiling is imposed. d. it will not be binding.
5. The government imposes a price ceiling below the equilibrium price. The price
ceiling will cause: a. demand to decrease.
b. supply to increase. *c. a shortage of the good. d. an increase in the quality of the good.
6. The NFL wants to give the “common fan” the opportunity to attend the Super
Bowl, so it sets Super Bowl prices “low”—tickets for a regular seat at Super Bowl XXXVII cost just $400. Scalpers, however, sell tickets for $1,500 or more. If there are no transaction costs to selling a ticket, the true cost of a regular ticket to Super Bowl XXXVII is: a. at most $400. *b. at least $1,500. c. the monetary price paid to obtain the ticket. d. $1,100 less than the opportunity cost of a ticket.
7. Rent controls set a price ceiling below the equilibrium price and therefore: a. quantity supplied exceeds the quantity demanded. *b. quantity demanded exceeds the quantity supplied. c. a surplus of rental units will result. d. all poor people will be helped.
8. A price ceiling will have no effect if: *a. it is set above the equilibrium price. b. the equilibrium price is above the price ceiling. c. it is set below the equilibrium price. d. it creates a shortage.
9.
Reference: Ref 7-1
(Table: The Market for Soda) Look at the table The Market for Soda. If the government does not impose a price control, the price of a can of soda will equal: a. $0.50. *b. $0.75. c. $1.00. d. $1.25.
10.
Reference: Ref 7-1
(Table: The Market for Soda) Look at the table The Market for Soda. If the government imposes a price ceiling of $0.50 per can of soda, the quantity of soda demanded will be: *a. 10 cans. b. 8 cans. c. 6 cans. d. 4 cans.
11.
Reference: Ref 7-1
(Table: The Market for Soda) Look at the table The Market for Soda. If the government imposes a price ceiling of $0.50 per can of soda, there will be: a. a shortage of 2 cans. *b. a shortage of 3 cans. c. a surplus of 3 cans. d. equilibrium in the market for soda.
12.
Reference: Ref 7-1
(Table: The Market for Soda) Look at the table The Market for Soda. If the government imposes a price ceiling of $1.00 per can of soda, the quantity of soda supplied will be: a. 7 cans. *b. 8 cans. c. 9 cans. d. 10 cans.
13.
Reference: Ref 7-1
(Table: The Market for Soda) Look at the table The Market for Soda. If the government imposes a price ceiling of $1.00 per can of soda, the quantity of soda demanded will be: a. 10 cans. *b. 8 cans. c. 6 cans. d. 4 cans.
14.
Reference: Ref 7-2
(Table: Market for Fried Twinkies) Look at the table The Market for Fried Twinkies. In response to popular anger over the high price of fried Twinkies and the extreme wealth of fried Twinkie producers, the government imposes a price ceiling of $1.20 per fried Twinkie. From this table, the price ceiling causes: *a. a shortage of 3,000 fried Twinkies. b. a shortage of 5,000 fried Twinkies. c. a surplus of 8,000 fried Twinkies. d. a surplus of 3,000 fried Twinkies.
15. Table: Market for Apartments
Reference: Ref 7-3
(Table: Market for Apartments) Look at the table Market for Apartments. If a government price ceiling of $700 is imposed on this market, an inefficiency will result in the form of a: a. surplus of 0.6 million apartments. *b. shortage of 0.6 million apartments. c. surplus of 0.2 million apartments. d. shortage of 0.2 million apartments.
16. Table: Market for Apartments Reference: Ref 7-3
(Table: Market for Apartments) Look at the table Market for Apartments. If a government price ceiling of $900 is imposed on this market, an inefficiency will result in the form of a: a. surplus of 0.6 million apartments. b. shortage of 0.6 million apartments. c. surplus of 0.2 million apartments. *d. shortage of 0.2 million apartments.
17. Table: Market for Apartments Reference: Ref 7-3
(Table: Market for Apartments) Look at the table Market for Apartments. If a government price ceiling of $600 is imposed on this market, an inefficiency will result in the form of a: a. surplus of 0.6 million apartments. b. surplus of 0.8 million apartments. *c. shortage of 0.8 million apartments. d. shortage of 0.6 million apartments.
18. Suppose the Jamaican government sets coffee prices at $1 per pound, when
the market price is $10. The government's actions will: a. improve efficiency, since the low prices will force producers to find cheaper production methods. b. result in coffee surpluses even in a coffee-rich country. *c. cause coffee shortages even in a coffee-rich country. d. improve equality between rich and poor, since the poor can now afford coffee.
19. Suppose that the average cost of a doctor's visit is $100. If the government
imposes a price ceiling of $50 on the cost of a doctor's visit, there will be: a. an excess supply of doctor's visits. *b. an excess demand for doctor's visits. c. an increase in the equilibrium number of doctor's visits. d. no change in the number of doctor's visits.
20. The most likely reason the government implements a ________ is because it
feels the price is too high for _______ *a. price ceiling; consumers b. price floor; consumers c. price ceiling; producers d. price floor; producers
21. The government decides to impose a price ceiling on a good because it thinks
the market-determined price is “too high.” If it imposes the price ceiling above the equilibrium price: a. consumers will respond to the higher price and therefore wish to purchase less of the good than at the equilibrium price. b. producers will respond to the higher price and therefore offer fewer units for sale. c. consumers will purchase less of the good after the price ceiling is imposed. *d. neither producers nor consumers will change their behavior.
22. The market for apples is in equilibrium at a price of $0.50 per pound. If the
government imposes a price ceiling in the market at a price of $0.40 per pound, then: a. quantity demanded will decrease. b. quantity supplied will increase. *c. there will be a shortage of the good. d. the price ceiling will not affect the market price or output.
23. To be binding, a price ceiling must be set at a price: *a. lower than the equilibrium price. b. higher than the equilibrium price. c. the same as the equilibrium price. d. any price ceiling is binding.
24. A maximum price set below the equilibrium price is a: a. demand price. b. supply price. c. price floor. *d. price ceiling.
25. A price ceiling is: *a. a maximum price sellers are allowed to charge for a good or service. b. the difference between the quantity supplied and quantity demanded. c. a minimum price buyers are required to pay for a good or service. d. the loss caused by an inefficiently high quantity.
26. Figure: Price Control
Reference: Ref 5-4
(Figure: Price Control) Look at the figure Price Control. In the graph, one effective price ceiling would be the price indicated at point ________ and a ________ would exist equal to the difference between points ________. a. b; surplus; f and e b. b; shortage; f and e *c. d; shortage; i and h d. d; surplus; e and h
27. The dictator of a small country restricts the price of cars to an amount less than
or equal to $1,200 (a price below the equilibrium price for cars). Such a policy would be an example of a: a. price floor. *b. price ceiling. c. quota. d. tariff.
28. A student organization is formed on your college campus to protest against the
high rent for apartments near campus. This organization is planning a meeting with the dean and president of the college. Which of the following best describes the policy the student organization will fight for? a. a laissez faire policy b. a price floor *c. a price ceiling d. a quantity control
29. Hugo Chávez is the president of Venezuela. Venezuela is a major producer of
oil products, which remain the keystone of Venezuela's economy. Suppose President Chávez wants to increase his popularity with the citizens of Venezuela and enacts a government policy that reduces the customer price of gasoline sold at state-owned gas stations to 50% of the previous price. This policy is called a: a. laissez faire policy. b. price floor. *c. price ceiling. d. quota.
30. Hugo Chávez is the president of Venezuela. Venezuela is a major producer of
oil products, which remain the keystone of Venezuela's economy. Suppose
President Chávez enacts a government policy that reduces the customer price of gasoline sold at state-owned gas stations to 50% of the previous price. In theory, assuming a downward-sloping demand curve for gasoline, this policy will result in the quantity of gasoline demanded to be ________ the quantity of gasoline supplied. a. equal to *b. greater than c. less than d. greater than or equal to
31. Figure: The Market for Hybrid Cars
Reference: Ref 7-5
(Figure: The Market for Hybrid Cars) Look at the figure The Market for Hybrid Cars. If there were a binding price ceiling in the market for hybrid cars, one possible price would be equal to ________, consumers would demand ________, and producers would supply ________. a. P1; Q1; Q3 b. P2; Q2; Q2 c. P1; Q3; Q1 *d. P3; Q3; Q1
32. Figure: The Market for Economics Textbooks
Reference: Ref 7-6
(Figure: The Market for Economics Textbooks) Look at the figure The Market for Economics Textbooks. Suppose the government believes textbooks are too expensive and it wants to make sure textbooks are affordable to more students. This
type of price control is called a ________ and one possible price binding price control would be ________. a. price floor; $100 b. price floor; $40 *c. price ceiling; $40 d. price ceiling; $100
33. (Figure: The Market for Economics Textbooks) Look at the figure The Market for
Economics Textbooks. At a price ceiling of $40 in the market, the market outcome would be: a. a surplus of 30 textbooks. b. a surplus of 10 textbooks. *c. a shortage of 30 textbooks. d. a shortage of 10 textbooks.
34. When price controls take the form of maximum prices set below the equilibrium
price, they are: a. illegal. b. equal to the demand price. c. price floors. *d. price ceilings.
35. A maximum price legislated by the government is called: a. a price support. b. a price floor. *c. a price ceiling. d. the parity price.
36. A persistent shortage may occur if: *a. the government imposes a price ceiling. b. the government imposes a price floor. c. demand keeps falling. d. supply shifts rightward.
37. If the government sets out to help low-income people by establishing a
maximum amount that can be paid for rent: a. a price floor has been set and a shortage of rental units may occur. *b. a price ceiling has been set and a shortage of rental units may occur. c. in the long run more rental units will appear.
d. the quality of rental units will be inefficiently high.
38. Rent controls usually set a price ceiling below the equilibrium price and
therefore: a. quantity supplied exceeds the quantity demanded. *b. quantity demanded exceeds the quantity supplied. c. a surplus of rental units will result. d. all low-income recipients will clearly be helped.
39. A price ceiling is not effective if: *a. it is set above the equilibrium price. b. the equilibrium price is above the price ceiling. c. it is set below the equilibrium price. d. it creates a shortage.
40.
Reference: Ref 7-7
(Table: Market for Butter) Look at the table Market for Butter. If the government imposes a price ceiling of $0.90 per pound of butter, the quantity of butter actually purchased will be: a. 10.5 million pounds. *b. 9.0 million pounds. c. 1.5 million pounds. d. 10.0 million pounds.
41. Figure: Supply and Demand
Reference: Ref 7-8
(Figure: Supply and Demand) Look at the figure Supply and Demand. In the market shown in the figure, a price ceiling of P1 causes:
a. a shortage equal to the distance AB. b. a surplus equal to the distance AB. *c. a shortage equal to the distance DE. d. no change to the market.
42. Figure: Supply and Demand
Reference: Ref 7-8
(Figure: Supply and Demand) Look at the figure Supply and Demand. In the market shown in the figure, a binding price ceiling is represented by: a. the price P1. b. the price P2. *c. the price P3. d. point C.
43. The Atlanta Symphony wants to make sure that its concerts are affordable for
all residents of Atlanta and therefore prices all its tickets at $25 each. However, outside Symphony Hall, people can sell the same tickets for $75 or more. The true cost to the concertgoer of a ticket to the symphony is at least: a. $25. b. $50. *c. $75. d. $100.
44. Producers will supply an inefficiently low quality of a good if the government
imposes: a. a price control. b. an excise tax. c. a binding price floor. *d. a binding price ceiling.
45. If the government imposes rent control and it is binding: a. rent will be set above the equilibrium price. *b. it may result in some landlords leaving the business because they cannot cover costs. c. it will lead to rental units being higher in quality because landlords are guaranteed a high price. d. it will create a surplus of housing.
46. Price ceilings that lead to shortages will impose costs on society because they:
a. will eliminate long waiting lines. b. may result in black market prices, which are lower than the market-determined price would be. *c. lead to a smaller quantity offered on the market. d. help businesses instead of consumers.
47. By definition, in a black market, goods or services are bought and sold: a. at night. b. without any information about quality. c. without any information about price. *d. illegally.
48. When a tenant in a rent-controlled apartment sublets the apartment to another
renter at a rent higher than the price ceiling: a. it is inefficient. *b. we say that the transaction takes place on a black market. c. there is an increase in quantity demanded. d. there is a decrease in quantity demanded.
49. Black markets may develop with price controls because: a. price controls increase efficiency. b. quantity demanded equals quantity supplied at the mandated price. c. individuals cannot profit by illegal exchanges. *d. individuals can profit by illegal exchanges.
50. Which of the following is an example of a black market? *a. a tenant in a rent-controlled apartment subletting at a higher rent b. the purchase of an inferior radio at a department store c. waiting in line during the gasoline shortages of the 1970s d. the oil market
51. ________ market is a market in which goods or services are bought and sold
illegally. *a. A black b. An uncontrolled c. An unregulated d. An unproductive
52. One of the ways rent control is inefficient is that it leads to: a. higher-quality apartments. *b. high opportunity costs associated with wasted time searching for apartments. c. markets that maximize total surplus. d. the construction of more apartments.
53. Rent controls in New York City cause all of the following except: a. inefficiently low quality apartments. b. wasted resources resulting from the opportunity cost of time associated with trying to find an apartment. c. black markets. *d. an increase in the quantity supplied of rent-controlled apartments.
54. Price controls encourage black markets because: a. they eliminate opportunity costs. *b. individuals can profit by illegal exchanges. c. they create too much efficiency. d. they create too much equity.
55. Suppose the government of the oil-rich country Saudi Arabia sets gasoline
prices at $0.25 per gallon when the market price is $1.50. The Saudi government's actions will: a. improve efficiency, since the low prices will force producers to find cheaper production methods. b. result in gasoline surpluses even in an oil-rich country. *c. cause gasoline shortages even in an oil-rich country. d. improve equality between rich and poor, since the poor can now afford gasoline.
56. A price ceiling is likely to result in: a. a persistent surplus, a transfer of surplus from producers to consumers, and deadweight loss. *b. a persistent shortage, a transfer of surplus from producers to consumers, and deadweight loss. c. a persistent shortage, a transfer of surplus from consumers to producers, and no deadweight loss. d. a persistent surplus, a transfer of surplus from consumers to producers, and deadweight loss.
57. Each of the following is a source of inefficiency from a binding rent-control price
ceiling except: a. inefficiently low quantity of the good exchanged. b. wasted resources of consumers caused by searching for the good. c. inefficient allocation of the good to consumers. *d. inefficiently high quality of the good being old.
58. Which is not an inefficiency caused by binding price ceilings? a. inefficient allocation to consumers b. wasted resources c. illegal activity *d. inefficient allocation of sales among sellers
59. Economists in general agree that rent controls are: a. an efficient and equitable way to help low-income families. *b. an inefficient but sometimes effective way to help low-income families. c. an efficient method of dealing with the shortages created during price ceilings. d. the only way to solve the problem of poverty.
60. Figure: Rent Controls
Reference: Ref 7-9
(Figure: Rent Controls) Look at the figure Rent Controls. Without rent controls, the equilibrium quantity is ________.
a. Q4 b. Q1 *c. Q2 d. Q3
61. Figure: Rent Controls
Reference: Ref 7-9
(Figure: Rent Controls) Look at the figure Rent Controls. Suppose that rent controls are imposed in the market. If the government wanted a rent control ceiling to be effective immediately, what is one possible price to set? *a. Rent4 for Q0 units b. Rent4 for Q1 units c. Rent3 for Q1 units d. No one would be willing to pay a higher actual price than Rent0.
62. Figure: Rent Controls
Reference: Ref 7-9
(Figure: Rent Controls) Look at the figure Rent Controls. Without rent controls, the equilibrium rent is ________. a. the shortage of rental units is the distance Q1 Q3. *b. some renters would be willing to pay a price as high as Rent4 for Q0 units. c. no one would have to pay a higher actual price than Rent0, nor would anyone be willing to do so. d. there would be a surplus of rental units.
63. Figure: Rent Controls
Reference: Ref 7-9
(Figure: Rent Controls) Look at the figure Rent Controls. If rent controls are set at Rent1: *a. the shortage of rental units is the distance Q3 – Q1.
b. some renters would be willing to pay a price as high as Rent4 for Q1 units. c. no one would have to pay a higher actual price than Rent0, nor would anyone be willing to do so. d. there would be a surplus of rental units, but it is impossible to tell how large the surplus is based on the information provided.
64. Figure: Rent Controls
Reference: Ref 7-9
(Figure: Rent Controls) Look again at the figure Rent Controls. If rent controls are set at Rent3: a. the shortage of rental units is the distance Q3 – Q1. b. some renters would be willing to pay a price as high as Rent4 for Q3 units. c. no one would have to pay a higher actual price than Rent0, nor would anyone be willing to do so. *d. rent would remain at Rent2.
65. Figure: Rent Controls
Reference: Ref 7-9
(Figure: Rent Controls) Look at the figure Rent Controls. If rent controls are set at Rent1: *a. rental apartments may be of inefficiently low quality. b. there will be an efficient allocation of rentals. c. some landlords may break the law by renting below the mandated price. d. new apartments will be constructed.
66. Governments continue to impose price controls. Which of the following is not a
valid reason for this? a. Some people do benefit from such price controls. b. People fear that prices will change dramatically if the price controls were removed. c. It is politically expedient to enact regulations that benefit influential voting groups. *d. Price controls are always effective.
67. The market for apples is in equilibrium at a price of $0.50 per pound. If the
government imposes a price floor in the market at a price of $0.40 per pound, then: a. quantity demanded will decrease. b. quantity supplied will increase. c. there will be a shortage of the good. *d. the price floor will not affect the market price or output.
68.
Reference: Ref 7-10
(Table: The Market for Soda) Look at the table The Market for Soda. If the government imposes a price floor of $1.00 per can of soda, there will be: a. a shortage of 2 cans. b. a shortage of 3 cans. *c. a surplus of 3 cans. d. equilibrium in the market for soda.
69. West African cotton farmers are very upset about the subsidies the U.S.
government pays to American cotton farmers. One reason for this could be that subsidized cotton from the United States: *a. leads to cotton surpluses in the United States and lower prices for West African farmers on world markets. b. raises the world price of cotton. c. has led to a global shortage of cotton. d. has led to an increase in the demand for West African cotton.
70. The United States and the European Union impose price floors on many
agricultural products. These price floors lead to unwanted surpluses. To deal with a surplus: a. the U.S. government typically pays farmers to produce as much as possible. *b. the U.S. government in some cases has destroyed the surplus production. c. the European Union pays farm exporters to sell products for a profit overseas. d. the U.S. government holds auctions to sell the surplus to the highest bidder.
71.
Reference: Ref 7-11
(Table: Market for Butter) Look at the table Market for Butter. If the government imposes a price floor of $0.90 per pound of butter, the quantity of butter actually purchased will be: a. 10.5 million pounds. b. 9.0 million pounds. c. 1.5 million pounds. *d. 10.0 million pounds.
72. Suppose the government sets a price floor of $2.85 per bushel on corn when
the current price is $2.55. This price floor will: *a. cause a surplus of corn. b. cause a shortage of corn. c. have no effect on the price of corn. d. increase the supply of corn.
73. Figure: Supply and Demand
Reference: Ref 7-12
(Figure: Supply and Demand) Look at the figure Supply and Demand. In the market shown in the figure, a binding price floor is represented by: *a. P1. b. P2. c. P3. d. point C.
74. Figure: The Market for Butter
Reference: Ref 7-13
(Figure: The Market for Butter) Look at the figure The Market for Butter. The figure represents a competitive market for butter. If a government price floor at $1.30 is imposed on this market, an inefficiency will result in the form of a: a. surplus of 4.5 million pounds of butter. *b. surplus of 6.0 million pounds of butter. c. shortage of 6.0 million pounds of butter. d. shortage of 4.5.million pounds of butter.
75. Figure: The Market for Butter
Reference: Ref 7-13
(Figure: The Market for Butter) Look at the figure The Market for Butter. If a government price floor at $1.20 is imposed on this market, an inefficiency will result in the form of a: *a. surplus of 4.5 million pounds of butter. b. shortage of 4.5 million pounds of butter. c. surplus of 1.5 million pounds of butter. d. shortage of 1.5 million pounds of butter.
76. Figure: The Market for Butter
Reference: Ref 7-13
(Figure: The Market for Butter) Look at the figure The Market for Butter. If a
government price floor at $1.10 is imposed on this market, an inefficiency will result in the form of a: a. surplus of 4.5 million pounds of butter. b. shortage of 4.5 million pounds of butter. *c. surplus of 3 million pounds of butter. d. shortage of 1.5 million pounds of butter.
77. Which of the following is a reason for governments imposing or maintaining
price controls? *a. Some consumers and producers can benefit from price controls. b. Price controls recapture the deadweight loss of equilibrium. c. The government benefits from price controls. d. Price controls improve the efficiency of the market.
78. The most likely reason the government would implement a ________ is
because it feels the price is too low for _________. a. price ceiling; consumers b. price floor; consumers c. price ceiling; producers *d. price floor; producers
79. To be binding, a price floor must be set at a price: a. lower than the equilibrium price. *b. higher than the equilibrium price. c. at which quantity demanded exceeds quantity supplied. d. lower than the equilibrium price and at which quantity demanded exceeds quantity supplied.
80. When the minimum wage increases: a. unemployment among skilled workers decreases. b. fewer workers are willing to work off the books. c. employment of unskilled workers increases. *d. unemployment among unskilled workers increases.
81. Farmers in developing countries want the United States to reduce the subsidies
that it gives to American farmers because subsidized agricultural products from the United States: *a. lead to agricultural surpluses and lower prices for developing country farmers. b. raise the world price of agricultural products. c. has led to a global shortage of agricultural products.
d. has led to an increase in the demand for agricultural products from the developing world.
82. When the government removes a binding price floor: a. quantity demanded will decrease and quantity supplied will increase. *b. quantity demanded will increase and quantity supplied will decrease. c. excess demand will develop. d. excess supply will develop.
83. A minimum price set above the equilibrium price is a: a. demand price. b. supply price. *c. price floor. d. price ceiling.
84. Suppose the government sets a price floor below the current price of the good.
This price floor will: a. result in an excess supply of the good. b. result in an excess demand for the good. *c. have no effect on the price of the good. d. increase the quantity supplied of the good.
85. Figure: The Shrimp Market
Reference: Ref 7-14
(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government wants to limit shrimp sales to 500 pounds, it could impose a: a. price floor of $15. b. price floor of $10. c. price ceiling of $10. *d. price floor of $15 or a price ceiling of $10.
86. Which of the following is an example of a price floor? a. a rent-controlled apartment b. a maximum legal price that could be charged for gasoline during a time of war *c. the minimum wage d. a government decree that capped the price of bottled water in the aftermath of a devastating hurricane
87. The likely result of a price floor is: *a. a surplus of the good at a price above the market equilibrium price. b. a shortage of the good at a price below the market equilibrium price. c. a surplus of the good at a price below the market equilibrium price. d. a shortage of the good at a price above the market equilibrium price.
88. If the minimum wage is a binding price floor, then: *a. the number of workers who want to work will be greater than the number of jobs available. b. the equilibrium wage will increase. c. there will be a job for everyone who is willing to work. d. business owners will hire more workers.
89. Figure: The Market for English Textbooks
Reference: Ref 7-15
(Figure: The Market for English Textbooks) Look at the figure The Market for English Textbooks. With a binding price floor at $90 in the market, the market outcome would be: *a. a surplus of 45 textbooks. b. a surplus of 30 textbooks. c. a shortage of 45 textbooks. d. a shortage of 30 textbooks.
90. Figure: The Market for Milk
Reference: Ref 7-16
(Figure: The Market for Milk) Look at the figure The Market for Milk. If there were a binding price floor in the market for milk, the price could be equal to ________, consumers would demand ________, and producers would supply ________. *a. P1; Q1; Q3 b. P2; Q2; Q2 c. P1; Q3; Q1 d. P3; Q3; Q1
91. Figure: The Market for Tortillas
Reference: Ref 7-17
(Figure: The Market for Tortillas) Look at the figure The Market for Tortillas. If there is a nonbinding price floor in the market for tortillas, the price could be equal to ________, where consumers would demand ________, and producers would supply ________. a. P1; Q1; Q3 *b. P2; Q2; Q2 c. P1; Q3; Q1 d. P3; Q2; Q1
92. Figure: The Market for Spanish Textbooks
Reference: Ref 7-18
(Figure: The Market for Spanish Textbooks) Look at the figure The Market for Spanish Textbooks. Suppose the government believes the producers of Spanish textbooks are not profitable and it wants to make sure textbook producers are profitable. It could impose a price control called a ________ and, to be binding, one possible price would be ________. *a. price floor; $90 b. price floor; $40 c. price ceiling; $40 d. price ceiling; $90
93. A binding price floor is a ________ set ________ the equilibrium price. a. minimum price; at
b. maximum price; below *c. minimum price; above d. maximum price; above
94. A binding price floor in the market for wheat: *a. increases the price paid by consumers. b. decreases the price paid by consumers. c. decreases the price received by farmers. d. does not change the price received by farmers.
95. A minimum price that the government guarantees farmers will receive for a
particular crop is: a. a price ceiling. *b. a price floor (price support). c. a deficiency price. d. an export price (export subsidy).
96. Figure: Supply and Demand in Agriculture
Reference: Ref 7-19
(Figure: Supply and Demand in Agriculture) Look at the figure Supply and Demand in Agriculture. If the equilibrium price for wheat is as shown in the graph, how could the government help increase farmers' income? *a. A price floor could be set at P4, causing a surplus of Q3 – Q0. b. A price floor could be set at P2, causing a surplus of Q2 – Q0.
c. A price ceiling could be set at P4, causing a surplus of Q2 – Q1. d. A price floor could be set at P1, causing a shortage of Q3 – Q0.
97. Figure: Supply and Demand in Agriculture
Reference: Ref 7-19
(Figure: Supply and Demand in Agriculture) Look at the figure Supply and Demand in Agriculture. If a price floor at P4 is set to help improve farm incomes and the government wants to assure farmers that their output will be purchased, the government would have to purchase an amount of output equal to: *a. Q3 – Q0. b. Q3 – Q1. c. Q2 – Q1. d. Q1 – Q3.
98. An agricultural market price support policy establishes a binding price floor,
which: a. decreases the price paid by consumers. b. does not change the price paid by consumers. *c. increases the price received by farmers. d. decreases the price received by farmers.
99. Figure: Price Control
Reference: Ref 5-4
(Figure: Price Controls) Look at the graph Price Controls. An effective price floor would be at price ________ and a ________ would result of the difference between points ________. a. c; surplus; f and e *b. b; surplus; f and e c. d; shortage; i and h d. b; shortage; f and e
100. The persistent unwanted surplus that results from a price floor creates
inefficiencies that include all of the following except:
*a. inefficiently low quality. b. inefficient allocation of sales among sellers. c. wasted resources. d. the temptation to break the law by selling below the legal price.
101. In Europe, the minimum wage has led to: a. low rates of unemployment, especially among young workers. b. a shortage of minimum wage workers. *c. widespread evasion of the minimum wage law in the black market for labor. d. European governments lowering the minimum wage.
102. A binding price floor causes: a. a shortage in the market. b. a surplus in the market. c. wasted resources. *d. a surplus in the market and wasted resources.
103. Suppose that a binding price floor is in place in a particular market. If the
market is deregulated and the price floor is removed, which of the following effects could occur? a. The quantity demanded would decrease and the quantity supplied would increase. b. An excess demand would develop. *c. There would be a decrease in the quality of the good supplied. d. There would be an increase in the quality of the good supplied.
104. One of the consequences of the minimum wage has been: a. decreased unemployment for low-skill workers. *b. workers offering to work off the books for less than the minimum wage. c. lower production costs for small businesses. d. increased employment for high-skill workers.
105. Price controls: a. always increase economic efficiency. b. always lead to more equitable results. *c. can result in inequitable outcomes. d. are always set below the equilibrium price.
106. Producers may supply a good with an inefficiently high quality if the
government imposes: a. a price floor set below the equilibrium price. b. a price ceiling set above the equilibrium price. *c. a binding price floor. d. a binding price ceiling.
107. In Europe the minimum wage has led to: a. lower unemployment, especially among young workers. b. a proliferation of large companies in Italy. *c. widespread evasion of the minimum wage law in the black market for labor. d. European governments hiring the surplus of workers.
108. Which is not an inefficiency caused by price floors? *a. inefficiently low quality b. inefficient allocation of sales among sellers c. wasted resources d. illegal activity
109. The system of taxicab medallions in New York City is an example of a a. price ceiling. b. nonbinding price ceiling. c. price floor. *d. quantity control.
110. When the government policy is to regulate the quantity of a good that can be
bought and sold rather than the price at which it is transacted, it uses a *a. quota b. price control c. price ceiling d. price floor
111. A quota is a. a lower limit on the quantity of a good that can be bought or sold. *b. an upper limit on the quantity of a good that can be bought or sold. c. a maximum price at which a good can be bought or sold.
d. a minimum price at which a good can be bought or sold.
112. The total amount of the good that can be transacted under a quantity control is
called the a. ceiling price. b. demand price. *c. quota limit. d. supply price.
113. Which of the following is an example of a quantity control? a. the Medicare reimbursement schedule for physicians. b. the minimum wage. c. unemployment insurance. *d. limits on the number of red snappers that can be caught in the Gulf of Mexico.
114. When the government imposes a limit on sales of a good or service by a
quota, it usually issues a license that gives the owner the right to sell a given quantity of the good. The market price of the license is equal to: a. the demand price of the good. b. the wedge that represents the difference between the demand price and the supply price. c. the quota rent. *d. the quota rent and the wedge that represents the difference between the demand price and the supply price.
115. If New York City had no medallion system for taxicabs, assuming that the
supply curve of taxicab rides is upward sloping and the demand curve of taxicab rides is downward sloping, the price of a taxicab ride would: a. increase because of the higher safety hazards. b. not change from its current level. *c. decrease. d. increase, but only slightly.
116. Suppose the U.S. government imposes a binding quota on the number of
Japanese-made cars allowed into the United States. If U.S.-made cars are substitutes for Japanese-made cars, we would expect the price of Japanese cars to ________ and the price of U.S.-made cars to ________. *a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease
117. The quota rent refers to: *a. the difference between the demand price and the supply price at the quota limit. b. the rent received by landlords who own rent-controlled apartments. c. the opportunity cost of using a quota-controlled service or of buying a good that is subject to an import quota. d. the minimum rent that the owner of a building must receive before he or she is willing to rent out the building.
118. Figure: The Market for Clams
Reference: Ref 7-23
(Figure: The Market for Clams) Look at the figure The Market for Clams. The government imposes a quota limiting sales of clams to 1,000 pounds. According to the figure, the quota rent per pound in this case is: a. $7.50. b. $5.00. *c. $2.50. d. The quota rent cannot be determined from the information provided.
119.
Reference: Ref 7-24
(Table: Market for Fried Twinkies) Look at the table Market for Fried Twinkies. Suppose the government decides to reduce fried Twinkie consumption as part of a “war on obesity.” After careful study, the government decides to limit production (i.e., the government imposes a quota on production) of fried Twinkies to 5,000 for the current calendar year. Using the table, what price will producers charge if they obey the quota law? a. $1.20
b. $1.30 *c. $1.50 d. The answer cannot be determined with this information.
120.
Reference: Ref 7-24
(Table: Market for Fried Twinkies) Look at the table Market for Fried Twinkies. Using the table, if the government imposes a quota on the fried Twinkie market of 5,000, the quota rent (per fried Twinkie) collected by the fried Twinkie producers will be: a. $1.20. *b. $0.30. c. $1.50. d. $1.00.
121. Table: The Market for Taxi Rides
Reference: Ref 7-25
(Table: The Market for Taxi Rides) Look at the table The Market for Taxi Rides. If a government quota limit at 6 million rides is imposed on this market, the quota rent accruing to the owner of a taxi medallion will be ________, but there will be a total missed opportunity (inefficiency) to consumers and producers of ________. a. $1 per ride; 1 million rides b. $2 per ride; 2 million rides c. $3 per ride; 3 million rides *d. $4 per ride; 4 million rides
122. Table: The Market for Taxi Rides Reference: Ref 7-25
(Table: Market for Taxi Rides) Look at the table The Market for Taxi Rides. If a government quota limit at 9 million rides is imposed on this market, the quota rent that will accrue to the owner of a taxi medallion will be ________, but there will be a total missed opportunity (inefficiency) to consumers and producers of ________.
*a. $1 per ride; 1 million rides b. $2 per ride; 2 million rides c. $3 per ride; 3 million rides d. $4 per ride; 4 million rides
123. Table: The Market for Taxi Rides Reference: Ref 7-25
(Table: Market for Taxi Rides) Look at the table The Market for Taxi Rides. If a government quota limit at 7 million rides is imposed on this market, the quota rent that will accrue to the owner of a taxi medallion will be ________, but there will be a total missed opportunity (inefficiency) to consumers and producers of ________. a. $1 per ride; 1 million rides b. $2 per ride; 2 million rides *c. $3 per ride; 3 million rides d. $4 per ride; 4 million rides
124. If the government imposes a limit on sales of a good or service by issuing a
license that gives the owner the right to sell a given quantity of the good, the difference between the demand and supply price is: a. the quota rent. b. the market price of the license, if licenses are tradable. c. the quota price. *d. the quota rent and the market price of the license, if licenses are tradable.
125. The difference between the demand price and the supply price at the quota
limit is: *a. the quota rent. b. the rent received by landlords who own rent-controlled apartments. c. the opportunity cost of using or buying a good, subject to an import quota. d. usually large enough to cause a surplus.
126. Assuming that American and French wines are substitutes in consumption, if
the U.S. government imposes a quota on the amount of French wine allowed into the United States and the quota is set at a quantity below equilibrium, the price of French wine in the United States will ________ while the U.S.-produced wine will ________. *a. increase; increase b. increase; decrease
c. decrease; increase d. decrease; decrease
127. An upper limit on the quantity of a good that can be bought and sold is a: *a. quota limit. b. price ceiling. c. price floor. d. tariff.
128. Quota limits cause: *a. the demand price to be greater than the supply price. b. the quantity demanded to be greater than the quantity supplied. c. the quantity demanded to be less than the quantity supplied. d. the demand price to be less than the supply price.
129. Which is not a correct statement about the undesirable side effects of a
quantity control? *a. Deadweight loss does not exist when there are quantity controls. b. Some mutually beneficial transactions do not occur because of quantity controls. c. When there are quantity controls, there are incentives for illegal activities. d. A wedge between the demand price and supply price is created with quantity controls.
130. If a quota is set above the equilibrium quantity, there will be: a. incentives for illegal activities. b. missed opportunities in the form of mutually beneficial transactions that don't occur. c. a supply price for the quantity transacted that will exceed the demand price of the quantity transacted. *d. no effect from the quota.
131. Quantity controls set below the equilibrium quantity cause all of the following
except: a. incentives for illegal activities. b. missed opportunities in the form of mutually beneficial transactions that don't occur. *c. the supply price of the quantity transacted exceeding the demand price of the quantity transacted. d. quota rents.
132. Figure: Quantity Controls
Reference: Ref 7-26
(Figure: Quantity Controls) Look at the figure Quantity Controls. If the government decides to restrict the quantity that is sold to 100, which of the following is not a true statement? a. Total surplus will fall by areas C and E. b. The market is not at equilibrium. *c. Consumer surplus is maximized. d. Mutually beneficial transactions have been missed.
133.
Reference: Ref 5-34 -- The Market for Round-Trip Airline Flights
(Figure: The Market for Round-Trip Airline Flights) Look at the figure The Market for Round-Trip Airline Flights. The supply and demand graph represents the market for round-trip airline flights between Boston and New York. Suppose the mayor of New York decides to limit the number of flights to Q1 to reduce air pollution. What area or areas represent deadweight loss after the quota is in place? a. a b. a + b + c *c. c + e d. b + d + f
134.
Reference: Ref 5-34 -- The Market for Round-Trip Airline Flights
(Figure: The Market for Round-Trip Airline Flights) Look at the figure The Market for Round-Trip Airline Flights. The supply and demand graph represents the market for round-trip airline flights between Boston and New York. Suppose the mayor of New York decides to limit the number of flights to Q1 to reduce air pollution. What is the quota wedge? a. P1 – P2 b. P2 – P3
*c. P1 – P3 d. P1 + P2
135.
Reference: Ref 5-35 -- The Market for Hotel Rooms
(Figure: The Market for Hotel Rooms) Look at the figure The Market for Hotel Rooms. The local government limits the number of hotel rooms rented each night to 200. The resulting deadweight loss is equal to: a. $750. *b. $375. c. $250. d. $0.
136.
Reference: Ref 5-35 -- The Market for Hotel Rooms
(Figure: The Market for Hotel Rooms) Look at the figure The Market for Hotel Rooms The local government limits the number of hotel rooms rented each night to 150. The resulting quota rent per room is equal to: a. $130. b. $100. c. $110. *d. $30.
137.
Reference: Ref 5-35 -- The Market for Hotel Rooms
(Figure: The Market for Hotel Rooms) Look at the figure The Market for Hotel Rooms. If the quota rent per room is equal to $45, we know the quota limit is equal to: *a. 100. b. 150. c. 200. d. 250.
138. Reference: Ref 7-29
(Table: The Market for Acupuncture) Look at the table The Market for Acupuncture. The production quota of 20 acupuncture treatments creates a deadweight loss because there are ________ additional transactions that would be welfare improving but would not take place under the quota. a. 80 b. 60 *c. 40 d. 20
139. Reference: Ref 7-29
(Table: The Market for Acupuncture) Look at the table The Market for Acupuncture. In an effort to regulate this market, the town requires each acupuncture therapist to purchase a license. Initially the government issues only enough licenses to provide for 20 treatments per month. Suppose this quota is in place for many years and, over time, the population of the town has substantially grown. This change could result in: a. larger quota rents and more deadweight loss as the demand curve shifted to the left. b. larger quota rents and less deadweight loss as the supply curve shifted to the right. *c. larger quota rents and more deadweight loss as the demand curve shifted to the right. d. smaller quota rents and more deadweight loss as the demand curve shifted to the right.
140. Figure: The Shrimp Market
Reference: Ref 7-31
(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government imposes a quota limiting sales of shrimp to 500 pounds, the quota rent per pound is: a. $15. b. $10. *c. $5. d. The quota rent cannot be determined from the information provided.
141. Figure: The Shrimp Market
Reference: Ref 7-31
(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government imposes a quota limiting sales of shrimp to 250 pounds, the quota rent per pound is: a. $17.50. *b. $10. c. $7.50. d. $0.
142. Figure: The Shrimp Market
Reference: Ref 7-31
(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government imposes a quota limiting sales of shrimp to 1,000 pounds, the quota rent per pound is: a. $15. b. $10. c. $5. *d. $0.
143. Figure: The Shrimp Market
Reference: Ref 7-31
(Figure: The Shrimp Market) Look at the figure The Shrimp Market. If the government imposes a quota limiting sales of shrimp to 250 pounds, it would have the same effect on the quantity transacted as a price ________ of ________. *a. floor; $17.50 b. floor; $10 c. floor; $7.50 d. The answer cannot be determined from the information provided.
144. Which of the following is a likely outcome of price controls and quota limits? a. prices higher than the market equilibrium price *b. illegal activity as people invent ways to get around the market constraint c. shortages and units of output that must be disposed of d. shortages and inefficiency created by buyers searching for units of the good
145. The market for salmon is in equilibrium. A price ceiling, a price floor, and a
quota limit in this market would all have which outcome in common? *a. deadweight loss created by a quantity exchanged that is less than the equilibrium quantity b. a supply price that exceeds a demand price c. revenue collected by the government on each unit of salmon harvested d. deadweight loss created by a transfer of surplus from consumers to producers
146. A binding price ceiling will create a persistent ________ and a binding price
floor will create a persistent ________.
a. surplus; surplus *b. shortage; surplus c. shortage; shortage d. surplus; shortage
147. Price controls are always set below the market equilibrium price. a. True *b. False
148. Suppose Congress imposes a price ceiling of $5 per ATM transaction. If the average market-clearing price for an ATM transaction is $2, the price ceiling will not be binding in this instance. *a. True b. False
149. A rent ceiling must be set above the equilibrium rent to be binding. a. True *b. False
150. A price ceiling benefits all consumers. a. True *b. False
151. Critics of the pharmaceutical industry often argue that price ceilings should be imposed on the drug manufacturers. If this happened, the quality of drugs would improve. a. True *b. False
152. Suppose the state of Mississippi creates a price floor in the market for cotton. If the floor is set below the current marketclearing price for cotton, the floor will cause a surplus of cotton. a. True *b. False
153. To dispose of the unwanted surplus resulting from agricultural price floors, the European Union pays exporters to sell products at a loss overseas.
*a. True b. False
154. A binding minimum wage will generally cause increased unemployment for low-skilled workers. *a. True b. False
155. If the state of Minnesota established a price floor in the market for pumpkins that was double the current market-clearing price, this would lead to an inefficient number of pumpkins sold in Minnesota. *a. True b. False
156. When transatlantic airfares were set artificially high by an international treaty, airlines offered customers an inefficiently high quality of service. *a. True b. False
157. The National Football League does not have a licensing process for quarterbacks. This means that the free market determines the standards that an aspiring quarterback must achieve. *a. True b. False
158. The demand price of a given quantity of doughnuts is the price at which consumers will demand that quantity of doughnuts. The supply price of donuts is the price at which donut producers will supply that quantity of doughnuts. *a. True b. False
159. The American Medical Association has a licensing process for people who aspire to become doctors. This licensing process has probably led to lower earnings for doctors over time. a. True *b. False
160. How does an effective price ceiling affect the quantity demanded and quantity supplied in a competitive market?
Correct Answer:
If the price ceiling is effective, it will be set below the market equilibrium price. This decreases the quantity supplied of the good but increases the quantity demanded of the good. Because quantity demanded exceeds quantity supplied at the price ceiling, a shortage is created, and the market cannot eliminate the shortage because the price is not allowed to rise. 161. Suppose the market price of wheat is $7 a bushel and a price ceiling is set at $9 a bushel. What is the impact of this price ceiling? Correct Answer:
This is an example of an ineffective (or nonbinding) price ceiling. A price ceiling is a legal maximum price, so to be effective it must be set below the equilibrium price. If the market price is below the ceiling, market forces will move toward $7 and the ceiling of $9 becomes irrelevant. 162. How do price ceilings create so-called black markets? Correct Answer:
A price ceiling creates a shortage of the good because the price is set below the equilibrium price. Some sellers would like to supply additional units of the good, but only if the price is higher than the ceiling price. If one of these sellers can find a willing buyer, a price can be negotiated above the legal maximum. 163. How could a minimum wage create an incentive for illegal hiring practices? Correct Answer:
A minimum wage is set above the equilibrium market wage, therefore creating a surplus of workers. We can imagine some workers who are willing to work for slightly less than the minimum wage and employers who are only too happy to pay them less than the minimum wage. If these workers can find such an employer, they might be paid cash under the table at a rate below the minimum wage.
164. Reference: Ref 7-33 (Table: The Market for Hamburger Flippers) Look at the table The Market for Hamburger Flippers. If the minimum wage in this market is $8, what is the impact on the market? Who are the winners and losers of the minimum wage? Correct Answer:
There is surplus labor of 10 hours. Winners are those who are able to supply the 45 hours of work at the higher wage. Losers are the firms now paying a wage higher than equilibrium. Additional losers are workers who are trying unsuccessfully to offer 10 hours that would not have been supplied at the equilibrium wage. Hamburger consumers may also be losers if the minimum wage requires an increase in the price of a hamburger.
165. Reference: Ref 7-34 (Table: The Market for Salmon) Look at the table The Market for Salmon. The state government has imposed a quota of 6 million pounds and has licensed commercial fishing boats to harvest the salmon. When the quota is reached, the season is over. What is the quota rent per pound of salmon when 6 million pounds is harvested and sold? Correct Answer:
The demand price is $27 per pound and the supply price is $21 per pound, so the quota rent is the difference of $6 per pound. 166. How is a quota limit different from or similar to a price control? Correct Answer:
The primary difference between the two policy instruments is the mechanism by which the policy is implemented. The outcomes are very similar for price controls and quotas. The difference lies in the tool that is used by the policy maker. One sets a law about a price that can be charged. This affects quantities bought and sold by driving a wedge between quantity supplied and quantity demanded at the mandated price and causing the quantity transacted to be less than the equilibrium quantity. The quota sets a law about quantities. This quantity affects the price by driving a wedge between demand price and supply price. Both policies create inefficiencies, deadweight loss, and an incentive for criminal behavior.
167. A price floor or a price ceiling is an example of: a. a quantity control. *b. a price control. c. market equilibrium price. d. a quota.
168. The minimum wage, which sets a lower limit on the wages that workers can
earn, is often above the equilibrium price. The minimum wage is an example of: *a. a price floor. b. a price ceiling. c. a quota. d. an equilibrium price.
169. Which of the following is the most likely scenario under which the government
would impose a price floor? a. demanders can make a strong moral or political argument for lower prices. b. suppliers can make strong moral or political arguments for lower prices. c. demanders can make strong moral or political arguments for higher prices. *d. suppliers can make strong moral or political arguments for higher prices.
170. Which of the following is the most likely scenario under which the government
would impose a price ceiling? *a. demanders can make strong moral or political arguments for lower prices. b. suppliers can make strong moral or political arguments for lower prices. c. demanders can make strong moral or political arguments for higher prices. d. suppliers can make strong moral or political arguments for higher prices.
171. A rent control scheme setting a maximum amount of rent paid below the
equilibrium rental price would most likely be supported by which of the following groups? *a. people who wish to rent such an apartment b. people who own rental apartments c. both renters and owners d. neither renters nor owners
172. In the rental housing market with price controls, the quantity of rental houses
demanded exceeds the quantity of rental housing supplied. This price control must be a: *a. price ceiling. b. price floor. c. quota. d. quantity control.
173. An effective price ceiling will most likely result in which of the following? a. an increase in producer surplus *b. an increase in consumer surplus c. a decrease in consumer surplus d. no change in either producer or consumer surplus
174. When a price ceiling is imposed, this results in: a. inefficiency resulting from overproduction of the good. *b. inefficiency due to a reduction in the quantity of the good transacted below the equilibrium quantity. c. a decrease in wasted resources as consumers find such goods more easily. d. surpluses in the market, which eventually lead to inefficient production costs.
175. A price ceiling on a good often results in: *a. black market or underground transactions of the good. b. a surplus of the product. c. greater communications between buyers and sellers about the appropriate price. d. a more efficient allocation of the good to buyers.
176. An increase in producer surplus would most likely occur if:
*a. a surplus of the good. b. a shortage of the good. c. a quantity control. d. an equilibrium price.
177. If minimum wages are set above the equilibrium wage in the market, then the
number of workers hired will be _______ the number of people who are willing to work. *a. less than b. greater than c. equal to d. either less than, greater than, or equal to
178. An effective minimum wage ultimately means that: *a. some unskilled workers may have a difficult time finding a job. b. employers must encourage workers to apply for positions. c. employers will have difficulty finding enough workers for their positions. d. employees are generally guaranteed employment.
179. An effective price floor will lead to: a. quantity demanded being greater than quantity supplied. *b. a resulting excess supply or a surplus. c. the need for government to produce more of the good. d. suppliers determining the amount of the good bought and sold in the market.
180. If government decides to control the amount of a good allowed into a market,
this will: a. always result in an increase in efficiency in the market. *b. increase incentives for market participants to engage in illegal or black market activities. c. result in the equilibrium quantity being produced if the quota is binding. d. lead to more of the good being produced.
181. A quota is: *a. a quantity restriction. b. a price control. c. a consumer surplus. d. a means to combat black markets.
182. Quotas often: a. result in few incentives to engage in illegal activities. *b. lead to deadweight losses resulting from a wedge between the price of sellers and that of demanders. c. create more efficient market outcomes. d. are necessary to increase the quantity of the goods in the market.
183. Which of the following statements is true?
I. Quantity controls drive a wedge between the demand price and the supply price of the good. II. The difference between the demand and supply price at the quota limit is referred to as consumer surplus. III. Quantity controls have no undesirable side effects. *a. Statement I is true. b. All statements are true. c. Statement II is true. d. Statements II and III are true.
184. Government intervention in the form of binding price floors or binding price
ceilings will: a. always enhance the efficiency of the market. *b. result in either surpluses or shortages. c. move the market toward its equilibrium quantity more quickly. d. often be seen as necessary to decrease the existence of black markets.
185. Inefficient allocations of goods to consumers often result from: *a. price ceilings. b. producer surplus. c. equilibrium prices. d. consumer surplus.
186.
Reference: Ref 7-36
(Table: Quantity Supplied and Quantity Demanded) Look at the table Quantity Supplied and Quantity Demanded. A government-imposed price ceiling equal to $5 would result in: a. the equilibrium quantity being bought and sold in this market. *b. excess demand. c. excess supply. d. a surplus occurring in this market.
187.
Reference: Ref 7-36
(Table: Quantity Supplied and Quantity Demanded) Look at the table Quantity Supplied and Quantity Demanded. If a price ceiling of $10 were imposed in this market, then: *a. the quantity demanded would be greater than the quantity supplied. b. the quantity supplied would be greater than the quantity demanded. c. an equilibrium quantity would result. d. excess supply equal to 25 units would result.
188.
Reference: Ref 7-36
(Table: Quantity Supplied and Quantity Demanded) Look at the table Quantity Supplied and Quantity Demanded. Excess supply would exist in this market if a price floor equal to ________ was imposed in this market. a. $5 b. $10 c. $15 *d. $20
189. Figure: Market I
Reference: Ref 7-37
(Figure: Market I) Look at the figure Market I. A surplus of the good would result if the price was equal to: *a. $15. b. $9. c. $6. d. $0.
190. Figure: Market I
Reference: Ref 7-37
(Figure: Market I) Look at the figure Market I. If a price floor of $15 was imposed on this market and the government chose to purchase the surplus, the government would need to buy ________ units of the good and spend a total amount of ________ on its purchase. a. 5; $75 *b. 10; $150 c. 9; $135 d. 9; $81
191. Figure: Market I
Reference: Ref 7-37
(Figure: Market I) Look at the figure Market I. A price floor of $5 imposed on this market would: a. result in a surplus of the good.
*b. have no effect on this market. c. increase production of this good. d. increase consumer spending on this good.
1. Goods and services purchased from abroad are ________, while goods and
services sold abroad are ________. a. exports; imports *b. imports; exports c. exports; quotas d. quotas; factors
2. Over the past 40 years in the United States, as a percentage of gross domestic
product: a. exports have grown and imports have remained constant. b. imports have grown and exports have remained constant. c. exports have decreased. *d. exports and imports have grown.
3. Which is true of the trends for imports and exports (as measured by a percentage
of the entire economy) in the United States? *a. Imports and exports have both been increasing. b. Imports and exports have both been decreasing. c. Imports have been increasing and exports have been decreasing. d. Imports have been decreasing and exports have been increasing.
4. Goods and services purchased from abroad are ________; goods and services
sold abroad are ________. *a. imports; exports b. tariffs; import quotas c. exports; imports d. import quotas; tariffs
5. When a domestic country exports goods to and imports goods from a foreign
country, in the short run, domestic: *a. producers in the exporting industry may be better off. b. consumers of the imported good may be worse off. c. consumers of the exported good may be better off. d. producers in the importing industry are better off.
6. When a domestic market begins to export goods to and import goods from a
foreign market: *a. producers in the exporting industry may be better off. b. consumers of the imported good may be worse off. c. consumers of the exported good may be better off. d. producers in the importing industry are better off.
7. If a domestic market begins to export goods to and import goods from a foreign
market, we can assume that: a. producers in the exporting industry may be worse off. b. consumers of the imported good may be worse off. c. consumers of the exported good may be better off. *d. producers in the importing industry may be worse off.
8. Compared with autarky, international trade leads to ________ domestic
production in exporting industries and ________ domestic production in importcompeting industries. *a. higher; lower b. higher; higher c. lower; higher d. lower; lower
9. A country has a comparative advantage in producing a good if: a. the opportunity cost of producing that good is higher in that country. *b. the opportunity cost of producing that good is lower in that country. c. people in that country consume more of that good. d. people in that country consume less of that good.
10. Suppose that the U.S. and Germany can produce either only cell phones, only
tablets, or some combination of the two. If the opportunity cost of producing a tablet in the U.S. is 5 cell phones, and the opportunity cost of producing a tablet in Germany is 8 cell phones: a. the U.S. has a comparative advantage in producing both tablets and cell phones. b. Germany has a comparative advantage in producing both tablets and cell phones. *c. the U.S. has a comparative advantage in producing tablets. d. Germany has a comparative advantage in producing tablets.
11. Suppose that the U.S. and Germany can produce either only cell phones, only
tablets, or some combination of the two. If the opportunity cost of producing a tablet in the U.S. is 5 cell phones, and the opportunity cost of producing a tablet in Germany is 8 cell phones: a. the U.S. has a comparative advantage in producing both tablets and cell phones.
b. Germany has a comparative advantage in producing both tablets and cell phones. c. the U.S. has a comparative advantage in producing cell phones. *d. Germany has a comparative advantage in producing cell phones.
12. The calculation of comparative advantage is based on knowing: *a. the opportunity costs of production. b. prices and quantities. c. the population of each country. d. the size of the workforce in each country.
13. In order for a country to gain from trade, it must be the case that: a. it pays lower wages than the country with which it is trading. b. it trades only with wealthier countries. c. it trades only with poorer countries. *d. each country specializes according to its comparative advantage.
14. If a nation imports a good when the economy is opened to trade, the domestic
price of the good will ________ and domestic consumption will ________. a. rise; rise b. rise; fall *c. fall; rise d. fall; fall
15. Figure: The Market for Oranges in South Africa
Reference: Ref 8-1
(Figure: The Market for Oranges in South Africa) Look at the Figure: The Market for Oranges in South Africa. In autarky, the price of oranges in South Africa is P1. When the economy is opened to trade, the price falls to PW. South Africa will ________ oranges and the volume of trade will equal ________. *a. import; CT – QT b. export; CT – QT c. import; Q1 – QT d. export; CT – Q1
16. Mexico can produce lettuce domestically, but lettuce can also be imported from
other nations. If Mexico imports some lettuce from other nations, it must be the case that: a. Mexico has the comparative advantage in lettuce production compared to other nations that produce lettuce. *b. the world price of lettuce is lower than the domestic price of lettuce. c. the price of lettuce in Mexico will rise to equal the world price of lettuce. d. the domestic quantity of lettuce supplied will increase as more lettuce is imported from other nations.
17. Figure: The Market for MP3 Players
Reference: Ref 8-2
(Figure: The Market for MP3 Players) Look at the Figure: The Market for MP3 Players. In the market for MP3 players, the autarky price equals ________. a. $140 b. $120 *c. $110 d. $100
18. Figure: The Market for MP3 Players
Reference: Ref 8-2
(Figure: The Market for MP3 Players) Look at the Figure: The Market for MP3 Players. In the market for MP3 players, if the world price equals $100 and there is free trade, this country:
*a. will import 150,000 MP3 players. b. will export 150,000 MP3 players. c. has a domestic supply equal to 250,000 MP3 players. d. has a domestic demand equal to 100,000 MP3 players.
19. Autarky is a situation in which a country: a. imports more than it exports. b. exports more than it imports. *c. does not trade with others. d. produces goods without any opportunity cost.
20. Under free trade, the world price of a good is the: a. equilibrium price in low-wage countries. b. equilibrium price in high-wage countries. *c. price at which unlimited quantities can be bought or sold abroad. d. price that would prevail under conditions of autarky.
21. Figure: Market for Cotton
Reference: Ref 8-3
(Figure: Market for Cotton) The Figure: Market for Cotton shows the domestic supply and domestic demand for cotton. Both the autarky price and the world price are indicated. If this economy is closed to world trade, what will be the outcome? *a. The price will be $100 per bale, and 5 million bales of cotton will be sold.
b. The price will be $100 per bale, and there will be a shortage of 5 million bales of cotton. c. The price will be $60 per bale, and there will be a shortage of 5 million bales of cotton. d. The price will be $60 per bale, and there will be a surplus of 5 million bales of cotton.
22. Figure: Market for Cotton
Reference: Ref 8-3
(Figure: Market for Cotton) The Figure: Market for Cotton shows the domestic supply and domestic demand for cotton. Both the autarky price and the world price are indicated. If this economy is open to world trade, what quantity of cotton will be grown domestically? *a. 3 million bales b. 5 million bales c. 8 million bales d. No cotton will be grown domestically.
23. Figure: Market for Cotton
Reference: Ref 8-3
(Figure: Market for Cotton) The Figure: Market for Cotton shows the domestic supply and domestic demand for cotton. Both the autarky price and the world price are indicated. If this economy is open to world trade, what quantity of cotton will be imported? a. 3 million bales *b. 5 million bales c. 8 million bales d. No cotton will be imported.
24. Figure: Market for Cotton
Reference: Ref 8-3
(Figure: Market for Cotton) The Figure: Market for Cotton shows the domestic supply and domestic demand for cotton. Both the autarky price and the world price are indicated. If this economy is open to world trade, what is the total quantity of cotton purchased by domestic consumers? a. 3 million bales b. 5 million bales
*c. 8 million bales d. No cotton will be purchased domestically.
25. Figure: The Domestic Supply and Demand for SUVs in the United States
Reference: Ref 8-4
(Figure: The Domestic Supply and Demand for SUVs in the United States) Look at the Figure: The Domestic Supply and Demand for SUVs in the United States. Suppose the world price equals $50,000 and there is free trade. The United States would ________ SUVs. a. import 6 million *b. export 6 million c. export 2 million d. import 2 million
26. Figure: The Domestic Market for Rice
Reference: Ref 8-5
(Figure: Domestic Market for Rice) Look at the Figure: The Domestic Market for Rice. In this figure, PA is the price in autarky, and PW is the world price. After international trade, this nation will ________ a quantity of rice equal to ________. a. import; Qs – Qd *b. export; Qs – Qd c. export; Qs – Qa d. import; Qa – Qd
27. If a country's price for wood furniture in the absence of trade is lower than the
price with trade, the country will likely: a. import wooden furniture. *b. export wooden furniture. c. have absolute advantage in wooden furniture production. d. have a surplus of wooden furniture.
28. If a country's price in the absence of trade is lower than the price with trade,
then the domestic quantity supplied with trade is ________ the domestic quantity demanded. *a. greater than b. less than c. equal to d. not comparable to
29. If a country has the comparative advantage in producing cloth, we would predict
that in the market for cloth, the autarky price would be ________ the world price and the country would choose to ________ cloth. *a. less than; export b. greater than; export c. less than; import d. the same as; export
30. Figure: The Market for Tea in Sri Lanka
Reference: Ref 8-6
(Figure: The Market for Tea in Sri Lanka) Look at the Figure: The Market for Tea in Sri Lanka. In autarky, the price of tea in Sri Lanka is P1. When the economy is opened to trade, the price rises to PW. Sri Lanka will ________ tea and the volume of trade will equal ________. a. import; QT – CT *b. export; QT – CT c. import; QT – Q1 d. export; Q1 – CT
31. If a nation exports a good when the economy is opened to trade, relative to
autarky the domestic price of the good will ________ and domestic consumption will ________. a. rise; rise *b. rise; fall c. fall; rise d. fall; fall
32. Figure: Market for Copper
Reference: Ref 8-7
(Figure: Market for Copper) The Figure: Market for Copper shows the domestic supply and domestic demand for copper. Both the autarky price and the world price are indicated. If this economy is closed to world trade, what will be the outcome? *a. The price of copper will be $4 per pound, and 80,000 pounds will be purchased on the domestic market. b. The price of copper will be $4 per pound, and 110,000 pounds will be purchased on the domestic market. c. The price of copper will be $6 per pound, and 40,000 pounds will be purchased on the domestic market. d. The price of copper will be $6 per pound, and 80,000 pounds will be purchased on the domestic market.
33. Figure: Market for Copper
Reference: Ref 8-7
(Figure: Market for Copper) The Figure: Market for Copper shows the domestic supply and domestic demand for copper. Both the autarky price and the world price are indicated. If this economy is open to world trade, what quantity of copper will be produced domestically? a. 40,000 pounds b. 80,000 pounds *c. 110,000 pounds d. No copper will be produced domestically at the world price.
34. Figure: Market for Copper
Reference: Ref 8-7
(Figure: Market for Copper) The Figure: Market for Copper shows the domestic supply and domestic demand for copper. Both the autarky price and the world price are indicated. If this economy is open to world trade, what quantity of copper will be purchased by domestic residents? *a. 40,000 pounds b. 80,000 pounds c. 110,000 pounds d. No copper will be purchased domestically at the world price.
35. Figure: Market for Copper
Reference: Ref 8-7
(Figure: Market for Copper) The Figure: Market for Copper shows the domestic supply and domestic demand for copper. Both the autarky price and the world price are indicated. If this economy is open to world trade, what quantity of copper will be exported? a. 40,000 pounds *b. 70,000 pounds c. 80,000 pounds d. 110,000 pounds
36. The effect of international trade on U.S. factor markets is to: *a. increase the wage of highly educated workers. b. increase the wage of unskilled workers. c. decrease the wage of both highly educated workers and unskilled workers. d. increase the wage of highly educated workers and unskilled workers.
37. Since the United States imports a large quantity of textiles from Asia, the overall
wages of U.S. textile workers has ________, while the price of textiles in the United States has ________. *a. decreased; decreased b. increased; decreased c. decreased; increased d. increased; not changed
38. If labor is abundant in South Africa but capital is scarce, when South Africa
opens to trade the: a. prices of labor and capital will rise. b. prices of labor and capital will fall. *c. price of labor will rise and the price of capital will fall. d. price of labor will fall and the price of capital will rise.
39. If labor is scarce in Sri Lanka but capital is abundant, when Sri Lanka opens to
trade the: a. prices of labor and capital will rise. b. prices of labor and capital will fall. c. price of labor will rise, and the price of capital will fall. *d. price of labor will fall, and the price of capital will rise.
40. Foreign trade, investment, and multinational corporations are all examples of: *a. globalization. b. autarky. c. tariffs. d. quotas.
41. An international comparison of wages shows that wage levels are positively
correlated with: a. birth rates. b. natural resource endowments. *c. productivity. d. population.
42. Compared with autarky, international trade leads to: *a. higher production in exporting industries and lower production in import-competing industries. b. lower production in exporting industries and higher production in import-competing industries. c. decreases the demand for factors used in exporting industries. d. increases the demand for factors used in import-competing industries.
43. Policies that limit imports, usually with the goal of protecting domestic producers
in import-competing industries from foreign competition, are known as: a. import-competing clauses. b. import reduction acts. *c. trade protection.
d. competition protection.
44. Restrictions on free international trade designed to protect domestic industries
from competitive market forces that originate beyond the borders of the country are: a. competitive policies. *b. protectionist policies. c. free-trade policies. d. antitrust policies.
45. An example of a tariff is a: a. limit on the total number of Honda automobiles imported from Japan. b. regulation specifying that each imported Honda automobile must meet certain emission exhaust guidelines. c. tax of $500 on each Honda automobile produced in the United States. *d. tax of 10% of the value of each Honda automobile imported from Japan.
46. If Japan levies tariffs on U.S. goods entering Japan, this will tend to: a. benefit both Japanese and U.S. producers. *b. damage U.S. producers and benefit Japanese producers. c. benefit U.S. producers and damage Japanese producers. d. damage both Japanese and U.S. producers.
47. If a country imposes a tariff on imported shoes, we expect the domestic price of
shoes to ________, domestic consumption to ________, and domestic production to ________. a. fall; fall; fall b. fall; rise; fall *c. rise; fall; rise d. rise; rise; fall
48. Figure: A Tariff on Oranges in South Africa
Reference: Ref 8-8
(Figure: A Tariff on Oranges in South Africa) Look at the Figure: A Tariff on Oranges in South Africa. When the government imposes a tariff on imported oranges, the price of oranges in South Africa rises from PW to PT and the volume of imports falls to: a. Q2 – Q1. b. C1 – C2. c. C1 – Q1. *d. C2 – Q2.
49. A tariff imposed on Japanese imports into the United States tends to: a. penalize U.S. producers and benefit Japanese producers. *b. benefit U.S. producers and penalize Japanese producers. c. penalize both U.S. and Japanese producers. d. benefit both U.S. and Japanese producers.
50. A tariff ________ the price received by domestic producers and ________ the
price paid by domestic consumers. a. decreases; increases b. increases; decreases c. decreases; decreases *d. increases; increases
51. A tariff is most likely to ________ prices and ________ domestic consumption
of the good or service being protected. a. decrease; increase *b. increase; decrease c. have no effect on; not change d. decrease; decrease
52. A tax imposed by a government on imported goods or services is a: a. quota. *b. tariff. c. nontariff barrier. d. trade embargo.
53. If Japan levies tariffs on U.S. goods entering Japan, this will tend in the short
run to: a. benefit both Japanese and U.S. producers. *b. damage U.S. producers and benefit Japanese producers.
c. benefit U.S. producers and damage Japanese producers. d. damage both Japanese and U.S. producers.
54. Which is an example of a tariff? a. A regulation specifying that each imported Yamaha motorcycle must meet certain emission exhaust guidelines. b. A limit on the total number of Yamaha motorcycles imported from Japan. *c. A tax of 5% of the value of each Yamaha motorcycle imported from Japan. d. A tax of $250 on each Yamaha motorcycle produced in the United States.
55. In the importing country, the most likely effect of a tariff on a good is to: *a. raise the price and decrease the quantity demanded. b. raise the price and increase the quantity demanded. c. raise the price without affecting the quantity demanded. d. decrease the quantity supplied.
56. If a country imposes a tariff on imported shoes, we expect the domestic price of
shoes to ________ and the quantity of shoes consumed in the domestic market to ________. a. fall; fall b. fall; rise *c. rise; fall d. rise; rise
57. If a country removes a tariff on imported shoes, we expect the domestic price of
shoes to ________ and the quantity of shoes consumed in the domestic market to ________. a. fall; fall *b. fall; rise c. rise; fall d. rise; rise
58. If Canada imposes a tariff of $5 per bottle on French wine, the most likely effect
will be to raise the price of wine in Canada by: a. more than $5 per bottle. *b. $5 per bottle. c. less than $5 per bottle and lower the price of wine in France by less than $5 per bottle.
d. less than $5 per bottle without affecting the price of wine in France.
59. Assume that a tariff is imposed on Chinese imports into the United States. This
tariff is likely to: a. penalize both U.S. and Chinese producers. b. benefit both U.S. and Chinese producers. *c. benefit U.S. producers and penalize Chinese producers. d. penalize U.S. producers and benefit Chinese producers.
60. A tariff imposed on U.S. imports into Japan tends to: *a. penalize U.S. producers and benefit Japanese producers. b. benefit U.S. producers and penalize Japanese producers. c. penalize both U.S. producers and Japanese producers. d. benefit both U.S. producers and Japanese producers.
61. A tax on imports of foreign goods is called a(n): a. import quota. b. subsidy. *c. tariff. d. export restriction.
62. Figure: Tariffs
Tariffs
Reference: Ref 8-9
(Figure: Tariffs) The Figure: Tariffs shows the domestic supply and demand for cotton. Suppose that the world price is $2 and that a $2 tariff has been imposed. Pw indicates the world price on the graph, and PT indicates the price with the tariff. Once the tariff is imposed, what quantity will be supplied domestically? a. 4000 pounds *b. 8000 pounds c. 11,000 pounds d. 15,000 pounds
63. Figure: Tariffs
Tariffs
Reference: Ref 8-9
(Figure: Tariffs) The Figure: Tariffs shows the domestic supply and demand for notebooks. Suppose that the world price is $2 and that a $2 tariff has been imposed. Pw indicates the world price on the graph, and PT indicates the price with the tariff. Once the tariff is imposed, what quantity will be imported? *a. 3000 b. 4000 c. 8000 d. 11,000
64. Figure: Tariffs
Tariffs
Reference: Ref 8-9
(Figure: Tariffs) The Figure: Tariffs shows the domestic supply and demand for cotton. Suppose that the world price is $2 and a $2 tariff has been imposed. P w indicates the world price on the graph, and PT indicates the price with the tariff. Once the tariff is imposed, what quantity will be purchased domestically? a. 8000 pounds b. 9000 pounds *c. 11,000 pounds d. 15,000 pounds
65. A regulation that specifies the maximum amount of a good or service that may
be imported during a specified period is: *a. an import quota. b. tariff. c. nontariff barrier. d. an export quota.
66. An example of an import quota is a: *a. limit on the total number of Honda automobiles imported from Japan. b. regulation specifying that each imported Honda automobile must meet certain emission exhaust guidelines. c. tax of 10% of the value of each Honda automobile imported from Japan. d. subsidy from the Japanese government of $500 for each Honda automobile imported into the United States.
67. Assume that the United States imposes a quota on Colombian coffee. Relative
to the equilibrium world price that would exist in the absence of import quotas, it is likely that the equilibrium price of coffee in the United States will ________ and the equilibrium price of coffee in Colombia will ________. a. decrease; remain the same b. remain the same; increase c. increase; increase *d. increase; decrease
68. Assume that the United States imposes an import quota on Scottish wool suits.
Relative to the equilibrium price that would exist in the absence of quotas, the equilibrium price of suits in the United States will most likely ________ and the equilibrium price of suits in Scotland will most likely ________. a. remain the same; decrease b. remain the same; increase c. increase; increase *d. increase; decrease
69. If the United States imposes an import quota on French wines, the result in the
short run is likely to be ________ profits for American wine producers and ________ profits for French wine producers. a. lower; lower b. lower; higher *c. higher; lower d. higher; higher
70. A direct restriction on the quantity of an import is called a(n): *a. import quota. b. tariff. c. import subsidy. d. import restriction.
71. In the case of U.S. import protection, quota rents for the most important import
licenses are earned by: *a. foreign governments. b. the U.S. government. c. U.S. producers of the good. d. importers who pay the highest price to get the licenses.
72. Which is an example of an import quota? *a. A limit on the total number of shoes imported from Italy. b. Regulations specifying that each imported toy from China must meet certain safety guidelines. c. A tax of $100 on each Suzuki motorcycle produced in the United States. d. A tax of 10% of the value of each Suzuki motorcycle imported from Japan.
73. Assume that the United States imposes an import quota on Italian shoes.
Relative to the equilibrium world price that would exist in the absence of import quotas, the equilibrium price of shoes in the United States will most likely ________, and the equilibrium price of shoes in Italy will most likely ________. *a. increase; decrease b. decrease; remain the same c. decrease; increase d. increase; remain the same
74. An import quota differs from a tariff in the respect that the quota will not: a. result in higher prices. b. cause any reduction in consumer surplus. *c. generate any revenue for the government. d. offer any protection for domestic suppliers.
75. When a business hires people in other countries to perform various tasks, then
________ has occurred.
a. comparative advantage b. globalization *c. offshore outsourcing d. pauper labor
76. The most likely effects of tariffs and/or import quotas are to ________ prices
and to ________ consumption of the protected goods in the importing country. a. raise; raise *b. raise; lower c. lower; raise d. lower; lower
77. The main difference between a tariff and an import quota is a(n): a. import quota reduces imports more sharply than a tariff. b. tariff will cause higher prices than an import quota. *c. tariff generates tax revenue for the government, while a quota generates rents to the license-holders. d. tariff will cause lower prices than an import quota.
78. Suppose the United States auctioned off all import quotas, the auctions were
perfectly competitive, and the government received the revenues from the auction. In this case, the deadweight loss from a quota would be ________ the deadweight loss from an equivalent tariff. a. less than b. greater than *c. equal to d. in the case of demand being elastic, greater than
79. Which best describes the most likely effects of a tariff or an import quota? a. The tariff or import quota will raise prices and increase the consumption of the protected goods in the importing country. *b. The tariff or import quota will raise prices and decrease the consumption of the protected goods in the importing country. c. The tariff or import quota will lower prices and increase the consumption of the protected goods in the importing country. d. The tariff or import quota will lower prices and decrease the consumption of the protected goods in the importing country.
80. In the importing country, the most likely effects of tariffs and/or import quotas is
to ________ prices and ________ consumption of the protected goods. *a. raise; reduce b. raise; raise
c. raise; not affect d. reduce; reduce
81. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule for wine. The autarky price is: a. $25 b. $15 *c. $10 d. $2.50
82. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule for wine. Under free trade, if the world price
is $5, domestic supply will be _______ bottles, and domestic demand will be ______ bottles. a. 300; 300 b. 900; 0 c. 400; 100 *d. 100; 400
83. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule for wine. Under free trade, if the world price is $5, domestic quantity supplied will be _______ bottles, and domestic quantity demanded will be ________ bottles. *a. 300 bottles will be imported. b. 300 bottles will be exported. c. 500 bottles will be imported. d. there will be no exports or imports.
84. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300
7.50 5.00 2.50
350 400 450
200 100 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule for wine. If the world price is $5, and a tariff of $2.50 per bottle is imposed, a. 450 bottles will be imported. b. 300 bottles will be imported. *c. 150 bottles will be imported. d. 150 bottles will be exported.
85. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule for wine. If the world price is $5, and a tariff of $2.50 per bottle is imposed, government revenue will be: a. $1125. *b. $375. c. $250. d. $0.
86. Table: Wine Market
Price per Bottle $25.00 22.50 20.00
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700
17.50 15.00 12.50 10.00 7.50 5.00 2.50
150 200 250 300 350 400 450
600 500 400 300 200 100 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule for wine. Under free trade, if the world price is $2.50, domestic supply will be _______ bottles, and domestic demand will be ______ bottles. a. 300; 300 *b. 450; 0 c. 0; 450 d. 100; 400
87. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Under free trade, if the world price is $2.50, a. 300 bottles will be imported. b. 400 bottles will be imported. *c. 450 bottles will be imported. d. there will be no exports or imports.
88. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. If the world price is $2.50, and a tariff of $2.50 per bottle is imposed, a. 450 bottles will be imported. *b. 300 bottles will be imported. c. 150 bottles will be imported. d. 150 bottles will be exported.
89. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. If the world price is $2.50, and a tariff of $2.50 per bottle is imposed, government revenue will be: *a. $625.
b. $375. c. $250. d. $0.
90. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. If the world price is $2.50, and a tariff of $5 per bottle is imposed, a. 450 bottles will be imported. b. 300 bottles will be imported. *c. 150 bottles will be imported. d. 150 bottles will be exported.
91. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. If the world price is $2.50, and a tariff of $5 per bottle is imposed, government revenue will be: a. $0. b. $375. c. $250. *d. $750.
92. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Assume that the world price of wine is $2.50 per bottle. A quota limit of _______ bottles would have the same effect on price as a tariff of $2.50. a. 0 b. 100 c. 150 *d. 300
93. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400
10.00 7.50 5.00 2.50
300 350 400 450
300 200 100 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Assume that the world price of wine is $2.50 per bottle. A quota limit of _______ bottles would have the same effect on price as a tariff of $5. a. 0 b. 100 *c. 150 d. 300
94. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Under free trade, if the world price is $15, domestic quantity supplied will be ______ bottles, and domestic quantity demanded will be _______ bottles. *a. 500; 200 b. 300; 300 c. 900; 0 d. 0; 450
95. Table: Wine Market
Price per Bottle
Quantity Demanded (bottles) Quantity Supplied (bottles)
$25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
0 50 100 150 200 250 300 350 400 450
900 800 700 600 500 400 300 200 100 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Under free trade, if the world price is $15, a. 500 bottles will be exported. *b. 300 bottles will be exported. c. 300 bottles will be imported. d. there will be no imports or exports of wine.
96. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Under free trade, if the world price is $17.50, domestic quantity supplied will be ______ bottles, and domestic quantity demanded will be _______ bottles. a. 750; 0 b. 150; 600 *c. 600; 150 d. 300; 300
97. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Under free trade, if the world price is $17.50, a. 750 bottles will be exported. b. 200 bottles will be exported. c. 150 bottles will be imported. *d. 450 bottles will be exported.
98. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Under free trade, if the world
price is $20, domestic quantity supplied will be ______ bottles, and domestic quantity demanded will be _______ bottles. *a. 700; 100 b. 100; 700 c. 800; 0 d. 300; 300
99. Table: Wine Market
Price per Bottle $25.00 22.50 20.00 17.50 15.00 12.50 10.00 7.50 5.00 2.50
Quantity Demanded (bottles) Quantity Supplied (bottles) 0 900 50 800 100 700 150 600 200 500 250 400 300 300 350 200 400 100 450 0
Reference: Ref 8-10
(Table: Wine Market) The Table: Wine Market shows the domestic demand schedule and domestic supply schedule of for wine. Under free trade, if the world price is $20, a. 800 bottles will be exported. *b. 600 bottles will be exported. c. 600 bottles will be imported. d. 200 bottles will be exported.
100. Although U.S. exports and imports have grown substantially in absolute terms since the 1960s, the share of exports and imports in total output has fallen significantly over the past few decades. a. True *b. False
101. Foreign trade as a percentage of GDP is much larger for the United States than it is for any other country. a. True *b. False
102. Relative to the size of their economy, many other countries engage in more foreign trade than the United States. *a. True b. False
103. When a country moves from autarky to free international trade, consumers and producers in the import and export sectors all gain. a. True *b. False
104. If France's opportunity cost of producing wine is lower than any other country's opportunity cost of producing wine, then France has a comparative advantage in producing wine. *a. True b. False
105. The opportunity cost of producing a bushel of peaches is 2 bushels of tomatoes in the U.S., then Mexico has a comparative advantage in producing peaches. a. True *b. False
106. Evidence shows that increased international trade has increased the wages of unskilled workers in the United States. a. True *b. False
107. Since labor is relatively scarce in Canada, free trade should cause the wages paid to Canadian labor to rise. a. True *b. False
108. U.S. exports are skill-intensive, which means that they are intensive in human capital. *a. True b. False
109. Countries with highly educated workforces tend to export goods whose production requires little skilled labor and import skillintensive goods.
a. True *b. False
110. Industries in Germany tend to be more skill-intensive than industries in Bangladesh. *a. True b. False
111. While the United States generally follows a policy of free trade, this is particularly true for agriculture and textiles, in which all restrictions on international trade have been removed. a. True *b. False
112. Import tariffs benefit domestic producers more than they hurt domestic consumers. a. True *b. False
113. Exporting skill-intensive products and importing labor-intensive products tends to narrow the income gap between more educated and less educated workers. a. True *b. False
114. Offshore outsourcing takes place when businesses hire people in another country to perform various tasks. *a. True b. False
115. Economists claim that opening up a market to imports leads to an increase in total surplus but that trade creates winners and losers. How does this work? Correct Answer:
A nation imports a good because the world price is lower than the domestic price. The effect of imports is a decrease in the domestic price. As the domestic price falls to the world price, domestic quantity demanded increases, and consumers gain consumer surplus, both from the lower price and from increased consumption. However, as the price falls to the world price, domestic quantity supplied falls, and producers lose producer surplus, both from the lower price and from selling fewer
units. Because the gains of the winners (consumers) outweigh the losses of the losers (producers), total surplus rises. 116. Suppose a nation has freely imported sugar at the world price PW for many years. However, a new government administration decides to levy a tariff on imported sugar, and the price rises to Pt. Most economists report that this has created inefficiency. How? Correct Answer:
A tariff, like an excise tax, increases the price above the level that was achieved with free competition, and economists usually cite two sources of inefficiency. First, this artificially higher price prevents some mutually beneficial trades. Some consumers who were willing to purchase sugar at prices slightly higher than PW, are now unwilling to do so at Pt, even though PW represents the true cost of producing sugar in the world economy. A second source of inefficiency arises because the tariff price Pt “protects” some producers who could not profitably produce sugar at the lower PW. In other words, some economic resources that are inefficiently used in the sugar industry would with competition be used in some better alternative industry. 117. If the world price of good X is lower than the domestic (autarky) price of that good, will a nation be an exporter or importer of good X? How will the domestic market price adjust? Explain. Correct Answer:
Because the world price of good X is a relative bargain, importers will find it profitable to purchase good X at the world price and sell it at the higher domestic price. Greater supply of good X in the domestic market will eventually drop the domestic price to the world price and importing will stop. 118. Suppose a nation is considering two alternative policies to protect a domestic industry from world trade. The two policies are an import quota of X units and a per-unit tariff that would reduce imports to X units. Though both policies would result in only X imported units of this good, there is a fundamental difference in the outcome. Explain this difference. Correct Answer:
The tariff acts is a tax and would therefore produce revenue for the domestic government. The quota produces no such revenue for the government. Instead, those dollars would accrue to foreign producers (or foreign governments) that have the right to import under the quota. Since the quota rents go to foreigners, the deadweight loss of an import quota is larger than the deadweight loss of the tariff, which generates revenue for the government.
119. Imports are good and services that are:
a. sold outside of the country. b. sold inside a country. *c. purchased from another country. d. purchased inside the country.
120. Figure: The Market for Melons in Russia
Reference: Ref 8-11
(Figure: The Markets for Melons in Russia) Look at the Figure: The Market for Melons in Russia. If the world price of melons is equal to E, Russia will: *a. I of melons – import H. b. I of melons – export H. c. G of melons – import F. d. export F – G of melons.
121. Figure: The Market for Melons in Russia
Reference: Ref 8-11
(Figure: The Markets for Melons in Russia) Look at the Figure: The Market for Melons in Russia. Suppose the world price of melons is D. Russia will: a. I of melons – import H. b. I of melons – export H. c. G of melons – import F. *d. export F – G of melons.
122. Figure: The Market for Melons in Russia II
Reference: Ref 8-12
(Figure: The Markets for Melons in Russia II) Look at the Figure: The Market for Melons in Russia II. Suppose Russia opens to trade and finds the world price to be equal to $10. Russia will: *a. import 42 units of melons. b. export 42 units of melons. c. not find it beneficial to trade. d. import 30 units of melons.
123. Figure: The Market for Melons in Russia II
Reference: Ref 8-12
(Figure: The Markets for Melons in Russia II) Look at the Figure: The Market for Melons in Russia II. Suppose producers lobby effectively for the imposition of a tariff that raises the world price to from $10 to $15. Tariff revenue to the government will equal: a. $150. b. $200. *c. $50. d. $5.
124. Figure: The Market for Melons in Russia II
Reference: Ref 8-12
(Figure: The Markets for Melons in Russia II) Look at the Figure: The Market for Melons in Russia II. Suppose the world price under free trade is $10 and the government imposes a tariff that raise the price of melons to $15. The burden of the tariff will be: a. borne by both producers and consumers. *b. totally borne by consumers. c. totally borne by producers. d. borne by the government.
1. The topics studied in macroeconomics include: a. inflation. b. unemployment. c. economic growth. *d. inflation, unemployment, and economic growth.
2. The topics studied in macroeconomics include: *a. inflation. b. monopolies. c. spillovers like pollution. d. mergers.
3. Macroeconomics involves the study of the: *a. overall behavior of the economy. b. individual decision makers in the economy. c. different market structures that exist in the economy. d. cost and production decisions made by firms.
4. Macroeconomics focuses on: *a. the economy as a whole. b. individual decisions. c. wages. d. the allocation of scarce resources.
5. The topics studied in macroeconomics include: a. the price of a motorcycle. b. the wages of engineers. *c. the average price level in the economy. d. how much ice cream consumers buy.
6. Which is most likely a macroeconomics question rather than a microeconomics
question? *a. Is the national unemployment rate rising or falling? b. Are consumers buying more bottled water and less fruit juice? c. Are salaries for nurses rising or falling? d. Should a tax be levied on each ton of carbon a factory emits?
7. Which of the following is a microeconomic question rather than a macroeconomic
question?
a. Will a decrease in the income tax rate lift the nation out of a recession? b. Will an increase in consumer spending create inflation? c. Will a decrease in the income tax rate create a budget deficit? *d. Will an increase in the cigarette tax cause a decrease in the number of packs sold?
8. Which would most likely be a microeconomic question? *a. Should I go to business school or take a job? b. What determines the overall salary levels paid to workers in a given year? c. What government policies should be adopted to promote full employment and growth in the economy as a whole? d. What determines the level of output for the economy as whole?
9. Which would NOT be classified as a macroeconomic question? a. How many people are employed in the economy as a whole? b. What determines the overall level of prices in the economy as a whole? c. What determines the overall trade in goods, services, and financial assets between the United States and the rest of the world? *d. What determines the cost to a university or college of offering a new course?
10. Which question is appropriate to the study of microeconomics? a. How does the aggregate price level affect overall consumer spending? b. How does the level of interest rates affect investment spending? *c. How much will Sony charge for the new game system to be introduced later this year? d. How does the GDP affect overall government spending?
11. Which question is appropriate to the study of macroeconomics? *a. How does the aggregate price level affect overall consumer spending? b. How does the level of interest rates affect Delta's decision to buy a new airplane? c. How much will Sony charge for the new game system to be introduced later this year? d. What determines whether Wachovia opens a new office in Beijing?
12. The distinguishing feature of macroeconomics is that it: a. evaluates the behavior of large firms. b. examines the markets for expensive items. *c. studies the behavior of the economy as a whole. d. uses economic theory to explain popular consumer trends.
13. Which is an example of a macroeconomic question? a. What will happen to the price of apples? *b. What will happen to the overall level of prices in the economy as a whole? c. What will happen to the price of yarn? d. What will happen to wages earned by workers in the hotel industry?
14. Periods in which output and employment are falling are known as: *a. recessions. b. booms. c. expansions. d. deflations.
15. An expansion is a period in which: a. output declines. b. the price level falls. *c. output rises. d. unemployment rises.
16. Recessions are periods when: a. output rises. b. the aggregate price level rises. c. the unemployment rate is falling. *d. output and employment are falling.
17. The short-run alternation between economic downturns and recessions, then
economic upturns and expansions is known as the: *a. business cycle. b. contractionary cycle. c. expansionary cycle. d. disequilibrium cycle.
18. If during a period of several months the economy is simultaneously increasing
its levels of output and employment, then the economy is in a(n): a. depression. *b. expansion. c. recession. d. turning point between a recovery and a downturn.
19. A business cycle is a: a. very deep and prolonged economic downturn. b. period in which output and employment are rising. c. period in which output and employment are falling. *d. short-run alternation between economic upturns and downturns.
20. The alternation between recessions and expansions is known as the: a. unemployment rate. b. long-run economic growth. *c. business cycle. d. macroeconomy.
21. In a typical business cycle, the business-cycle trough is immediately followed by
the: a. business-cycle peak. b. recession. c. depression. *d. expansion.
22. In a typical business cycle, the business-cycle peak is immediately followed by
the: *a. recession. b. business-cycle trough. c. expansion. d. depression.
23. An economic expansion in the United States is typically associated with a(n): a. falling inflation rate. b. increase in the poverty rate. *c. falling unemployment rate. d. decrease in corporate profits.
24. Economists have identified several consecutive months of falling employment
and forecasts for the next few months suggest more of the same. At what point in the business cycle is the economy? *a. recession b. expansion c. business-cycle peak d. business-cycle trough
25. For the past several months, per capita output has increased, but at a slower
and slower rate. Over the same period, the unemployment rate has been falling, but it appears to have leveled off and may soon rise. Where in the business cycle is the economy? *a. the business-cycle peak b. a recession c. the business-cycle trough d. an expansion
26. The point at which a recession ends and the expansion begins is called the: *a. business-cycle trough. b. downturn. c. business-cycle peak. d. lag.
27. The trough of the business cycle: a. comes right after the expansion phase. b. comes before the recession phase. c. is a temporary maximum level of real GDP. *d. is a temporary minimum level of real GDP.
28. A period of rising real GDP is a(n): a. peak. b. trough. *c. expansion. d. recession.
29. A period of falling real GDP is a(n): a. peak. b. trough. c. expansion. *d. recession.
30. A pattern of expansion, then recession, then expansion again is a(n): a. annual trend. b. secular trend. *c. business cycle. d. consumer cycle.
31. The point on a business cycle when real GDP stops rising and begins falling is
a(n): *a. business-cycle peak. b. business-cycle trough. c. expansion. d. recession.
32. The point on a business cycle when real GDP stops falling and begins rising is
a(n): a. business-cycle peak. b. expansion. *c. business-cycle trough. d. recession.
33. The sequence of business cycle phases is: a. business-cycle peak, business-cycle trough, expansion, recession. b. business-cycle peak, expansion, business-cycle trough, recession. *c. business-cycle peak, recession, business-cycle trough, expansion. d. business-cycle peak, expansion, recession, business-cycle trough.
34. Suppose an economy has rising total output accompanied by increasing
employment. This is generally known as: a. stagflation. b. recession. c. inflation. *d. expansion.
35. A country's total product, better known as real gross domestic product (GDP)
undergoes periodic fluctuations called a(n): a. recession.
*b. business cycle. c. expansion. d. trough.
36. Figure: The Business Cycle
Reference: Ref 9-1
(Figure: The Business Cycle) Point B on this graph shows a(n): a. peak. *b. trough. c. expansion. d. recession.
37. Figure: The Business Cycle
Reference: Ref 9-1
(Figure: The Business Cycle) The movement from point B to C is called a(n): a. trough. *b. expansion, c. depression. d. peak.
38. A broad-based downturn, in which employment declines in many industries, is
known as a(n): *a. recession. b. expansion. c. declining interval. d. growth reversal.
39. An economic expansion is also referred to as a(n): a. expenditure phase. b. trend improvement. c. growth spurt. *d. recovery.
40. The pattern of alternating recessions and expansions is known as:
a. the economic roundabout. *b. the business cycle. c. the policy paradigm. d. economic synergy.
41. The beginning and the end of a recession are officially determined by the: a. U.S. Congress. b. Federal Reserve. c. U.S. Chamber of Commerce. *d. National Bureau of Economic Research.
42. A business-cycle peak occurs when the: a. economy switches from recession to expansion. *b. economy switches from expansion to recession. c. current unemployment rate is equal to the long-term average unemployment rate. d. current unemployment rate reaches a new historic high.
43. A business-cycle trough occurs when the: *a. economy switches from recession to expansion. b. economy switches from expansion to recession. c. current unemployment rate is equal to the long-term average unemployment rate. d. current unemployment rate reaches a new historic low.
44. The concept of the business cycle: a. is a minor concern to most macroeconomists. b. has not received much formal study from the discipline of economics. *c. has played a crucial role in developing the field of macroeconomics. d. is the only question of interest to macroeconomists.
45. Keynesian policies: a. have succeeded in eliminating the business cycle. b. are no longer used in addressing the business cycle. *c. are still used by many governments when recession strikes. d. have proven to be ineffective in improving macroeconomic performance.
46. A recession leads to all EXCEPT: a. higher unemployment. b. reduced output. c. reduced income and living standards. *d. higher employment.
47. Which measure is typically used as an indicator of the conditions in the labor
market? *a. the unemployment rate b. the population growth rate c. the inflation rate d. the trade deficit
48. In the United States, recessions are typically associated with a(n): a. falling unemployment rate. b. decrease in the number of people living in poverty. *c. decrease in the percentage of Americans with health insurance. d. increase in corporate profits.
49. The most painful effect of a recession is: a. inflation. *b. unemployment. c. money neutrality. d. liquidity trap.
50. The most painful consequence of a recession is: *a. rising unemployment. b. increasing inflation. c. increasing aggregate output. d. higher interest rates.
51. The most widely used indicator of conditions in the labor market is the: a. number of job openings advertised. b. average wage rate. c. level of average household income. *d. unemployment rate.
52. During recessions in the U.S., there is typically a decrease in the:
*a. number of people with health insurance coverage. b. number of people who are unemployed. c. number of people who lose their homes due to not being able to make mortgage payments. d. number of people living below the poverty line.
53. During recessions in the U.S., there is typically an increase in: a. the number of people with health insurance coverage. *b. the number of people who are unemployed. c. overall output. d. overall spending.
54. In many countries, economists adopt the rule that a recession is a period of at
least ______ during which aggregate output falls. a. one quarter *b. two consecutive quarters c. three consecutive quarters d. a full year
55. An independent panel of economic experts at the ______ analyzes the
macroeconomy and determines when recessions begin and end. a. Bureau of the Census b. President's Council of Economic Advisors c. Treasury Department *d. National Bureau of Economic Research
56. The widely held view that the government should take an active role in the
macroeconomy dates to: a. the Civil War. b. World War I. *c. the Great Depression. d. the Vietnam War.
57. The central mission of modern macroeconomics is to prevent: a. shortages. b. surpluses. c. high gas prices. *d. a deep recession like the Great Depression.
58. Which are considered to be the two types of macroeconomic policies?
*a. monetary and fiscal policy b. monetary and regulation policy c. fiscal and regulation policy d. fiscal policy and price controls
59. If macroeconomic policy has been successful over time, it is likely that the
economy has not seen: a. any inflation. *b. any severe recessions. c. any unemployment. d. a business cycle.
60. In recent times, the U.S. government has been trying to help the economy
through one of the worst economic slumps ever. The policies used are based on: *a. Keynesian theory. b. classical theory. c. supply-side theory. d. trickle-down theory.
61. Keynesian economics promotes economic ideas that: a. government intervention in the economy can be destabilizing. *b. the government can help a depressed economy via fiscal and monetary policies. c. the private sector is perfectly capable to regulate itself. d. the free market system will always prevail.
62. John Maynard Keynes believed that the government should: *a. actively try to mitigate the effects of recessions by using fiscal and monetary policies. b. not interfere with the economy and should let the economy self-correct. c. intervene only when there is a boom but let the recession run its course. d. not use fiscal and monetary policies, as these policies have long-term adverse effects on the economy.
63. The purpose of macroeconomic policy is to: a. bring unemployment closer to the natural rate. b. reduce the severity of recessions. c. rein in excessively strong expansions. *d. bring unemployment closer to the natural rate, rein in excessively strong expansions, and reduce the severity of recessions.
64. According to official statistics for the United States, since the Great Depression: a. economists are confident in that the business cycle has been tamed. b. the economy has constantly had positive real GDP growth rates. c. the economy only had longer recessions than expansions during the 1960s and 1990s. *d. the economy has not had another severe and prolonged economic downturn comparable to it.
65. A depression occurs when: a. both output and employment increase. *b. the economic downturn becomes extremely deep and prolonged. c. both price level and unemployment increase. d. output rises but employment remains unchanged.
66. According to Keynesian economics, a depressed economy is caused by: *a. inadequate spending. b. irrational consumer behavior. c. an inadequate educational system. d. poor decisions made by business executives.
67. Monetary policy involves: a. putting more money directly in the hands of consumers. b. putting more money directly in the hands of college students. *c. changes in the money supply intended to affect interest rates. d. changing bank regulations.
68. Fiscal policy involves: a. changes in the money supply intended to affect the rate of inflation. b. putting more money directly in the hands of consumers. *c. changes in taxation and government spending. d. changes in business regulation.
69. The recession that gave rise to the Great Depression lasted: a. 12 months b. 32 months *c. 43 months
d. 56 months
70. The idea that fiscal and monetary policies could be used to fight recessions was
initially proposed by: a. Milton Friedman. *b. John Maynard Keynes. c. Herbert Hoover. d. Joseph Schumpeter.
71. Milton Friedman's work in macroeconomics suggested that: *a. it is important to smooth out both the ups and the downs of the business cycle. b. unemployment typically will not increase during a recession. c. overall measures of macroeconomic performance are not reliable. d. macroeconomic questions cannot be answered scientifically.
72. Long-run growth is the sustained upward trend in: *a. aggregate output per person over several decades. b. nominal GDP over time. c. interest rates over time. d. aggregate output per person over the business cycle.
73. Long-run growth is the: *a. sustained upward trend in aggregate output per person over several decades. b. expansion phase of business cycles. c. downturn phase of business cycles. d. sustained downward trend in the employment rate over several decades.
74. Long-run growth is represented by: *a. the sustained upward trend in the economy's overall output per person that generates higher incomes and a higher standard of living for its members. b. an increase in the rate of inflation across time which reduces real salaries. c. an increase in the overall output of the economy over a threeor four-year period. d. a reduction in the price level over decades.
75. Historical evidence shows that over: a. an extended period, long-run growth is just as important as the business cycle in determining a country's living standards. b. short periods, long-run growth is less important than the business cycle in determining a country's living standards. *c. an extended period, long-run growth is much more important than the business cycle in determining a country's living standards. d. long periods, it is difficult to determine whether the business cycle or long-run growth in determining a country's living standards.
76. Which is generally accepted as a long-run indicator of a rising standard of
living? *a. an increase in the nation's output per person b. an increase in the nation's unemployment rate c. an increase in the nation's inflation rate d. an increase in the nation's trade deficit
77. Long-run economic growth is best measured by: *a. a sustained rise in the quantity of goods and services produced by the country. b. the growth of a nation's money supply over time. c. the trade surpluses enjoyed by a country in the long run. d. the rate of private saving in the long run.
78. Which measures long-run economic growth for a country? a. a rise in employment b. an increase in the money supply *c. a sustained increase in the production of goods and services d. an increase in the labor force
79. Economists use the term long-term growth to indicate: a. the expansion phase of the business cycle. *b. growth of the economy over several decades. c. growth of the economy over a period longer than one year but less than five years. d. long-run growth of the value of a company.
80. Per capita economic growth is: a. economic growth per unit of capital. *b. economic growth per person.
c. economic expansion over the business cycle. d. sustained increase in aggregate output.
81. Which statement about the U.S. economy is NOT accurate? *a. Since the Second World War, aggregate output has grown at a rate lower than the average annual growth rate of population. b. Since the Second World War, aggregate output has grown at a rate higher than the average annual growth rate of population. c. Since the Second World War, macroeconomic policy has helped make the economy more stable. d. Long-run growth per capita is the key to higher wages and a rising standard of living.
82. Long-run economic growth is the: a. process of addressing the business cycle. b. same thing as a business cycle expansion. *c. sustained rise in the quantity of goods and services the economy produces. d. same thing as an economic recovery.
83. Since 1951, the real value of goods and services per person produced by the
U.S. economy has: *a. tripled. b. doubled. c. remained about the same. d. declined.
84. Long-run economic growth: *a. has important implications for policy concerns, such as the financing of Social Security. b. is due only to the increase in the size of the workforce. c. can be measured by looking at the rate of increase in prices over time. d. can be measured by looking at the unemployment rate over time.
85. Economic growth per capita: a. arises from fiscal and monetary policies used to address the business cycle. b. does not reflect improvements in productivity. c. is independent of the size of the workforce. *d. is the key to higher wages and sustained increases in the standard of living.
86. Which is true? *a. Inflation means an increase in the overall level of prices. b. Deflation refers to a decrease in prices only in the energy and transportation sectors. c. During inflation most people hold more cash than usual. d. Inflation was first a problem in the recession of 1929–1933.
87. Inflation: a. is defined as a movement of the economy toward economic growth. b. can be thought of as an increase in a nation's standard of living. c. is a sustained fall in the overall level of prices. *d. is an increase in the overall level of prices.
88. If the economy grew at a 3% rate this year and average prices increased
______, people would be better off this year than last year. a. 3% b. faster than 3% *c. less than 3% d. faster than 10%
89. If wages grew at a 5% rate last year and average prices grew at a 3% rate, then
the average worker is: *a. better off. b. worse off. c. has lost purchasing power. d. unaffected.
90. If workers' nominal wages have risen by 50% over a ten-year period and prices
have increased by 40% in that same period, then we can safely conclude that the amount of goods and services that workers can buy has: a. fallen. *b. increased. c. not changed. d. decreased in quality.
91. An increase in the nation's overall price level is: a. long-term economic growth. b. unemployment.
*c. inflation. d. deflation.
92. During inflation the: a. average price level falls. *b. average price level increases. c. average price level becomes negative. d. real price level falls.
93. The annual percentage change in the aggregate price level is negative when
there is: *a. deflation. b. disinflation. c. inflation. d. spiraling inflation.
94. Deflation: a. raises the cost of making purchases and sales for which cash is required. b. can result in an increase in employment. *c. encourages people to hold cash rather than invest in new factories and productive assets. d. is caused by changes in interest rates.
95. With regard to the aggregate price level, economists generally believe: *a. price stability is a desirable goal. b. inflation is worse than deflation. c. deflation is worse than inflation. d. inflation actually benefits most retired people.
96. Which is true about inflation and deflation? a. Both are good for the economy. b. Inflation is always good for the economy and deflation is always bad for the economy. c. Inflation is always bad for the economy and deflation is always good for the economy. *d. Both inflation and deflation can pose problems for the economy.
97. Inflation affects people adversely because:
a. nominal income falls during inflation. b. purchasing power tends to increase during inflation. c. budget deficit increases during inflation. *d. inflation causes money to lose its value over time if the overall price level is rising.
98. Price stability occurs when: a. the overall price level is zero. b. the economy is at full employment. *c. the overall cost of living is changing very slowly. d. food prices have remained the same.
99. A rise in the overall level of prices is known as: a. price escalation. b. expenditure escalation. c. price recovery. *d. inflation.
100. A decline in the overall level of prices is known as: *a. deflation. b. expenditure recession. c. expenditure reversal. d. price dampening.
101. Inflation may cause people to: a. hold onto their money indefinitely. *b. stop using money and rely on bartering instead. c. think of holding money as a good investment. d. view money as an asset that gains value over time.
102. Which goal does economists view as desirable? a. inflation b. deflation *c. price stability d. hyperinflation
103. If a country sold more goods and services to the rest of the world than it
purchased from the other countries, then the country has a: a. trade deficit. b. budget deficit.
*c. trade surplus. d. budget surplus.
104. If a country has a trade deficit, does it indicate that the country has a serious
problem? *a. No. Trade deficits occur when a country's investment spending is higher than its level of saving. b. Yes. Trade deficits occur when a country has low worker productivity. c. Yes. Trade deficits occur when a country does not have a comparative advantage in production. d. Yes. Trade deficits occur when a country has high budget surplus.
105. Goods and services that are produced in a foreign country but consumed
domestically are called: a. exports. *b. imports. c. investment goods. d. consumer durables.
106. An open economy is an economy: *a. that trades goods and services with other countries. b. that does not regulate its industries. c. that does not impose taxes on its citizens. d. in which freedom of speech and religion can be practiced freely.
107. When the value of a nation's imports exceeds the value of that nation's
exports, the nation is said to have: a. hyperinflation. *b. a trade deficit. c. price stability. d. a trade surplus.
108. An open economy: a. trades only with its neighbors. b. trades goods but not services or assets with other countries. c. does not trade goods, services, or assets with other countries. *d. trades goods and services with other countries.
109. In an open economy: a. the exchange rate is determined by the government. b. specialization in activities with a comparative advantage is not possible. c. trade is beneficial only to the relatively larger economy. *d. there is trade in goods, services, or assets with other countries.
110. An economy that trades goods and services with other countries is known as
a(n): *a. open economy. b. balanced economy. c. deficit economy. d. surplus economy.
111. When the value of a country's imports exceed the value of its exports, the
country is experiencing: a. a trade surplus. *b. a trade deficit. c. a recession. d. inflation.
112. When the value of a country's exports exceed the value of its imports, the
country is experiencing: *a. a trade surplus. b. a trade deficit. c. a recession. d. inflation.
113. Whether a country experiences a trade deficit or a trade surplus will depend on a. whether it is experiencing a recession. b. its current level of overall prices. c. its comparative advantage. *d. its decisions about savings and investment.
114. The additional profit earned by Microsoft Corporation by marketing and using a different method of coding software is a microeconomic issue. *a. True b. False
115. The business cycle is the long-run alternation between economic downturns and economic upturns. a. True *b. False
116. Expansions are periods of economic growth when real GDP and employment are growing. *a. True b. False
117. Recessions are periods in which output and employment are falling. *a. True b. False
118. Business cycles are the expansion, contraction, then expansion again of nominal GDP. a. True *b. False
119. Following a business cycle trough, real GDP increases. *a. True b. False
120. The peak of the business cycle provides evidence that the recession is over. a. True *b. False
121. Monetary and fiscal policy are undertaken to reduce the severity of recessions. *a. True b. False
122. Fiscal policy can be used to reduce the severity of recessions. *a. True b. False
123. Between 1980 and 2012, inflation wiped out most of the wage gains of the typical worker. *a. True b. False
124. A newspaper article documents the closing of a local factory and the many jobs that are lost. A separate article describes the rising U.S. unemployment rate. Why is the first article a microeconomic issue and the second article a macroeconomics issue? Correct Answer:
The two articles, a factory closing and the national unemployment rate rising, do seem related. However an important distinction is that microeconomics is the study of how individuals and firms make decisions. In this case, the factory owner has decided that the firm's optimal strategy is to shut down and exit this market. Macroeconomics examines the overall behavior of the economy. The rising unemployment rate is a function of many firms adding and subtracting jobs and many workers entering and leaving the workforce. 125. The economy is in a recession and Congress passes legislation to reduce income taxes and shorten the recession. Tom, seeing an increase in his take-home pay, goes to Best Buy and purchases a new television. Why is the Congressional tax cut a macroeconomic issue, while Tom's new TV is a microeconomic issue? Correct Answer:
The Congressional tax cut is an example of fiscal policy to stimulate the overall macroeconomy by giving people like Tom more money to spend. Consumers like Tom take this additional income and then make micro decisions to decide what to do with it. For Tom, a new TV is now within his means and apparently provides him with utility. 126. Suppose the business cycle is indicating economic expansion. Predict how the economic indicators of real gross domestic product (GDP), the unemployment rate, and the inflation rate are moving. Correct Answer:
When the economy is expanding, the nation's output is rising because consumers are spending more of their income on goods and services (and income is rising). The unemployment rate is falling because firms are hiring workers to produce those goods and services. The inflation rate is rising because consumers have more money to spend, thus pushing up the overall price level. 127. You read a newspaper article that says the unemployment rate rose this month. Are we in a recession? Explain.
Correct Answer:
Maybe, maybe not. Economists at the National Bureau of Economic Research consider many factors, including the nation's unemployment situation, but identification of a recession involves more than a single piece of information like the unemployment rate and requires more than one month of recession-like outcomes. 128. What do economists mean by Keynesian policies? Correct Answer:
John Maynard Keynes advocated an active role for the government when the economy was in recession. He believed that economists and policy makers should engage in fiscal and monetary policy to stimulate a weak economy, rather than standing by and allowing the economy to self-correct. 129. What is long-run economic growth, and why is it so important for a nation's economy? Correct Answer:
Long-run economic growth is the sustained rise in the quantity of goods and services the economy produces. When long-run growth per capita is rising, each person's share of the nation's output is rising. This is the key to higher wages and a rising standard of living. 130. Your boss is impressed with your performance over the past year and has decided to give you a 5% increase in your salary. Are you unambiguously better off with your increased salary? What factors must be considered? Correct Answer:
A 5% salary increase may or may not make you better off than you were last year. If overall consumer prices have increased by less than 5%, there is a good chance that your purchasing power has increased and your higher salary enables you to purchase more goods and services. An additional factor to consider is the tax effect on your higher salary and purchasing power.
131. One of the issues of importance to macroeconomists is: a. the behavior of individuals and their allocation of income. b. how firms determine the profit-maximizing level of output. *c. understanding how living standards change over time. d. the behavior of individual markets.
132. In macroeconomics: *a. aggregate data such as real GDP, the price level, and unemployment are analyzed.
b. individual and firm decisions regarding utility and profit maximization are studied. c. long-term growth is not considered to be important. d. market intervention from the government is not considered important.
133. During a recession, one will often observe: a. rising aggregate output. *b. rising unemployment rates and falling aggregate output. c. rising employment rates. d. zero unemployment rates.
134. When economists measure economic growth, they often use: a. the inflation rate. b. the unemployment rate. c. nominal GDP. *d. real GDP.
135. One normally expects that unemployment increases while aggregate output
and aggregate incomes decrease during: a. an expansion. b. government intervention. *c. a recession. d. the peak of the business cycle.
136. A contraction in the business cycle is: a. called the long run. *b. called a recession. c. accompanied by an increase in employment. d. viewed as a rarity.
137. When an economy is operating between the business cycle trough and the
business cycle peak, it is called: *a. an expansion. b. a contraction. c. a short-run phenomenon. d. the beginning of a fall in aggregate spending.
138. An economic recovery encompasses all EXCEPT: a. sustained economic growth.
b. a short-run increase in aggregate production in an economy. c. a time of increasing employment. *d. the end of the business cycle.
139. When an economy is in an expansion, unemployment: *a. tends to fall, and overall prices tend to rise. b. and overall prices tend to fall. c. tends to rise, and overall prices tend to fall. d. and overall prices tend to rise.
140. Fiscal and monetary policies: a. have no role in macroeconomic policies. b. have been used by the government for over 250 years. c. are most effective in microeconomic settings. *d. are used to correct for short-term economic fluctuations.
141. When an economy's overall production grows faster than its population, it is
referred to as: *a. long-run growth per capita. b. an increase in nominal GDP. c. deflation. d. the paradox of thrift.
142. An overall decrease in the price level is called: a. inflation. *b. deflation. c. long-run growth. d. the result of an increase in economic production.
143. When overall price levels rise over time, it is referred to as: a. deflation. *b. inflation. c. an increase in purchasing power. d. the consumer price index.
144. If an economy is open: a. anyone can immigrate to the country. *b. trading with other countries makes up a portion of its economy. c. it does not trade with other countries.
d. its real GDP will drop.
145. A trade surplus occurs: a. during economic contractions only. b. when the value of goods and services a country imports exceeds the value of goods and services it exports. *c. when the value of goods and services a country imports is less than the value of goods and services it exports. d. when unemployment is rising.
146. If the value of a country's exports is greater than the value of the country's
imports, this country is: *a. running a trade surplus. b. running a trade deficit. c. in an economic contraction. d. likely to find its investment spending greater than its level of saving.
147. If a country runs a trade deficit, its investment spending is probably: *a. greater than its level of saving. b. less than its level of saving. c. equal to its level of saving. d. equal to zero.
148. The relation between a country's level of saving and investment: *a. affects its trade balances. b. does not affect an open economy. c. has often been used to correct a trade deficit but not a trade surplus. d. pertains to trade surpluses only.
1. The national accounts keep track of everything except: a. the spending of consumers and the government. b. the sales of producers. c. business investment. *d. exchange rates.
2. The national income and product accounts are calculated by the: a. Congressional Budget Office. b. Federal Reserve. *c. Bureau of Economic Analysis. d. Office of Management and Budget.
3. The circular-flow diagram illustrates: a. the minimum wage in different states. b. fluctuations in exchange rates. c. changes in worker productivity. *d. the key concepts in the national accounts.
4. The circular-flow diagram illustrates the U.S. economy EXCEPT: *a. the growing income inequality in the United States. b. flows of money. c. flows of goods and services. d. the purchase and sale of factors of production.
5. According to the circular-flow diagram, which economic agent engages in
consumer spending? a. firms *b. households c. factor markets d. financial markets
6. A share in the ownership of a company held by a shareholder is considered a(n): a. bond. *b. stock. c. dividend. d. IOU.
7. Which would accurately characterize the portion of a firm's profit paid to the
owner of one share of its stock?
a. interest *b. dividend c. stock d. bond
8. Which is/are considered to be an IOU? a. stocks *b. bonds c. interest d. dividends
9. Households derive income from all EXCEPT: a. wages or labor income. b. interest from lending. c. rent from allowing firms to use their land. *d. imports.
10. The total income households have after paying taxes and receiving government
transfers is called: *a. disposable income. b. private savings. c. aggregate spending. d. investment.
11. Private savings is equal to: a. disposable income less taxes. *b. disposable income less consumption. c. wealth. d. wealth plus government transfer payments.
12. A stock in a company is: *a. a share of ownership of a company held by a shareholder. b. an IOU that pays interest. c. a portion of a firm's profits paid to stock owners. d. part of private savings.
13. A bond is: a. a share of ownership of a company held by a shareholder. *b. an IOU that pays interest. c. a portion of a firm's profits paid to stock owners.
d. part of private savings.
14. In the expanded circular-flow diagram, the three markets of the economy are: *a. factor markets, financial markets, and markets for goods and services. b. corporations, partnerships, and sole proprietorships. c. local, state, and federal. d. government, for-profit firms, and non-profit organizations.
15. When households buy products in the market for goods and services, this is
known as: a. individual budget expenditure. *b. consumer spending. c. inventory depletion. d. flow of consumer funds.
16. Wages, interest, profits, and _____ are the forms of household income. a. taxes *b. rent c. credit d. debt
17. Total household income after paying taxes and receiving government transfers
is known as: *a. disposable income. b. discretionary income. c. financial income. d. exclusive income.
18. Investment spending is the process of: a. households setting aside money for savings. b. households purchasing stock in private corporations. *c. firms accumulating inventories and buying physical capital to facilitate the production process. d. government paying off its long-term debt.
19. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, what is GDP in this economy? a. $100 b. $400 *c. $500 d. $600
20. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is an increase in consumer spending? *a. an increase in the nominal GDP b. a decrease in the nominal GDP c. an increase in the unemployment rate d. a decrease in the inflation rate
21. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is a decrease in consumer spending? a. an increase in the nominal GDP b. an increase in the real GDP *c. an increase in the unemployment rate d. an increase in the inflation rate
22. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is an increase in investment spending? a. a decrease in the nominal GDP *b. an increase in the nominal GDP c. an increase in the unemployment rate d. a decrease in the inflation rate
23. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is a decrease in investment spending? a. an increase in the nominal GDP b. an increase in the real GDP *c. an increase in the unemployment rate d. an increase in the inflation rate
24. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is an increase in government spending? *a. an increase in the nominal GDP b. a decrease in the real GDP c. an increase in the unemployment rate d. a decrease in the inflation rate
25. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is a decrease in government spending? a. an increase in the nominal GDP b. an increase in the real GDP *c. an increase in the unemployment rate d. an increase in the inflation rate
26. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is an increase in exports? a. a decrease in the nominal GDP b. a decrease in the real GDP *c. a decrease in the unemployment rate d. a decrease in the inflation rate
27. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is a decrease in exports? *a. a decrease in the nominal GDP b. an increase in the real GDP c. a decrease in the unemployment rate d. an increase in the inflation rate
28. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal
to the sum of the money flowing out of that box), which is likely to happen if there is an increase in imports? a. an increase in the nominal GDP *b. a decrease in the nominal GDP c. a decrease in the unemployment rate d. an increase in the nominal GDP and in the unemployment rate
29. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, if the circular-flow model is in equilibrium (the sum of money flowing into each box is equal to the sum of the money flowing out of that box), which is likely to happen if there is a decrease in imports? *a. an increase in the nominal GDP b. a decrease in the nominal GDP c. an increase in the unemployment rate d. an increase in the nominal GDP, a decrease in the nominal GDP, and an increase in the unemployment rate
30. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, what are net exports in this economy? *a. $0 b. $30 c. $60 d. $100
31. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, what is disposable income in this economy? a. $0 b. $100 *c. $400 d. $500
32. Figure: Circular-Flow Model
Reference: Ref 22-1
(Figure: Circular-Flow Model) According to the Figure: Circular Flow Model, how does the government finance its purchases of goods and services? a. by printing money *b. by taxes c. by borrowing d. by taxes and borrowing
33. In the circular-flow model, households: *a. receive transfer payments from the government. b. buy resources in the factor markets. c. sell products in the market for goods and services. d. issue stocks and bonds to raise capital.
34. The indirect ownership of physical capital refers to households owning: a. cash. *b. stock. c. savings accounts. d. their house.
35. The money spent on domestically produced final goods and services is: *a. GDP. b. equal to exports minus imports. c. subtracted in the circular-flow model. d. called GDP, is equal to exports minus imports, and is subtracted in the circular-flow model.
36. Most households derive the bulk of their income from which source? *a. wages b. interest c. profit d. rent
37. An example of a government transfer is a(n): a. expenditure on an interstate highway.
b. bequest from a deceased relative. *c. Social Security payment. d. salary for a member of the armed forces.
38. Which would NOT be considered a government transfer? a. unemployment compensation b. food stamps *c. payments by the Defense Department for a new weapons system d. Medicare benefits paid to someone who is indigent
39. Disposable income equals income: *a. plus government transfers minus taxes. b. plus government spending minus taxes. c. minus taxes plus government spending. d. minus taxes minus government transfers.
40. The market(s) that channel the excess savings of households into investment
spending by firms is(are) known as: a. the stock market. *b. financial markets. c. the international market. d. the bond market.
41. Goods that are produced domestically but sold abroad are: a. imports. *b. exports. c. part of domestic consumption. d. investment.
42. Investment spending represents spending on: *a. productive physical capital. b. stocks. c. mutual funds. d. corporate bonds.
43. Disposable income in a particular period is: a. total income earned. b. income earned plus government transfer payments. *c. income earned plus government transfer payments less taxes.
d. income earned plus government transfer payments less taxes and savings.
44. Goods and services sold to people in other countries are known as: a. imports. b. investments. *c. exports. d. transfer payments.
45. Investment spending is spending on: *a. productive physical capital. b. bonds. c. shares of stock. d. productive physical capital, on bonds, and on shares of stock.
46. An example of investment spending would be the purchase of a: a. bond. b. loaf of bread. *c. new productive machine. d. bond, a loaf of bread, or a new productive machine.
47. Government borrowing is: *a. the amount of funds raised by government in financial markets. b. government spending on goods and services. c. government tax revenues. d. the amount of funds raised by government in the financial markets, government spending on goods and services, and government tax revenues.
48. If we add up the consumer spending on goods and services, investment
spending, government purchases of goods and services, and the value of exports, then subtract the value of imports, we have measured the nation's: a. disposable income. *b. gross domestic product. c. trade deficit. d. value added.
49. Which represents an outflow of funds from a domestic economy? a. household savings
b. government tax collections c. government transfer payments *d. imports
50. Which transaction is included in a current year's GDP as investment spending? a. ABC company purchased 10,000 shares of IBM stock. b. Ronnie bought a new BMW. c. Anton purchased his friend's condo. *d. Maggie bought a play-gym set for her day-care business.
51. Which is an example of consumption expenditure? a. Samantha bought an oven for her cooking show on Food Network. *b. Stephanie bought a laptop for her brother. c. Jim purchased 200 shares of Google stock. d. Mr. Smith spent $1500 to buy a used car for his son.
52. A transfer payment is a payment for: a. a military transfer to a war zone. *b. which no services were rendered during the current year. c. transfer of a debt to a different person. d. being transferred to a different city by your employer.
53. Purchases of foreign-produced goods and services are: a. net exports. b. exports. *c. imports. d. transfer payments.
54. Goods that are produced in a particular period but NOT sold in that period: a. go into inventory and are called consumption. *b. end up in inventory and are included in investment. c. are finally included in depreciation when they are sold. d. are classified as intermediate goods.
55. Which would be classified as consumption? a. a new computer purchased by Federal Express for one of its corporate executives b. a storage facility for a moving company *c. a new car purchased by an employee of a company for personal use
d. a dump truck purchased by a demolition company
56. Inventory investment is counted as investment because inventory: a. is used for future production. *b. is a source of future sales. c. has no opportunity cost. d. is tax deductible.
57. Which is NOT included in investment spending in the national income
accounts? a. new residential construction b. the purchase of machinery and other productive physical capital *c. the purchase of stocks and bonds by a business d. spending on inventories
58. A laptop computer that is purchased by an accounting firm is considered to be: a. consumption spending. *b. investment spending. c. private saving. d. a pretax dividend.
59. An example of investment spending is the: a. amount of funds raised by the government in the financial markets. b. purchase of government bonds by a private household. *c. purchase of a freezer by an ice-cream parlor. d. purchase of stock shares by a mutual fund.
60. A laptop computer purchased by a private individual is considered to be: *a. consumption spending. b. investment spending. c. private saving. d. a transfer of income.
61. Households receive income in the form of all EXCEPT: a. wages. b. dividends. c. interest and rent. *d. investment spending.
62. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, what is GDP in this economy? a. $200 b. $700 *c. $1000 d. $1080
63. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, what is the value of net exports? *a. –$20 b. $20 c. $50 d. $130
64. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, what is the value of disposable income? a. $1020 b. $1000 *c. $870 d. $850
65. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, how much is total government spending? a. $20 *b. $220 c. $370 d. $200
66. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, the government has a budget: a. surplus of $150. b. surplus of $220. *c. deficit of $70. d. deficit of $200.
67. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, how does the government finance all of its spending? *a. taxes of $150 plus borrowing of $70 b. foreign borrowing and sales of stock of $110
c. investment spending of $120 d. net exports of $80
68. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, which is NOT a sector of the economy shown in the circularflow model? a. households b. firms c. the rest of the world *d. factor markets
69. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, which is a type of market in the economy? a. household b. rest of the world c. government *d. financial
70. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, the total flow of funds into and out of financial markets is: a. $70. b. $110. c. $170. *d. $300.
71. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, the total flow of funds into and out of households is: *a. $1020. b. $1000. c. $850. d. $700.
72. Figure: Expanded Circular-Flow Model
Reference: Ref 22-2
(Figure: Expanded Circular-Flow Model) According to the Figure: Expanded Circular-Flow Model, the total flow of funds into and out of the rest of the world is: a. $30. b. $80. *c. $160. d. $240.
73. The person who is usually credited with developing national income accounts is: a. Adam Smith. b. John Maynard Keynes. *c. Simon Kuznets. d. Milton Friedman.
74. The government returns part of the money it raises from taxes in the form of government transfers. *a. True b. False
75. The national income accounts were developed in the early 1970s by Robert McNamara to document spending on the Vietnam War. a. True *b. False
76. In the circular-flow diagram, government purchases of goods and services are
financed by: a. tax revenues. b. tax revenues net of transfer payments. *c. tax revenues net of transfer payments plus government borrowing from financial markets.
d. tax revenues plus government borrowing from financial markets.
77. The instrument by which a household makes a loan to a firm and the firm pays
interest to the household is known as: a. a stock. *b. a bond. c. a transfer payment. d. disposable income.
78. Households indirectly own the physical capital used by firms through: *a. stocks. b. bonds. c. transfer payments. d. private debt.
79. Private saving by households is: *a. the portion of disposable income not spent on goods and services. b. the portion of income coming from transfer payments. c. often larger than consumption spending. d. not related to consumption spending.
80. Investment refers to the: a. accumulation of financial stock by an individual firm. *b. addition to the economy's supply of productive physical capital. c. total net value of assets sold to foreigners. d. total spending by households in an economy.
81. The construction of new homes is considered part of: *a. investment spending. b. consumption. c. government purchases of goods and services. d. private saving.
82. Flows into financial markets are equal to the sum of: a. foreign lending. *b. foreign lending and purchases of stock plus private saving. c. borrowing and stock issues plus foreign borrowing and sales of stock.
d. private saving.
83. A decrease in inventories is: *a. a fall in investment spending that will lead to a drop in future sales. b. an increase in investment spending that will lead to an increase in future sales. c. thought to have no impact on investment, since it is not part of investment spending. d. part of government spending.
84. Within the circular-flow diagram, the value of household income, the sum of
wages, dividends, interest, and rent plus transfer payments equals the sum of: a. the value of household tax payments. *b. consumer spending, private saving, and the value of household tax payments. c. the money supply. d. transfer payments and household tax payments.
85. Transfer payments are: a. a means by which government raises funds. *b. a redistribution of funds from one individual to another individual in the economy. c. counted in GDP. d. another term for government taxation.
86. Wages represent: *a. the income earned by households by selling their labor. b. the interest earned from bonds. c. rent earned from the use of land to firms. d. the indirect ownership of the physical capital used by firms.
87. Disposable income refers to: a. income spent on imports. *b. household income and government transfers less taxes paid to the government. c. gross income. d. government transfer payments.
88. When a firm buys a new machine for its business, it is considered to be:
a. consumption. *b. investment spending. c. government spending. d. private saving.
1. The value, at current market prices, of the final goods and services produced
during a particular period is: a. disposable personal product. b. gross foreign factor output. c. gross personal product. *d. gross domestic product.
2. If we add up all of the values added at every stage of production for a good, we
will get the: a. total cost of the labor used to produce the good. b. prices of the factors of production used to produce the good. *c. final value of the good. d. intermediate value of the good.
3. Gross domestic product is defined as: a. consumer spending + government purchases + financial spending + exports – imports. b. consumer spending + government transfers + investment spending + exports – imports. c. disposable income + taxes + investment spending + exports + imports. *d. consumer spending + government purchases + investment spending + exports – imports.
4. Which is the best definition of GDP? *a. the total dollar value of all final goods and services produced in the economy during a given year b. the total value of all goods and services produced in the economy during a given year c. the total value of all primary, intermediate, and final goods and services produced in the economy during a given year d. the total value of all goods and services produced and sold in the economy during a given year
5. GDP is the total dollar value of: a. intermediate goods and services produced in the economy in a given period. b. wages paid to producing workers in a given period. *c. final goods and services produced in the economy in a given period. d. government production in a given period.
6. GDP is the:
*a. total market value of all final goods and services produced in one year. b. total accumulated wealth of an economy. c. volume of all dollar transactions made in an economy in one year. d. dollar amount of all sales made in the economy in one year.
7. Gross domestic product is the economy's total production of _______ for a given
period. a. goods and services *b. final goods and services c. intermediate goods and services d. consumer goods and services
8. Which is false? Gross domestic product: a. is aggregate output. b. is the total production of final goods and services. c. grows during an expansion. *d. is the total production of all final and intermediate goods and services.
9. Intermediate goods are not counted in the calculation of GDP because: *a. to do so involves double counting. b. these goods are not produced for the market. c. these goods are produced in the underground economy. d. these goods involve financial transactions.
10. An intermediate good would be: a. a new boat purchased by a professor to be used on vacation. *b. lumber used to build a house. c. payments to military personnel. d. a professor's salary.
11. Which is an example of an intermediate good? a. stocks and bonds purchased by a business executive b. a cellular telephone purchased by a college student c. a wedding ring purchased by an engineer for his fiancée *d. tires purchased from Goodyear by General Motors for newly produced electric cars
12. The equation that breaks GDP down by the four sources of aggregate spending
is: a. GDP = C + I + G + X + IM. b. GDP = C + I + G – X – IM. c. GDP = C – I – G – X + IM. *d. GDP = C + I + G + X – IM.
13. Final goods and services are goods and services that are: *a. sold to the final, or end, user. b. bought from one firm by another firm to be used as inputs in the production of final goods and services. c. obsolete. d. faulty and are being recalled.
14. Intermediate goods and services are goods and services that are: a. sold to the final, or end, user. *b. bought from one firm by another firm to be used as inputs in the production of final goods and services. c. obsolete. d. faulty and are being recalled.
15. Which is an example of a final good? a. tires purchased by Ford from Goodyear to go on a new Ford Explorer. b. lumber purchased by a construction company to be used in building a new home. *c. a computer purchased from Apple by a college student to be used to take online courses. d. flour purchased from Pillsbury by a bakery to make birthday cakes.
16. Which is an example of an intermediate good? a. new tires purchased by Jim for his 2010 Camry. b. an iPhone purchased by Mary as a birthday gift for her daughter. c. a computer purchased from Apple by a college student to be used to take online courses. *d. flour purchased from Pillsbury by a bakery to make birthday cakes.
17. Gross domestic product is the total value of all: a. physical capital used in the production process.
b. production activity accomplished within households. *c. final goods and services produced in the economy in the period of a year. d. goods produced domestically that are exported.
18. In the year 2013, GDP for the United States was about a. $900 billion. b. $11,000 billion. *c. $16,800 billion. d. $100,000 billion.
19.
Reference: Ref 11-1
(Table: Calculating GDP) Using the information in the Table: Calculating GDP, which is the correct calculation for GDP? a. $47,475 *b. $12,200 c. $21,485 d. $34,085
20. GDP is the sum of: a. personal consumption, investment, government purchases, exports, and imports. *b. personal consumption, investment, government purchases, and net exports. c. personal consumption, investment, government purchases, and net imports. d. value added, net imports, and government purchases.
21.
Reference: Ref 11-2
(Table: GDP) GDP in the Table:GDP is: *a. $94 billion. b. $188 billion. c. $168 billion. d. $139 billion.
22. The Arcadia Entertainment Co. produced 20,000 DVDs of the movie Thor in
2011. Only 4000 copies remained unsold at the end of 2011. As a result: a. only 16,000 DVDs should be included in GDP in 2011 as consumption expenditure. *b. all 20,000 DVDs will be included in GDP in 2011, 16,000 as consumption expenditure and 4000 as investment expenditure c. only 16,000 DVDs are included in GDP of 2011; the remaining 4000 are counted in GDP of 2012. d. all 20,000 DVDs are initially counted in 2011 GDP as consumption expenditure, but they will be subtracted and added to 2012 GDP as the merchandise gets sold.
23. In 2011, consumption spending is $7000, government purchasing is $2000, and
investment spending is $1500. If GDP for 2011 is $10,300, then: a. exports are $400 and imports are $200. b. exports are $100 and imports are $200. *c. exports are $600 and imports are $800. d. exports are $500 and imports are $300.
24. Enchante Inc., a designer clothing company, buys $400 worth of silk from a silk
trader and $30 worth of accessories from AccessoriesRuS to produce each dress. If the value added by Enchante is equal to $200, then according to the value-added approach, the price of the designer dress should be: *a. $630. b. $230. c. $200.
d. $830.
25. The Boeing Company buys $3 million worth of steel, $2.5 million worth of
computer hardware and software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing sells this particular model of aircraft at $10 million. The value added by Boeing is equal to: *a. $3.5 million. b. $16.5 million. c. $13 million. d. $15.5 million.
26. Which equation correctly measures GDP? a. C + I + G + IM – X. *b. C + I + G + X – IM. c. C + I + G + X + IM. d. C + I + G – T + TR.
27. Don has built an expansion to his house. This transaction will be: *a. not included in GDP because it is not produced for the marketplace. b. included in GDP because Don is a professional builder. c. not included in GDP because it is an intermediate good. d. included in GDP because building is Don's hobby.
28. Which transaction will be included in the official measurement of GDP? a. Stan sold his house at a huge gain. b. Monica illegally downloaded movies to her laptop. c. Ben won the state lottery. *d. Sean bought a new iPhone.
29. An example of an intermediate good is: a. wages paid to an employee. *b. steel purchased by aircraft manufacturers. c. vegetables purchased for your dinner. d. electric bills for the office.
30. Which would NOT be included in this year's GDP? a. the production of a television show b. the purchase of a new work truck c. the hiring of a new police officer
*d. your purchase of your neighbor's 2001 Toyota
31. Which of the following best represents the equation for GDP? a. GDP = C+ I + G – X + IM *b. GDP = C + I + G + X – IM c. GDP = C + I + G + taxes – value added d. GDP = C + I + G + taxes + X + IM
32. Which would NOT be included in GDP? *a. the dollar value of a repair job done by your professor on his or her own car b. the dollar value of a lawyer's service c. new car sales by a local car dealer d. production of new cars that were not sold in the current year
33. Goods that are produced in a particular period but not sold in that period: a. count as consumption in the next year. *b. are included in investment. c. are treated like exports. d. are classified as purely financial transactions.
34. A country's exports minus its imports during a period are: *a. net exports. b. gross exports. c. net imports. d. gross imports.
35. Net exports are calculated by subtracting: *a. imports from exports. b. exports from imports. c. out all intermediate goods. d. I, G, and value added from GDP.
36. A nation's exports minus its imports: a. equals its private investment. *b. is net exports. c. is always a positive number. d. is equal to net transfer payments.
37.
Reference: Ref 11-3
(Table: Furniture Production Schedule) What is the total value added at all stages of the production process of the furniture as described in Table: Furniture Production Schedule? a. $800 *b. $1200 c. $1800 d. $2000
38. Suppose that Mr. Green Jeans sells $5000 of wheat to Big Ben Bakery. Big Ben
uses the wheat to make flour and then hamburger buns, which it sells to Hamburger Heaven for $11,000. Hamburger Heaven also buys $20,000 of beef from a rancher. Hamburger Heaven uses the beef and buns to make 10,000 hamburgers, which are sold for $5 each. How much do these transactions add to GDP? a. $86,000 b. $36,000 c. $31,000 *d. $50,000
39. Value added in national income accounts refers to the: a. value added by labor to the production process. *b. difference between the final price and the value of inputs purchased. c. difference in profits at various stages of production. d. value of all the inputs used by the final producer.
40. Which is included in GDP? a. the purchase of 100 shares of Microsoft stock b. the purchase of a 1965 Ford Mustang c. Social Security payments from the U.S. government to retired people *d. the purchase of a ticket to a Lady Gaga concert
41. Suppose that a doctor who lives alone hires the services of a maid and pays her
$15,000 a year to clean his house. Suppose that he marries her the following year.
Other things equal, which would be true about the reported official GDP the following year? a. It would rise. *b. It would fall. c. It would stay the same. d. The effect on GDP would depend on whether the maid was an undocumented immigrant or a U.S. citizen.
42. If during 2010, the country of Sildavia recorded investment spending of $3
billion, government purchases of $3 billion, consumer spending of $7 billion, imports of $5 billion, government transfers of $1 billion, and exports of $3 billion. Sildavia's GDP in 2010 was: *a. $11 billion. b. $12 billion. c. $13 billion. d. $14 billion.
43. Suppose a consumer buys a frozen cheese pizza at the grocery store for $10.
The frozen pizza company sold the pizza to the store for $5. The frozen pizza company purchased the pizza dough and tomato sauce from a food processing company at a price of $2 and bought the cheese from a dairy at a price of $1. How much has GDP increased? a. $2 b. $5 *c. $10 d. $18
44. GDP may be calculated as the sum of: *a. consumer spending, investment spending, government purchases of goods and services, and exports minus imports. b. consumer spending, investment spending, government transfer payments, and exports minus imports. c. consumer spending, investment spending, government purchases of goods and services, and exports. d. exports and imports only.
45.
Reference: Ref 11-4
(Table: Pizza Economy I) Based on the Table: Pizza Economy I, GDP in this economy is: a. $73,000. *b. $65,000. c. $57,000. d. $51,000.
46.
Reference: Ref 11-5
(Table: Pizza Economy II) Based on the Table: Pizza Economy II, GDP in this economy is: a. $74,000. b. $45,000. c. $29,000. *d. $16,000.
47. If during 2011 the country of Sildavia recorded a value added of $78 billion,
wages of $40 billion, profits of $8 billion, and total sales of $90 billion, the value of intermediate goods purchased during 2011 in Sildavia was: a. $42 billion. b. $30 billion. *c. $12 billion. d. $4 billion.
48. If during 2011, the country of Sildavia recorded a GDP of $65 billion, interest
payments of $15 billion, imports of $13 billion, profits of $7 billion, exports of $15 billion, and rent of $7 billion, wages during 2011 in Sildavia were: *a. $36 billion. b. $38 billion.
c. $51 billion. d. $64 billion.
49. Table: Measuring GDP
Reference: Ref 11-6
(Table: Measuring GDP) In the Table: Measuring GDP, GDP is equal to: a. $500 billion. b. $850 billion. *c. $995 billion. d. $1000 billion.
50. Table: Measuring GDP Reference: Ref 11-6
(Table: Measuring GDP) In the Table: Measuring GDP, total expenditures on GDP by the household sector are: a. $100 billion. b. $150 billion. c. $200 billion. *d. $500 billion.
51. Table: Measuring GDP Reference: Ref 11-6
(Table: Measuring GDP) In the Table: Measuring GDP, government purchases of goods and services are: a. $50 billion. b. $100 billion. c. $200 billion. *d. $300 billion.
52. Table: Measuring GDP Reference: Ref 11-6
(Table: Measuring GDP) In the Table: Measuring GDP, exports are: a. –$5 billion. b. $0 billion. c. $5 billion. *d. $10 billion.
53. GDP can be calculated as: *a. the total value of all final goods and services produced in a given year. b. the sum of all spending by firms on inputs used to produce final goods and services in a given year. c. the value of all of the intermediate goods used to produce final goods and services in a given year. d. the amount of tax paid on all intermediate and final goods and services in a given year.
54. GDP can be calculated as the: a. total value of all intermediate and final goods produced in a given year. *b. sum of aggregate spending on all domestically produced final goods and services in a given year. c. total amount of spending by consumers and firms in a given year. d. total income earned by workers in the manufacturing sector in a given year.
55. The value added of a producer is the: a. value of its final sales. b. costs of the inputs used in production of intermediate goods. *c. value of its sales less the value of its purchases of inputs. d. sum of the wages and payroll taxes it pays.
56. If Daylight Doughnuts spends $300 on doughnut ingredients, makes doughnuts
and sells them for $750, the value added by Daylight Doughnuts is: a. $300 b. $750 c. $1050 *d. $450
57. If Sam buys wood for $150 and makes a book case that he sells for $400,
Sam's value added is:
*a. $250. b. $150. c. $400. d. $550.
58. Barbara pays $3 for a plain basket and buys $2 of craft materials to make
Easter baskets. If the value added by Barbara is $7, the price of each basket should be: a. $2. b. $3. c. $7. *d. $12.
59. GDP is equal to a. the total value of physical capital. b. the total value of investment. *c. aggregate spending on domestically produced goods and services. d. the total value of goods and services held in inventory.
60. If a firm uses $20,000 worth of intermediate goods and services to generate
$25,000 in sales of its final product, then we can say that it has created $5,000 of a. profit. *b. value added. c. investment income. d. factor income.
61. Which part of household spending is NOT added into GDP? a. spending on entertainment b. spending on education *c. spending on imports d. spending on health care
62. Which would NOT be a part of GDP? *a. used car sales b. new residential construction c. a new truck purchased by a building contractor d. telephone service purchased for a home
63. The total volume of business sales in the economy is much larger than GDP
because:
a. GDP understates the value of total output. *b. the output approach to measuring GDP excludes intermediate transactions. c. GDP includes transfer payments. d. GDP excludes exports.
64. Which would NOT be included in this year's GDP? a. the production of a television show b. the purchase of a new hybrid truck c. the hiring of a new school teacher *d. your purchase of your neighbor's house, which was built in 1994
65. If your professor wins the lottery: a. GDP goes up. b. GDP goes down. *c. GDP is not affected. d. the economy will clearly be better off.
66. The purchases of which goods are included in GDP? a. used goods b. newly issued stocks c. foreign-produced investment goods *d. capital goods
67. The reason the dollar value of only final goods and services are counted in GDP
is that: a. we can measure only the value of final goods and services, not the value of inputs. *b. if we counted the value of all goods, we would count inputs, like the value of steel in a new automobile, more than once. c. intermediate goods reduce GDP. d. only final goods and services matter for the economy.
68. The value of all the goods is included in the calculation of GDP EXCEPT the
value of: a. Firestone tires sold at your local garage. *b. Bridgestone tires purchased by Ford Motor Co. c. Goodyear tires purchased by the U. S. Secret Service. d. Michelin tires purchased by Canadian car collectors.
69. Which would be included in the calculation of GDP? *a. expenditure on new construction b. a retiree's monthly Social Security check c. buying an existing house d. buying shares of Home Depot stock
70. Included in GDP would be the: a. dollar value of a used car sold during the period. b. dollar value of a new car imported during the period. *c. dollar value of a new car exported during the period. d. purchase of 100 shares of General Motors stock.
71. Which value would be counted in GDP? a. glass for windshields purchased by a car manufacturer *b. a new car sold by a car dealer c. a used car sold by a car dealer d. a share of stock in a car manufacturer
72. Which transaction would be included in the nation's gross domestic product? a. A college student buys a used textbook from his roommate. b. A construction company purchases lumber to use in building a new house. *c. A college student has a pizza delivered to her dorm room. d. A group of college students volunteer to rake leaves at an assisted living facility for senior citizens.
73. Which transaction would not be counted in the GDP for the United States? a. Nike builds a Niketown retail store in Chicago. b. Your mother buys a pound of Washington-grown apples at the grocery store. *c. Your mother buys 100 shares of Nike stock. d. The Indiana state government spends taxpayer money to repair a damaged bridge over the Wabash River.
74. In the United States, consumer spending accounts for approximately what
percentage of GDP? a. 55 percent b. 63 percent *c. 71 percent d. 88 percent
75. The largest component of U.S. GDP involves value added in: a. household production. *b. business production. c. government production. d. production of goods sold overseas.
76. In the United States, investment spending accounts for approximately what
percentage of GDP? a. 6 percent *b. 13 percent c. 24 percent d. 33 percent
77. In the United States, government spending accounts for approximately what
percentage of GDP? a. 7 percent b. 9 percent *c. 19 percent d. 29 percent
78. In 2012, _____ was the largest component of U.S. GDP, at approximately 71
percent of the total aggregate spending. a. government spending *b. consumer spending c. investment spending d. net export spending
79. The value of all of the following goods is included in the calculation of aggregate
output EXCEPT the value of: a. Firestone tires sold at your local garage. b. a new shower installed in a recently purchased 1920s house. c. the six-CD player installed to replace the factory-mounted radio-cassette player in your new car. *d. Firestone tires installed on brand-new Volvo station wagons.
80. Which is included in GDP? *a. changes to inventories b. purchases of used goods c. purchases of financial assets
d. intermediate goods and services
81. Which transaction is included in GDP? a. the purchase of 100 shares of Apple stock by a college student *b. the purchase of a new iPad by a college student c. the purchase of a used economics textbook d. hamburger buns purchased by a restaurant
82. Which is NOT included in GDP? a. the purchase of a new office building built this year in New York City *b. a U.S. car dealership's purchase of a BMW built in Germany c. a Japanese citizen's purchase of a Chevrolet built in Kansas d. the purchase of a robot used on an assembly line of a Texas company
83. The difference between an investment good and an input is that: a. an input will last for many years and will be used repeatedly, but an investment good is used up quickly in the production process. *b. an investment good will last for many years and be used repeatedly, but an input is used up quickly in the production process. c. inputs are almost always more expensive than investment goods. d. there is no difference between inputs and investment goods.
84. Which is NOT included in the investment spending component of GDP? a. purchases of physical capital b. the construction of residential and commercial structures *c. the purchase of corporate bonds d. changes to inventories
85. Which would NOT be included in the investment spending component of GDP? a. purchases of robots to assemble automobiles b. the construction of a new house for a family c. an increase in a discount store's inventory of bicycles *d. a mutual fund's purchase of 100,000 shares of General Motors stock
86. Consumer spending is about
percent of GDP.
a. 30 b. 50 *c. 70 d. 90
87. Which component of GDP is currently negative for the United States? *a. net exports b. investment spending c. consumer spending d. government spending
88. GDP excludes all EXCEPT: a. the value of leisure. b. damage done to the environment. c. the value of housework. *d. the value of owner-occupied housing.
89. When economists impute a value for household services that individuals
perform for themselves, they: *a. assign an estimate of what the market value of that work would be if it were paid for. b. assume that the services are unimportant in calculating GDP. c. agree that the value of the services should be subtracted from GDP. d. include 10 percent of the value of the services in calculating GDP.
90. The only imputed value that is included in calculating GDP is the value of: a. owning an automobile. *b. owner-occupied housing. c. a college education. d. a healthy labor force.
91. When measuring GDP as spending on domestically produced final goods and services, spending on inputs like steel in manufacturing a car is counted in GDP, but spending on a new factory in which the cars are produced is NOT counted in GDP. a. True *b. False
92. Final goods and services are sold to the final or end user.
*a. True b. False
93. Final goods and services are goods and services that are bought from one firm by another firm to be used as inputs in the production of final goods and services. a. True *b. False
94. Intermediate goods and services are goods and services that are bought from one firm by another firm to be used as inputs in the production of final goods and services. *a. True b. False
95. When Disney builds a new amusement park in the United States, it is counted as part of GDP. *a. True b. False
96. Most of the value added included in GDP in the United States is added by businesses rather than consumers. *a. True b. False
97. The largest spending category in GDP is consumption. *a. True b. False
98. If the United States exports $500 of goods and services and imports $700 of goods and services, net exports are $1,200. a. True *b. False
99. Steel manufactured for the purpose of producing a car is not counted in aggregate output, but the car that results is counted. *a. True b. False
100. Overcounting in the GDP can be avoided by including both final and intermediate production. a. True *b. False
101. Gross domestic product can be calculated as the sum of consumer spending, investment spending, government purchases of goods and services, exports, and imports. a. True *b. False
102. GDP can be calculated as the wholesale value of all of the intermediate goods used to produce final goods and services. a. True *b. False
103. GDP is equal to aggregate spending on domestically produced final goods and services in a given year. *a. True b. False
104. GDP is equal to the total amount of spending by consumers and firms on intermediate and final goods in a given year. a. True *b. False
105. The value added of a producer is the value of its sales minus the value of its purchases of inputs. *a. True b. False
106. The largest component of GDP is government purchases of goods and services. a. True *b. False
107. The largest component of GDP is consumer spending, which accounts for approximately 70 percent of GDP. *a. True
b. False
108. The difference between investment goods and inputs is that investment goods are used up quickly in production, and inputs are not used up in production. a. True *b. False
109. A delivery truck for a florist is an investment good, but gasoline for the truck is an input. *a. True b. False
110. The investment spending component of GDP includes spending on corporate stocks and bonds. a. True *b. False
111. If a Ford Focus, produced in 2014 in Michigan, is not sold in 2014, it is not included in 2014 GDP. a. True *b. False
112. A Ford Focus, produced in 2014 in Michigan, but not sold until 2015, is included in 2014 GDP as investment spending. *a. True b. False
113. Renting a car to go on a vacation will result in more GDP than if you used your own car. *a. True b. False
114. When economists impute the value of a home owner mowing their own grass rather than hiring a lawn service to do it, they are assigning an estimate of the market value of mowing the grass. *a. True b. False
115. The only imputed value actually included in calculating GDP is the value of a high school education. a. True *b. False
116. For each transaction, explain why it would or would not be counted in the GDP of the United States. A) Japanese auto producer Honda builds a factory in Indiana. B) You buy a new pair of pants produced at a factory in Honduras. C) You mow your uncle's yard and he gives you $10 for a job well done. Correct Answer:
A) Yes. If a factory is built in the United States, it counts as investment spending in the U.S. GDP. It doesn't matter if the builder is headquartered in Japan or any other nation. B) No. You did purchase the pants in the United States, which does count as consumption spending, but this garment was produced in a foreign country. Thus it would be deducted from U.S. GDP as an import. C) No. In an accountant's perfect world, this sort of “cash under the table” transaction would count, because you have produced a service and received payment for it. However, you are unlikely to report this income on your tax returns. Official GDP tabulations would miss almost all of these smaller transactions. 117. For each transaction, explain why it would or would not be counted in the GDP of the United States. A) American auto producer Ford builds a factory in Alberta, Canada. B) You buy a blueberry muffin at your local coffee shop. C) A Ford dealership in Ohio has 15 unsold new 2011 model cars at the end of 2011. Correct Answer:
A) No. This is investment spending but not in the United States, so it does not count in U.S. GDP. B) Yes. This is consumer spending. C) Yes. These unsold cars would be counted as unsold inventory in investment spending. 118. A single woman is a busy attorney who is too busy to take care of her yard, so she hires a local firm to perform lawn service like mowing the grass, raking the leaves, and trimming the rose bushes. After several years she and the owner of the lawn service fall madly in love and get married. After the honeymoon, her new husband takes care of the yard maintenance, and she no longer pays his company the monthly fee. What has happened to GDP? Correct Answer:
Official GDP accounts would fall. While the lawn service is still being performed, the husband's firm is no longer receiving a payment. Domestic work performed by a family member is not captured by the standard measure of GDP.
119. GDP measures the: a. money circulating through an economy during a year. *b. value of the final goods and services produced within the borders of a country during a given period. c. value of the final goods and services produced by the citizens of a country regardless of their location during a given period. d. amount of government spending undertaken during a given period.
120. An economy's gross domestic product is made up of consumption,: a. saving, investment, and government spending. *b. investment, government spending, and net exports. c. saving, inventories, financial markets, and government spending. d. and saving.
121. Suppose only two countries existed in the world. Country A imported $200
million worth of goods and services from country B. Country B imported $100 million worth of goods and services from country A. Net exports for: a. country A equal $200 million. b. country B equal $200 million. *c. country A equal –$100 million. d. country B equal –$100 million.
122. When intermediate goods are included in the GDP calculation, it is referred to
as: a. the value-added method. *b. double counting. c. deflating the value of GDP. d. the expenditure method of GDP calculation.
123. Calculating GDP via the factor payments approach would include payments
such as: *a. wages, interest payments, rent, and profits. b. taxes, wages, interest payments, and rents. c. rents, profits, value added adjustments, and taxes. d. consumption, investment, and government.
124. Which of the following is false? GDP can be calculated by summing:
a. total market value of all final goods and services within a country's borders in a given year. b. all factor payments within a country's borders in a given year. c. the value added for all goods and services. *d. government spending and tax revenues.
125. The value added is equal to the: a. value of sales by a company. *b. value of sales minus the value of intermediate goods used by a company. c. value of intermediate goods. d. sum of payments to labor and capital.
126. Which is NOT included in the calculation of GDP? *a. the Social Security check your relative receives each month b. the new textbook you purchase for a college course c. a coffee you purchase from the coffee shop down the street d. the wages you pay to the employee who cleans your house
127. Double counting would occur if: a. GDP were calculated by adding together C, I, G, and NX. *b. used goods were included in the GDP calculation. c. imports were subtracted from GDP. d. inventories were added to the GDP calculation.
128. When consumers purchase imported products, this is: *a. subtracted from GDP. b. considered domestic spending, since it is spent by a domestic consumer. c. double counting. d. not a part of the GDP calculation.
129. Spending on inputs is __________________, and spending on investment is
_______________. a. part of GDP; part of GDP *b. not a part of GDP; part of GDP c. part of GDP; not a part of GDP d. not a part of GDP; not a part of GDP
1. The inflation-adjusted measure of aggregate output typically used by economists
is called: a. aggregated output. b. nominal gross national product. c. net domestic product. *d. real gross domestic product.
2. The most important use of GDP is as a measure of: *a. the size of the economy. b. the level of unemployment. c. changes in the price level. d. rates of return in financial markets.
3. To compare economic performance between years, economists most often use: a. the circular-flow diagram. *b. GDP. c. the business cycle. d. fiscal policy.
4. An increase in the value of nominal GDP over time: a. is always due to an increase in prices. b. is always due to an increase in the production of goods and services. *c. may be due to an increase in prices, an increase in the production of goods and services, or a combination of an increase in prices and an increase in aggregate output. d. may be due to a decrease in prices, a decrease in the production of goods and services, or a combination of a decrease in prices and a decrease in aggregate output.
5. In order to measure the quantity of goods and services produced, we adjust GDP
for changes in: a. population. *b. the price level. c. family size. d. firm size
6. Real GDP is nominal GDP adjusted for: a. double counting. *b. changes in prices. c. population.
d. imports.
7. If real GDP rises while nominal GDP falls, then prices on average have: a. risen. *b. fallen. c. stayed the same. d. decreased and then have been offset by an equal increase.
8. Aggregate output is: a. equal to consumer spending on goods and services. b. the value of new construction, changes in inventories, and the purchase of physical capital by businesses. c. the total quantity of intermediate goods produced within an economy. *d. the total quantity of final goods and services produced within an economy.
9. If real GDP falls while nominal GDP rises, then prices on average have: *a. risen. b. fallen. c. stayed the same. d. had no effect on nominal GDP.
10. A base year must be selected if we are to define: a. net exports. b. nominal GDP. *c. real GDP. d. investment spending.
11. To calculate real GDP, we measure the total value of output using: *a. the prices that prevailed during a selected base year. b. current prices, with base-year quantities. c. estimated quantities, based on population growth. d. estimated quantities, based on average family size.
12. U.S. statistics on real GDP are always expressed: a. in nominal dollars. b. in terms of a comparison with foreign currencies. c. as a percentage of global output. *d. in chained dollars.
13. Consider an economy that produces only two goods: DVDs and DVD players. If
10 DVDs are sold at $20 each and 5 DVD players are sold at $100 each, then nominal GDP is: a. $100. *b. $700. c. $1100. d. $900.
14. Consider an economy that produces only two goods: DVDs and DVD players.
Last year, 10 DVDs were sold at $20 each and 5 DVD players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Nominal GDP this year is: a. $100. *b. $650. c. $700. d. $500.
15. Consider an economy that produces only two goods: DVDs and DVD players.
Last year, 10 DVDs were sold at $20 each and 5 DVD players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Real GDP this year using last year as the base year is: a. $100. b. $700. *c. $1300. d. $300.
16. Suppose that nominal GDP is $1000 in 2009 and nominal GDP is $1500 in
2010. If the overall price level ____ between 2009 and 2010, we could say that real GDP _____. *a. increased by 50 percent; stayed constant. b. increased by less than 50 percent; decreased. c. increased by more than 50 percent; increased. d. increased by 50 percent; increased.
17.
Reference: Ref 12-1
(Table: Peanut Butter and Jelly Economy) A simple economy produces only peanut butter and jelly. Using the data in the Table: Peanut Butter and Jelly Economy for 2011, nominal GDP was ____ and real GDP was _____. a. $450; $400 *b. $525; $450 c. $525; $400 d. $450; $575
18.
Reference: Ref 12-1
(Table: Peanut Butter and Jelly Economy) A simple economy produces only peanut butter and jelly. Using the data in the Table: Peanut Butter and Jelly Economy, from 2010 to 2011 real GDP ____ by _____ percent. *a. increased; 12.5 b. decreased; 50 c. increased; 43.75 d. decreased; 12.5
19.
Reference: Ref 12-1
(Table: Peanut Butter and Jelly Economy) According to the Table: Peanut Butter and Jelly, nominal GDP in 2010 was: a. $200. *b. $400. c. $450. d. $525.
20.
Reference: Ref 12-1
(Table: Peanut Butter and Jelly Economy) Between 2010 and 2011 in the Table: Peanut Butter and Jelly Economy, nominal GDP: a. increased by 12.5 percent. b. decreased by 12.5 percent. c. increased by 16.67 percent. *d. increased by 31.25 percent.
21.
Reference: Ref 12-1
(Table: Peanut Butter and Jelly Economy) According to the Table: Peanut Butter and Jelly Economy, how much of the increase in nominal GDP between 2010 and 2011 was due to inflation? a. 31.25 percent *b. 18.75 percent c. 12.5 percent d. 4 percent
22. Chained dollars are: a. money that banks are required to keep in their vaults to back deposits. b. the measure of the value of intermediate goods. *c. a method for calculating changes in real GDP, which uses an early base year and a late base year. d. a method used to convert real to nominal GDP.
23. Real GDP is: a. the value of the production of all final goods and services measured in current prices. *b. the value of the production of all final goods and services adjusted for price changes. c. the projected future value of GDP. d. calculated by adding up only the real number of all items sold in the United States regardless of their prices.
24. Scenario: Real GDP
Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each. Reference: Ref 12-2
(Scenario: Real GDP) In Scenario: Real GDP, the value of nominal GDP in years 1 and 2 respectively is: *a. $900; $1,077.50. b. $900; $990. c. $180,000; $257,400. d. $1000; $1005.
25. Scenario: Real GDP
Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each. Reference: Ref 12-2
(Scenario: Real GDP) In Scenario: Real GDP, using year 1 as the base year, real GDP in year 2 is: a. $900. *b. $970. c. $1000. d. $1,077.50.
26. Scenario: Real GDP
Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each. Reference: Ref 12-2
(Scenario: Real GDP) In Scenario: Real GDP, the growth rate of nominal GDP from year 1 to year 2 is: a. 10 percent. b. 7.8 percent. *c. 19.7 percent. d. 8.8 percent.
27. Scenario: Real GDP
Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each. Reference: Ref 12-2
(Scenario: Real GDP) In Scenario: Real GDP, using year 1 as the base year, the growth rate of real GDP from year 1 to year 2 is: a. 10 percent. *b. 7.8 percent. c. 19.7 percent. d. 8.8 percent.
28. Nominal GDP may be used to compare: *a. the dollar amount of final goods produced in different years. b. the price of final goods times the number of goods produced in one year. c. output if prices are held constant. d. living standards among different countries.
29. Nominal GDP: *a. has not been adjusted for changes in prices over time. b. has been adjusted for changes in prices over time. c. is a small or nominal amount of output. d. excludes the international sector.
30. If both aggregate output and the aggregate price level increase: a. real GDP will increase faster than nominal GDP. *b. nominal GDP will increase faster than real GDP. c. it makes no difference to real or nominal GDP.
d. real GDP and nominal GDP will increase faster than the price level.
31. If nominal GDP increases from one year to the next: a. prices must have risen from one year to the next. b. real GDP must have risen from one year to the next. c. prices and real GDP must have risen from one year to the next. *d. either output or prices or both must have risen from one year to the next.
32. If nominal GDP decreases from one year to the next: a. prices must have fallen from one year to the next. b. real GDP must have fallen from one year to the next. c. prices and real GDP must have fallen from one year to the next. *d. either output or prices or both must have fallen from one year to the next.
33. If nominal GDP of 2012 is higher than nominal GDP of 2011, we can state that: a. production in 2012 is higher than production in 2011, while prices remain unchanged. *b. production or prices or both are higher in 2012 than in 2011. c. prices in 2012 are higher than prices in 2011, while production remains unchanged. d. production in 2012 has gone down and prices have increased.
34. If the price level in the economy and the nominal wages both doubled, then real
wages would: a. also double. b. increase by half. *c. remain unchanged. d. decrease by half.
35. Real GDP is the same as: a. current-dollar GDP. *b. inflation-adjusted GDP. c. nominal GDP. d. value-added GDP.
36. Nominal GDP is the:
a. inflation-adjusted GDP. b. real GDP minus depreciation. *c. current-dollar GDP. d. constant-dollar GDP.
37. Government economists have adopted a new method of calculating the change
in real GDP known as the ________, which uses the average between the GDP growth rate calculated using an early base year and the GDP growth rate calculated using a late base year. a. cost indexation method. b. straight-line depreciation method. *c. chain-linking method. d. fixed base year method.
38. Assume that in the base year 2011, a country's nominal GDP is $10,000 billion.
The country has been experiencing inflation at a rate of 5 percent each year since the year 2006. Based on this information, the real GDP of 2011 is equal to: a. $10,500 billion. b. $11,025 billion. *c. $10,000 billion. d. $9500 billion.
39. The total value of all final goods and services produced in the economy in a
given year and calculated using prices from the year in which the output is produced is: a. real GDP. *b. nominal GDP. c. net exports. d. consumption spending.
40. The total value of all final goods and services produced in the economy in a
given year, calculated using the prices from a selected base year, is: *a. real GDP. b. nominal GDP. c. net exports. d. consumption spending.
41. Table: Lemonade and Cookies
Lemonade
2013 Output 200 glasses
2013 Prices $1 per glass
2014 Output 220 glasses
2014 Prices $1 per glass
Cookies
100 cookies
$2 per cookie
100 cookies
$2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assuming that the economy only produces lemonade and cookies, nominal GDP in 2013 was: *a. $400. b. $420. c. $445. d. $820.
42. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assuming that the economy only produces lemonade and cookies, nominal GDP in 2014 was: a. $400. b. $420. *c. $445. d. $820.
43. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assuming that the economy only produces lemonade and cookies, the growth rate of nominal GDP from 2013 to 2014 was: a. 5 percent. b. 10 percent. *c. 11.25 percent. d. 45 percent.
44. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assuming that the economy only produces lemonade and cookies, if 2013 is the base year, real GDP in 2013 was: *a. $400. b. $420. c. $425. d. $445.
45. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assuming that the economy only produces lemonade and cookies, if 2013 is the base year, real GDP in 2014 was: a. $400. *b. $420. c. $425. d. $445.
46. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assuming that the economy only produces lemonade and cookies and that 2014 is the base year, the growth rate of real GDP from 2013 to 2014 was: *a. 5 percent. b. 10 percent. c. 11.25 percent. d. 20 percent.
47. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assume that an economy produces only two goods, lemonade and cookies. The growth of nominal GDP from 2013 to 2014 was due to an average _____ percent increase in prices and an average _____ percent increase in aggregate output. a. 11.25; 0 b. 0; 45 c. 5; 11.25 *d. 6.25; 5
48. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assume that an economy produces only two goods, lemonade and cookies. If 2014 is the base year, real GDP in 2014 was: a. $400. b. $420. c. $425. *d. $445.
49. Table: Lemonade and Cookies
Lemonade Cookies
2013 Output 200 glasses 100 cookies
2013 Prices $1 per glass $2 per cookie
2014 Output 220 glasses 100 cookies
2014 Prices $1 per glass $2.25 per cookie
Reference: Ref 12-3
(Table: Lemonade and Cookies) The Table: Lemonade and Cookies shows the output levels and prices for lemonade and cookies. Assume that an economy produces only two goods, lemonade and cookies. Assuming that 2014 was the base year, the growth rate of real GDP from 2013 to 2014 was: a. -5 percent.
*b. 4.7 percent. c. 11.25 percent. d. 20 percent.
50. Real GDP tends to understate our economic well-being because it: a. includes the value of services produced in the home. *b. excludes the value of leisure. c. includes expenditures on crime prevention equipment. d. includes health care costs related to the consumption of cigarettes.
51. Real GDP tends to overstate our economic well-being by including which? a. expenditures on crime prevention b. payments for cleaning up the environment c. repairs to structures destroyed by storms *d. expenditures on crime prevention, payments for cleaning up the environment, and repairs to structures destroyed by storms
52. A country's living standard is best measured by the: a. per capita nominal GDP. b. real GDP. c. nominal GDP. *d. per capita real GDP.
53. Economists frequently use GDP per capita to reflect: a. the impact of prices on GDP. *b. differences in living standards across countries. c. people who are employed. d. people who are both employed and unemployed.
54. GDP per capita is: a. a perfect measure of a country's standard of living. b. the only way to measure living standards among different countries. *c. an incomplete measure of a country's standard of living. d. used by the United Nations to compare nations based on measures of welfare.
55. For measuring a nation's standard of living, the best available common measure
is:
a. nominal GDP. b. market GDP. *c. real GDP per capita. d. nominal GDP per capita.
56. Dividing real GDP by the population: a. results in consumption per capita. b. results in nominal GDP per person. *c. gives real GDP per capita. d. is a measure of happiness.
57. Assume that the real GDP of the United States is approximately $12 trillion and
the population of the United States is approximately 300 million. What is per capita real GDP? a. $4000 b. $36,000 *c. $40,000 d. $360 million
58. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. The growth rate of nominal GDP from 2011 to 2014 is: a. 37.5 percent b. 60 percent c. 62.5 percent *d. 166.7 percent
59. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. Per capita nominal GDP in 2011 is: *a. $600.
b. $400. c. $300. d. $30.
60. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. Per capita nominal GDP in 2014 is: a. $600. *b. $800. c. $300. d. $1600.
61. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. The growth rate of per capita nominal GDP is: a. 10 percent. b. 20 percent. c. 25 percent. *d. 33 percent.
62. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. If 2011 is the base year, real GDP in 2011 is: a. $500. *b. $3000. c. $4000. d. $300,000.
63. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. If 2011 is the base year, real GDP in 2014 is: a. $400. b. $3000. *c. $4000. d. $80,000.
64. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. If 2011 is the base year, the growth rate of real GDP from 2011 to 2014 is: a. 10 percent. b. 20 percent. c. 25 percent. *d. 33 percent.
65. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. If 2011 is the base year, per capita real GDP in 2011 is: *a. $600. b. $400. c. $300. d. $30.
66. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. If 2011 is the base year, per capita real GDP in 2014 is: a. $600. b. $800. c. $300. *d. $400.
67. Table: Per Capita GDP
Year 2011 2014
Nominal GDP $3000 $8000
Price Level $100 $200
Population 5 10
Reference: Ref 12-4
(Table: Per Capita GDP) Look at the Table: Per Capita GDP. If 2011 is the base year, the growth rate per capita of real GDP from 2011 to 2014 is: a. 200 percent. b. 50 percent. c. -50 percent. *d. -33 percent.
68. Real GDP divided by the population size is known as a. adjusted GDP. b. standard GDP. c. segmented GDP. *d. real GDP per capita.
69.
Reference: Ref 12-5
(Table: Pizza Economy III) Considering 2010 as the base year in Table: Pizza Economy III, nominal GDP in 2011 was:
*a. $47,000. b. $69,000. c. $72,000. d. $114,000.
70.
Reference: Ref 12-5
(Table: Pizza Economy III) Considering 2010 as the base year in Table: Pizza Economy III, real GDP in 2011 was: a. $47,000. *b. $69,000. c. $72,000. d. $114,000.
71.
Reference: Ref 12-5
(Table: Pizza Economy III) Considering 2010 as the base year in Table: Pizza Economy III, real GDP between 2010 and 2011 grew at a rate of: a. 53.19 percent. b. 39.47 percent. *c. –39.47 percent. d. –58.67 percent.
72.
Reference: Ref 12-5
(Table: Pizza Economy III) Considering 2010 as the base year in Table: Pizza Economy III, given that total population was 1140 in 2010 and 1300 in 2011, real GDP per capita in 2010 was: a. $80. b. $53. c. $60. *d. $100.
73.
Reference: Ref 12-5
(Table: Pizza Economy III) Considering 2010 as the base year in Table: Pizza Economy III, given that total population was 1140 in 2010 and 1380 in 2011, real GDP per capita between 2010 and 2011 grew at a rate of: *a. –50 percent. b. –25 percent. c. 50 percent. d. 75 percent.
74.
Reference: Ref 12-5
(Table: Pizza Economy III) Using 2010 as the base year in Table: Pizza Economy III, nominal GDP in 2010 was:
a. $47,000. b. $69,000. c. $72,000. *d. $114,000.
75.
Reference: Ref 12-5
(Table: Pizza Economy III) Using 2010 as the base year in Table: Pizza Economy III , real GDP in 2010 was: a. $47,000. b. $69,000. c. $72,000. *d. $114,000.
76. Table: Price and Output Data
Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, the value of year 4's output in nominal dollars is: a. $6. b. $24. c. $30. *d. $36.
77. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, the value of year 2's output in real dollars is: a. $4. b. $12. *c. $15. d. $16.
78. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, the value of year 3's output in real dollars is: a. $5. *b. $20. c. $27. d. $36.
79. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data,, the value of year 3's output in nominal dollars is: a. $5. b. $5.20. *c. $20. d. $36.
80. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data,, the value of year 4's output in real dollars is: a. $5.20. b. $6. *c. $30. d. $36.
81. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, between years 2 and 3, nominal GDP: a. increased by 33 percent. b. increased by 25 percent. *c. increased by 67 percent. d. increased by 8 percent.
82. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, between years 2 and 3, real GDP increased by: a. 10 percent. b. 20 percent. c. 30 percent. *d. 33 percent.
83. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, between years 2 and 3 the amount of change in nominal GDP due to inflation was: a. 100 percent. *b. 34 percent. c. 22 percent. d. 5 percent.
84. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, nominal GDP in year 5 is: a. $1.29. b. $16. c. $45. *d. $63.
85. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, real GDP in year 5 is: a. $1.29. b. $16. *c. $45. d. $63.
86. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, between years 4 and 5, nominal GDP increased by: a. 33 percent. *b. 75 percent. c. 50 percent. d. 13 percent.
87. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, between years 4 and 5, real GDP: a. decreased by 14 percent. b. did not change. c. increased by 3 percent. *d. increased by 17 percent.
88. Table: Price and Output Data Reference: Ref 12-6
(Table: Price and Output Data) According to the Table: Price and Output Data, between years 4 and 5, ________ of the increase in nominal GDP was due to inflation. a. none b. 58 percent c. 92 percent *d. all
89. Table: Real and Nominal Output
Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, nominal GDP in year 4 is equal to: a. $40.
b. $60. c. $100. *d. $280.
90. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, nominal GDP in year 2 is equal to: a. $40. *b. $60. c. $100. d. $280.
91. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, the year in which the increase in nominal GDP is exclusively due to the increase in the price level rather than physical output is year: a. 2. b. 3. c. 4. *d. 6.
92. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, in which year is all of the increase in nominal output due to an increase in real output? a. 2 *b. 3 c. 5 d. 6
93. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, nominal output in year 3 is:
a. $20. b. $50. *c. $100. d. $1500.
94. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, nominal output in year 4 is: a. $70. b. $120. c. $140. *d. $280.
95. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, the change in nominal output between years 3 and 4 is an increase of: a. 64 percent. b. 100 percent. *c. 180 percent. d. 280 percent.
96. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, assuming year 3 is the base year, real output in year 3 is: *a. $100. b. $120. c. $140. d. $200.
97. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, assuming year 3 is the base year, real output in year 4 is:
a. $100. b. $120. *c. $140. d. $200.
98. Table: Real and Nominal Output Reference: Ref 12-7
(Table: Real and Nominal Output) According to the Table: Real and Nominal Output, the change in real output between years 3 and 4 is an increase of: *a. 40 percent. b. 100 percent. c. 140 percent. d. 200 percent.
99. The most important use of GDP is as a measure of the size of the economy which can be used to compare economic performance over time or between countries. *a. True b. False
100. If nominal GDP increases from $10 trillion to $12 trillion in a year, it can only mean that aggregate output grew by 20 percent. a. True *b. False
101. If GDP increases from $10 trillion to $12 trillion in a year, it could mean that aggregate output grew by 20 percent, that prices increased 20 percent, or that prices and aggregate output both increased. *a. True b. False
102. Aggregate output is the sum of consumer spending on goods and services and investment spending by firms. a. True *b. False
103. Aggregate output is the total quantity of intermediate goods and services produced in the economy in a year. a. True
*b. False
104. Aggregate output is the total quantity of final goods and services produced within the economy. *a. True b. False
105. If real GDP falls when nominal GDP increases, then prices have fallen. a. True *b. False
106. If real GDP falls when nominal GDP increases, then prices have increased. *a. True b. False
107. If the dollar amount of nominal GDP decreases, then aggregate output is definitely decreasing. a. True *b. False
108. GDP in the United States was $5803 billion in 1994 and $11,734 billion in 2008, so we can conclude that aggregate output roughly doubled over the 14-year period in the United States. a. True *b. False
109. Why do economists bother to compute real GDP? Why can't we just compare nominal GDP from one year to the next? Correct Answer:
Nominal GDP shows the value of a nation's output of goods and services in a given year, but part of that value is determined by the prices of those goods and services. If those prices increase, nominal GDP will increase, even if output levels stay the same. Real GDP computes the value of goods and services produced during a year using prices from a reference year, or base year. This way we can see whether the nation's output changed, holding prices constant.
110. The total value of all final goods and services produced in the economy in a given year and calculated using prices from the year in which the output is produced is nominal GDP. *a. True b. False
111. The total value of all final goods and services produced in the economy in a given year and calculated using prices from the year in which the output is produced is real GDP. a. True *b. False
112. Real GDP will increase if aggregate output increases. *a. True b. False
113. Chain linking is the method of calculating changes in real GDP where the chain-linked grow rate of real GDP is the average of the real GDP growth rate using an early base year and the real GDP growth rate using a late base year. *a. True b. False
114. Chain linking is a method used to measure the change in real GDP. *a. True b. False
115. Between 2000 and 2011, the nominal GDP of Venezuela grew by 29% annually primarily because the prices in Venezuela decreased rapidly during the period. a. True *b. False
116. GDP per capita measures the value of all intermediate goods and services produced in the economy. a. True *b. False
117. Reference: Ref 12-8 (Table: Gadget GDP in Rayistan) Rayistan is a small nation that produces only one good, the gadget. The Table: Gadget GDP in Rayistan shows production and prices of gadgets for two consecutive years, as well as the population of Rayistan. A) Compute nominal GDP in 2010 and 2011. B) Compute real GDP in 2010 and 2011. C) Has Rayistan's standard of living, as measured by real GDP per capita, increased, decreased, or stayed the same? Correct Answer:
A) Nominal GDP in 2010 = 4000 × $500 = $2 million. Nominal GDP 2011 = 4400 × $600 = $2.64 million. B) Real GDP in 2010 = $2 million because it is the base year. Real GDP 2011 = 4400 × $500 = $2.2 million. C) Real per capita GDP in 2010 = $2 million / 10,000 = $200. Real per capita GDP in 2011 = $2.2 million / 12,000 = $183. So the standard of living has actually fallen, as measured by real GDP per capita. 118.
Reference: Ref 12-9
(Scenario: Good A and Good B) According to the Scenario: Good A and Good B, in 2010, nominal GDP is: a. greater than the nominal GDP in 2011. *b. greater than the nominal GDP in 2009. c. equal to the nominal GDP in 2011. d. equal to the nominal GDP in 2009.
119.
Reference: Ref 12-9
(Scenario: Good A and Good B) According to the Scenario: Good A and Good B, using 2009 as the base year, one would find that the real GDP in 2009: a. is equal to the real GDP in 2010.
*b. is equal to the nominal GDP in 2009. c. is greater than the real GDP in 2010. d. is greater than the real GDP in 2011.
120.
Reference: Ref 12-9
(Scenario: Good A and Good B) According to the Scenario: Good A and Good B, with 2009 as the base year, real GDP is greatest in: a. 2009. b. 2010. *c. 2011. d. its base year always.
121. Real per capita GDP is: *a. real GDP divided by the population. b. real GDP divided by the amount of capital available in the economy. c. not a good useful measure of human welfare. d. rarely used as a tool to compare countries' possible resources.
1. People who are counted as unemployed by the government are: *a. people without a job who are actively seeking a job. b. discouraged workers. c. workers who are underemployed. d. people without a job who are actively seeking a job, discouraged workers, and workers who are underemployed.
2. Table: Unemployment and Employment Data
Reference: Ref 13-1
(Table: Unemployment and Employment Data) According to the Table: Unemployment and Employment Data, the unemployment rate for this economy is: a. 2.9 percent. b. 4.8 percent. *c. 5 percent. d. 5.3 percent.
3. Table: Unemployment and Employment Data Reference: Ref 13-1
(Table: Unemployment and Employment Data) According to the Table: Unemployment and Employment Data, the labor force in this economy is: a. 170 million. b. 140 million. *c. 100 million. d. 98 million.
4. Table: Unemployment and Employment Data Reference: Ref 13-1
(Table: Unemployment and Employment Data) According to the Table: Unemployment and Employment Data, if marginally attached workers are included, the labor force in this economy is: a. 170 million. *b. 103 million. c. 100 million.
d. 98 million.
5. Table: Unemployment and Employment Data Reference: Ref 13-1
(Table: Unemployment and Employment Data) According to the Table: Unemployment and Employment Data, if marginally attached workers are included in the labor force and in the unemployment rate, the unemployment rate in this economy is: a. 8.4 percent. *b. 7.8 percent. c. 5 percent. d. 3 percent.
6.
Reference: Ref 13-2
(Table: Employment Data) According to the data from the Table: Employment Data, the unemployment rate is: *a. 6.25 percent. b. 6.45 percent. c. 9.09 percent. d. 9.37 percent.
7.
Reference: Ref 13-2
(Table: Employment Data) According to the data from the Table: Employment Data, the labor force is: a. 33 million. *b. 32 million. c. 31 million. d. 22 million.
8.
Reference: Ref 13-2
(Table: Employment Data) According to the Table: Employment Data, if marginally attached workers are included in the labor force, the labor force in this economy is: a. 1 million. b. 11 million. c. 32 million. *d. 33 million.
9.
Reference: Ref 13-2
(Table: Employment Data) According to the Table: Employment Data, if marginally attached workers are included in the labor force and in the unemployment rate, the unemployment rate in this economy is: *a. 39.4 percent. b. 30.3 percent. c. 9.1 percent. d. 6.25 percent.
10.
Reference: Ref 13-3
(Table: Population Data for Estill County) Use the Table: Population Data for Estill County. How many people are in the labor force in the county? *a. 6000 b. 9400 c. 7400 d. 6500
11.
Reference: Ref 13-3
(Table: Population Data for Estill County) Use the Table: Population Data for Estill County. What is the labor force participation rate in the county? a. 64 percent *b. 81 percent c. 17 percent d. 79 percent
12.
Reference: Ref 13-3
(Table: Population Data for Estill County) Use the Table: Population Data for Estill County. What is the unemployment rate in the county? a. 64 percent b. 48 percent *c. 17 percent d. 6 percent
13.
Reference: Ref 13-3
(Table: Population Data for Estill county) According to the Table: Population Data for Estill County, if marginally attached workers are included in the labor force, the labor force is: a. 7400. *b. 6500. c. 6000. d. 5500.
14.
Reference: Ref 13-3
(Table: Population Data for Estill County) According to the Table: Population Data for Estill County, if marginally attached workers are included in the labor force and in the unemployment rate, the unemployment rate in this economy is: a. 10.6 percent. b. 15.4 percent. *c. 23.1 percent. d. 33.2 percent.
15. Employment is the total: a. labor force. b. population of working age. *c. number of people actively working. d. number of people not unemployed.
16. The labor force is the total: a. of people employed. b. population. c. of the population of working age. *d. of people employed and unemployed.
17. The unemployment rate is the: *a. percent of the labor force that is unemployed. b. number of people unemployed. c. ratio of the labor force to the number of people unemployed. d. average length of time someone is unemployed.
18. To be counted as unemployed, one must: a. have had a job previously. *b. be out of work and be actively looking for a job. c. have had a job before and be actively looking for work.
d. be actively looking for a job and have at least a high-school diploma or its equivalent.
19. The unemployment rate is the ratio of all of the people: a. out of work to the total population. b. out of work to those over age 16. c. unemployed to those looking for work. *d. unemployed to those in the labor force.
20. If a country has a working-age population of 200 million, 135 million people with
jobs, and 15 million people unemployed and seeking employment, then its unemployment rate is: a. 4 percent. b. 7.5 percent. *c. 10 percent. d. 67.5 percent.
21. If a country has a working-age population of 200 million, 120 million people with
jobs, and 30 million people unemployed and seeking employment, then its unemployment rate is: a. 5 percent. b. 7.5 percent. c. 15 percent. *d. 20 percent.
22. If a country has a working-age population of 200 million, 135 million people with
jobs, and 15 million people unemployed and seeking employment, then its labor force is: a. 335 million. b. 200 million. c. 155 million. *d. 150 million.
23. The labor force is equal to the: *a. sum of employment and unemployment. b. population minus the number of employed. c. sum of the employed and the underemployed. d. number of people working in the economy.
24. To be classified as unemployed, a person must be:
a. not working. *b. not working and actively looking for a job in the last four weeks. c. not working or working part-time when he or she wishes to be working full time. d. not working and actively looking for a job in the last four weeks or discouraged and not actually looking for a job.
25. Which statement is true? a. The number of people not working but who have looked for work in the past year are unemployed. *b. The labor force is the total number of people working plus those who are unemployed. c. The unemployment rate is the number of people unemployed expressed as a percentage of the population. d. The labor force is the same as the population.
26. A person who is not working and is not looking for work is: a. included in the unemployment rate. b. underemployed. c. a member of the labor force who is not working. *d. not counted in the unemployment statistics.
27. The labor force is considered to be: a. everyone who is employed. *b. everyone who is employed plus everyone who is unemployed. c. the population of the nation. d. those not frictionally unemployed plus all others employed.
28. The statistics and data on unemployment are gathered and reported: a. daily. b. weekly. *c. monthly. d. yearly.
29. You are a college student and not working or looking for work. You are: a. unemployed. b. in the labor force but not employed. *c. not part of the labor force. d. counted as part of the labor force as a discouraged worker.
30. The percentage of the labor force that is unemployed is the: a. labor force participation rate. b. employment ratio. *c. unemployment rate. d. natural employment rate.
31. A person without a job who is actively seeking and available for work is
considered: a. employed. *b. unemployed. c. underemployed. d. marginally attached.
32. A person who has no job but is looking for one is: a. unemployed. b. a discouraged worker. c. part of the labor force. *d. unemployed and part of the labor force.
33. In order to be officially unemployed, a person must be: *a. looking for work in the past four weeks. b. under 55 years old. c. eligible for social security. d. receiving disability payments.
34. The rate of unemployment is found by dividing the: a. number of people looking for work by the population. *b. number of people looking for work by the number of people looking for work plus the number of people employed. c. labor force by the number of people looking for work. d. unemployed and discouraged workers by the labor force.
35. A survey reveals that on a small island 40 people have jobs, 10 people are
looking for jobs, and 30 people are neither working nor looking for work. The unemployment rate on the island is: a. 12.5 percent. *b. 20 percent. c. 25 percent. d. 50 percent.
36. A survey reveals that on a small island initially 40 people have jobs, 10 people
are looking for jobs, and 30 people are neither working nor looking for work. Suppose that 10 of the 30 people who weren't looking for work now begin looking for work. There are now 20 people looking for work and 40 people working. What happens to the unemployment rate? *a. It rises to 33.3 percent. b. It rises to 50 percent. c. It falls to 25 percent. d. Nothing happens to the unemployment rate, because these people weren't working before and they aren't working now.
37. A survey reveals that on a small island 100 people have jobs, 25 people are
looking for jobs, and 45 people are neither working nor looking for work. The unemployment rate on the island is: a. 12.5 percent. *b. 20 percent. c. 25 percent. d. 50 percent.
38. A survey reveals that on a small island initially 100 people have jobs, 25 people
are looking for jobs, and 45 people are neither working nor looking for work. Suppose that 15 of the 45 people who weren't looking for work now begin looking for work. There are now 40 people looking for work and 100 people working. What happens to the unemployment rate? a. It falls to 20 percent. *b. It rises to 28.6 percent. c. It rises to 50 percent. d. Nothing happens to the unemployment rate, because these people weren't working before and they aren't working now.
39. A survey reveals that on a small island 1000 people have jobs, 250 people are
looking for jobs, and 450 people are neither working nor looking for work. The unemployment rate on the island is: *a. 20 percent. b. 25 percent. c. 45 percent. d. 15.6 percent.
40. A survey reveals that on a small island initially 1000 people have jobs, 250
people are looking for jobs, and 450 people are neither working nor looking for work. Suppose that 150 of the 450 people who weren't looking for work now begin looking for work. There are now 400 people looking for work and 1000 people working. What happens to the unemployment rate?
a. It falls to 20 percent. *b. It rises to 28.6 percent. c. It rises to 50 percent. d. Nothing happens to the unemployment rate, because these people weren't working before and they aren't working now.
41. A survey reveals that on a small island 1000 people have jobs, 200 people are
looking for jobs, and 200 people are neither working nor looking for work. The unemployment rate on the island is: a. 12.5 percent. *b. 16.7 percent. c. 20 percent. d. 30 percent.
42. A survey reveals that on a small island initially 1000 people have jobs, 200
people are looking for jobs, and 200 people are neither working nor looking for work. Suppose that 100 of the 200 people who weren't looking for work now begin looking for work and that half of the new entrants successfully find a job. What happens to the unemployment rate? *a. It rises to 19.2 percent. b. It rises to 21.4 percent. c. It rises to 28.6 percent. d. Nothing happens to the unemployment rate.
43. Suppose there are 70 million people in the labor force, of whom 60 million are
employed. The unemployment rate is: a. 7 percent. b. 10 percent. *c. 14.28 percent. d. 4.2 percent.
44. Which calculation is correct? a. Unemployment rate = unemployed / employed x 100 b. Unemployment rate = unemployed / population x 100 c. Unemployment rate = employed / labor force x 100 *d. Unemployment rate = unemployed / labor force x 100
45. In 2011, 10 million people did not have a job but were actively looking for
employment and 85 million people had either a full-time or a part-time job. Based on this information, the unemployment rate in 2011 was:
a. 10 percent. b. 9.5 percent. *c. 10.5 percent. d. 8.5 percent.
46. The country of Livonia has an adult population of 100 million; 60 percent of
Livonia's population is employed, but 10 percent of the people are unemployed. The labor force participation rate in Livonia is: *a. 70 percent. b. 60 percent. c. 7 percent. d. 10 percent.
47. If the labor force totals 100 million workers and 90 million are actively working,
then the unemployment rate is: a. 1 percent. b. 5 percent. *c. 10 percent. d. 90 percent.
48. If the labor force includes 100 million workers and 5 million people are
unemployed but actively seeking work, then the unemployment rate is: a. 1 percent. *b. 5 percent. c. 10 percent. d. 95 percent.
49. If 99 million people are working and 1 million are unemployed but actively
seeking work, then the unemployment rate is: *a. 1 percent. b. 5 percent. c. 10 percent. d. 100 percent.
50. If the population of the United States is 260 million, the labor force is 130
million, and 120 million workers are employed, the rate of unemployment is: *a. 7.7 percent. b. 8.3 percent. c. 50 percent. d. 92 percent.
51. If the rate of unemployment is 10 percent and the labor force is 130 million, the
number of unemployed workers is: a. 10 percent. *b. 13 million. c. 10 million. d. 8 million.
52. If there are 100 million people in the total population, a labor force of 50 million,
and 47 million employed workers, the unemployment rate is: a. 3 percent. *b. 6 percent. c. 8 percent. d. 10 percent.
53. Which most accurately describes how to calculate the unemployment rate? a. (unemployed / population) × 100 b. (unemployed / employed) × 100 *c. (unemployed / labor force) × 100 d. [(unemployed – employed) / labor force] × 100
54.
Reference: Ref 13-4
(Table: Labor Force Data) Using the data from the Table: Labor Force Data, suppose the labor force participation rate is 70 percent. The labor force is equal to: a. 1200 million. b. 50 million. *c. 105 million. d. 400 million.
55.
Reference: Ref 13-4
(Table: Labor Force Data) Using the data from the Table: Labor Force Data, suppose the labor force participation rate is 70 percent. The number of unemployed adults is: *a. 8 million. b. 53 million. c. 103 million. d. 50 million.
56.
Reference: Ref 13-4
(Table: Labor Force Data) According to the Table: Labor Force Data, if the labor force participation rate in this economy is 70 percent, the unemployment rate is: *a. 7.6 percent. b. 5 percent. c. 4 percent. d. 3 percent.
57.
Reference: Ref 13-5
(Table: Labor Force Distribution) Based on the Table: Labor Force Distribution, the total population is: a. 486 million. b. 253 million. *c. 278 million. d. 283 million.
58.
Reference: Ref 13-5
(Table: Labor Force Distribution) Based on the Table: Labor Force Distribution, the unemployment rate is: *a. 3.85 percent. b. 10 percent. c. 4.55 percent. d. 6.75 percent.
59. Employment is the total number of people who are: a. working full time. *b. working either full or part time. c. working and earning above minimum wage. d. either working or volunteering for community organizations.
60. Unemployment is the total number of people: a. collecting unemployment benefits. b. working for a wage less than what they would like. c. working fewer hours than they would like. *d. who are actively looking for work but aren't currently employed.
61. The sum of employment and unemployment is known as the: *a. labor force. b. employment base. c. human capital index. d. worker input index.
62. The labor force participation rate is the portion of: a. a person's life spent working. b. the labor force working full time. *c. the working-age population in the labor force. d. a person's waking hours spent working.
63. The unemployment rate is the: a. portion of the population unemployed. *b. portion of the labor force unemployed. c. ratio of the number unemployed to the number employed. d. difference between the number unemployed and the number employed.
64. To be considered unemployed, a person must: a. have turned down at least one job offer. b. be receiving unemployment benefits. c. have been laid off from a prior job. *d. be actively seeking work, but currently not working.
65. The unemployment rate is based on numbers collected from a monthly survey
of _______ families. a. 100,000 b. 75,000 *c. 60,000 d. 25,000
66. If a country has a working-age population of 200 million, 135 million people with
jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then its labor force is: a. 150 million. b. 145 million. *c. 140 million. d. 135 million.
67. If a country has a working-age population of 200 million, 135 million people with
jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then the number of discouraged workers is: a. 25 million. b. 15 million. *c. 10 million. d. 5 million.
68. A person who is out of work, would like to work, but has given up looking for
work is called: a. unemployed. b. employed. *c. a discouraged worker. d. a lazy nonworker.
69. Suppose that roughly 8 million people in the United States were actively seeking
jobs but had not found them this month, the same number as last month. Suppose that 2 million of the people who were unemployed last month gave up their search this month and stopped looking for work. What will happen to the unemployment rate this month, all other things unchanged? a. It will rise, because 2 million people are not in the labor force this month and are not counted as unemployed. *b. It will fall, because 2 million people are not in the labor force this month and are not counted as unemployed. c. It will be unaffected, because the same number of people are unemployed. d. The unemployment rate will decrease by 25 percent.
70. The Bureau of Labor Services calculates U6. This measures the: *a. underutilization of labor that includes discouraged workers, marginally attached workers, and underemployed workers. b. utilization of labor based on different demographics. c. labor force participation rate in a more comprehensive way. d. rate of overutilization of labor when workers hold multiple jobs.
71. The official unemployment rate reported by the government may tend to
understate the amount of unemployment because it: a. includes discouraged workers in the calculations. *b. excludes discouraged workers who are not actively seeking employment.
c. includes people over 65 who aren't retired in the calculations. d. excludes teenagers from the calculations.
72. Discouraged workers are those individuals who: a. are getting paid too little. b. do not like their job. c. are working part time but are looking for a full-time job. *d. have given up looking for a job.
73. According to official statistics, discouraged workers are: a. included in the employment statistics. b. included in the labor force. *c. not included in the labor force. d. treated just like the underemployed.
74. The official unemployment rate ignores: a. people with professional jobs. b. people who work on commission. *c. discouraged workers who have given up looking for a job. d. people with professional jobs, people who work on commission, and discouraged workers who have given up looking for a job.
75. Which situation is likely to lead to an increase in discouraged workers? a. The economy is expanding. *b. The availability of jobs falls. c. The economy is experiencing inflation. d. The economy is experiencing deflation.
76. An increase in the number of discouraged workers in the economy tends to: a. raise the official unemployment rate. *b. lower the official unemployment rate. c. lower the number of people who are frictionally unemployed. d. increase the number of people who are structurally unemployed.
77. Donna was laid off by her employer at the beginning of 2011. She looked for a
job for three months, but could not find anything suitable. She then decided to volunteer for a soup kitchen and stopped looking for a job. Donna is considered to be: a. unemployed.
b. underemployed. *c. a discouraged worker. d. a part-time worker.
78. Economists claim that the unemployment rate can understate the true level of
unemployment because none of the following groups are included, EXCEPT: a. discouraged workers. b. marginally attached workers. c. underemployed workers. *d. workers without jobs who have looked for work in the last four weeks.
79. Jim has a part-time job and would prefer to have a full-time job but has been
unable to find full-time work. Jim is classified as: a. a discouraged worker. *b. an underemployed worker. c. an unemployed worker. d. out of the labor force.
80. Which federal agency calculates and reports the official unemployment rate? a. Federal Reserve Bank b. Treasury Department c. Department of Health and Human Services *d. Bureau of Labor Statistics
81. Suppose that Allison has an accounting degree, but she lost her job two months
ago when her company merged with another firm. Allison hasn't been able to find another full-time accounting job, so she has taken a part-time job as a sales clerk at a clothing store. The Bureau of Labor Statistics would classify Allison as: a. a marginally attached worker. b. a discouraged worker. *c. underemployed. d. unemployed.
82. Suppose that Allison has an accounting degree, but she lost her job two months
ago when her company merged with another firm. Allison hasn't been able to find another accounting job, so she has taken a part-time job as a sales clerk at a clothing store. As a result the official unemployment rate will: a. not change. b. increase. *c. decrease. d. increase temporarily, then fall back to its original level.
83. Unemployment rates are usually highest for: a. white teenagers. *b. African-American teenagers. c. male workers from ages 25 to 54. d. female workers from ages 25 to 54.
84. Individuals who give up looking for work because they don't feel that there are
good prospects of finding a job are known as: a. the lost labor force. *b. discouraged workers. c. idle human capital. d. the forgotten unemployed.
85. If there are discouraged workers, the measured: a. unemployment rate may overstate the percentage of people who would like to work but are unable to find jobs. *b. unemployment rate may understate the percentage of people who would like to work but are unable to find jobs. c. size of the labor force will overstate the number of people available for work. d. labor force participation rate will overstate the true labor force participation.
86. Which individual would be counted as unemployed? *a. an individual who is currently not working, but is looking for work in a high-paying industry b. a discouraged worker c. a marginally attached worker d. a worker who is underemployed
87. Which federal agency calculates the official unemployment rate? a. Department of Commerce b. Congressional Budget Office *c. Bureau of Labor Statistics d. U.S. Treasury
88. Which labor market measure includes the underemployed, discouraged
workers, and marginally attached workers along with the unemployed as a measure of labor underutilization?
a. U2 *b. U6 c. U12 d. The Universal Labor Index
89. Which of the following statements is FALSE? a. Unemployment always rises during recessions. *b. Unemployment always falls during expansions. c. There is a strong negative relation between growth in real GDP and changes in unemployment. d. In general, there is a trade-off between inflation and unemployment in the short run.
90. If the growth rate of GDP is above its historical average, then there is a
tendency for the unemployment rate to: a. fall to zero. b. rise. *c. fall. d. stabilize.
91. During a recession: a. unemployment and the growth rate of real GDP both decrease. b. unemployment decreases and the growth rate of real GDP increases. *c. unemployment increases and the growth rate of real GDP decreases. d. there is no relation between unemployment and the growth rate of real GDP.
92. In general, for the U.S. economy, the relation between unemployment and
economic growth is: a. positive. b. direct. c. neutral. *d. negative.
93. According to historical economic data for the United States from 1949 to 2012,
the unemployment rate is most likely to rise: *a. whenever the economy grows at a rate below 3.19 percent. b. only when there is zero percent economic growth. c. only when there is positive economic growth. d. whenever the economy grows at a rate between 4 percent and 4.8 percent.
94. For most of U.S. modern economic history, when the unemployment rate is
_____, real GDP is _____. *a. falling; rising b. falling; falling c. rising; unchanged d. rising; rising
95. In general, expansions are characterized by: a. increasing unemployment. *b. falling unemployment c. decreasing employment. d. constant employment.
96. Periods of recession are likely to be marked by: *a. rising unemployment. b. constant unemployment. c. increasing employment. d. constant employment.
97. Since the 1950s, U.S. data show that a. the unemployment rate always falls during a period of economic expansion. b. the unemployment rate has steadily declined since 1950. c. changes in GDP do not impact the unemployment rate in any predictable way. *d. falling real GDP is always associated with a rising rate of unemployment.
98. The unemployment rate is the ratio of the unemployed to the labor force. *a. True b. False
99. Discouraged workers are people who are not working, who want to work, but who are not actively looking for a job. *a. True b. False
100. Discouraged workers is another term for the unemployed.
a. True *b. False
101. Underemployed people are counted as employed even though they are not fully using their skills. *a. True b. False
102. Counted among the unemployed are underemployed people who cannot find a job working as many hours as they wish. a. True *b. False
103. The official unemployment rate is a useful but not altogether accurate measure of joblessness. *a. True b. False
104. A high unemployment rate implies a high level of GDP. a. True *b. False
105. A jobless recovery occurs when GDP is growing at a below-average rate and unemployment is rising. *a. True b. False
106. A jobless recovery occurs when GDP is decreasing and unemployment is rising. a. True *b. False
107. Since the 2007 recession, recent college graduates, ages 21-23, have had an unemployment rate lower than any other age group in the labor force. a. True *b. False
108. Since 2007 unemployment rates have been higher than average for recent college graduates because they are less qualified than graduates of the 1990s. a. True *b. False
109. Some economists argue that the official unemployment rate understates the true level of unemployment. Summarize these arguments. Correct Answer:
If workers are not actively seeking work because they have grown discouraged over job prospects, they are categorized as discouraged workers. These workers are not counted in the official ranks of the unemployed, yet their lack of work is real. There are some workers, the underemployed, who would like to have a full time job but cannot find one, so they are working at a part-time job. These workers are officially classified as employed, yet they are being underutilized. Adding the discouraged workers and underemployed workers to the official ranks of the unemployed would increase the unemployment rate.
110. Reference: Ref 13-6 (Table: Dexter's Employment Statistics) Use the Table: Dexter's Employment Statistics to complete the following computations. A) What is the size of the labor force in Dexter? B) What is the labor force participation rate in Dexter? Correct Answer:
A) The labor force is the sum of the employed and the unemployed that are looking for work. LF = 7000 + 900 = 7900. B) The labor force participation rate is the labor force divided by the population aged 16 and older. LFPR = 7900/9600 = 82.3 percent. 111. Reference: Ref 13-6 (Table: Dexter's Employment Statistics) Use the Table: Dexter's Employment Statistics to complete the following computations. A) What is the unemployment rate? B) If we include the discouraged workers, what is the unemployment rate?
Correct Answer:
A) The unemployment rate is the number of unemployed looking for work divided by the labor force. UR = 900/7900 = 11.4 percent. B) The inclusion of discouraged workers increases the ranks of the unemployed by 500 and also increases the labor force by 500. New UR = 1400/8400 = 16.7 percent.
112. Two primary goals for macroeconomists are: a. zero percent unemployment and price stability. b. zero percent frictional unemployment and price stability. *c. price stability and low unemployment. d. zero percent structural unemployment and price stability.
113. To be classified as unemployed, a worker must: a. be working less than full time (40 hours a week). *b. not have a job and must be actively looking for work. c. not be looking for a job and must not have a job. d. be a discouraged worker.
114. Unemployment rates tend to: a. be the same across geographic areas. *b. vary depending upon age groups and ethnicities. c. increase when an expansion in the economy occurs. d. stay the same only when there is cyclical unemployment.
115. The presence of discouraged workers causes the: a. actual unemployment rate to increase when the workers are not included in the unemployment calculation. *b. actual unemployment rate to understate the true level of unemployment. c. actual unemployment rate to overstate the true level of unemployment. d. natural rate of unemployment to increase.
116. Sally works 20 hours a week for an accounting firm. She would like to work full
time and expects that she will in the future. Sally is a(n): a. discouraged worker b. unemployed worker *c. underemployed worker d. full time worker
117. Low unemployment rates are often: a. associated with recessions. *b. associated with an ability to find a job with relative ease. c. an indicator of the difficulty of finding a job. d. the result of high cyclical unemployment rates.
118. Unemployment rates tend to decrease when: *a. there is an expansion in the economy. b. discouraged workers become active job seekers. c. underemployed workers become unemployed. d. a contraction in the economy occurs.
119. Looking at past data, one finds that when the unemployment rate has
increased, the annual growth rate of real GDP has usually: a. increased. *b. decreased. c. not changed. d. no relationship with changes in the unemployment rate.
120. Scenario: Employment in Xenia
Xenia has 10,000 people. Of this population, 1000 residents are below the age of 16 and 2000 have given up looking for work. Currently, 500 people are unemployed but are actively looking for work; 2500 work part time, and the remaining number are fully employed. Reference: Ref 13-7
(Scenario: Employment in Xenia) According to the Scenario: Employment in Xenia, what is the unemployment rate? *a. 7.14 percent b. 4.25 percent c. 11.11 percent d. 2 percent
121. Scenario: Employment in Xenia
Xenia has 10,000 people. Of this population, 1000 residents are below the age of 16 and 2000 have given up looking for work. Currently, 500 people are unemployed but are actively looking for work; 2500 work part time, and the remaining number are fully employed. Reference: Ref 13-7
(Scenario: Employment in Xenia) According to the Scenario: Employment in
Xenia, suppose the number of workers who had given up looking for work start looking for work. What happens to the unemployment rate? *a. The unemployment rate will increase. b. The unemployment rate will decrease. c. The unemployment rate is unaffected by this change. d. It is uncertain what will happen to the unemployment rate.
122. Scenario: The Employment Rate
In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one unemployed worker, and two full time workers. Reference: Ref 13-8
(Scenario: The Employment Rate) According to the Scenario: The Employment Rate, the unemployment rate is: a. 10 percent. b. 30 percent. *c. 20 percent. d. 50 percent.
123. Scenario: The Employment Rate
In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one unemployed worker, and two full time workers. Reference: Ref 13-8
(Scenario: The Employment Rate) According to the Scenario: The Employment Rate, the labor force participation rate is: a. 30 percent. *b. 50 percent. c. 70 percent. d. 80 percent.
124. Scenario: The Employment Rate
In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one unemployed worker, and two full time workers. Reference: Ref 13-8
(Scenario: The Employment Rate) According to the Scenario: The Employment Rate, if the discouraged workers in this group became active job searchers, then the: a. unemployment rate would fall. *b. unemployment rate and the labor force participation rate would rise.
c. labor force participation rate would fall. d. unemployment rate and the labor force participation rates would both fall.
1. Anna recently moved to Boston in order for her husband Joe to begin a new job
as an economics professor at Harvard. Anna is an experienced surgeon who is interviewing with several hospitals in Boston. Anna is: *a. frictionally unemployed. b. structurally unemployed. c. cyclically unemployed. d. counted as employed, since she is likely to receive a job offer soon.
2. All are examples of job search EXCEPT: *a. attending class at a community college to learn database management. b. sitting at a coffee shop while reading the employment section of the local newspaper. c. calling a former college roommate to see if there are any job openings in her company. d. visiting a former college professor to learn about potential work as a research assistant.
3. Unemployment that is due to the time workers spend in job search is considered: *a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. natural unemployment.
4. Last week Stephanie quit her job as a copywriter at an advertising agency. She
has spent the past few days browsing the help wanted ads but hasn't found anything that matches her skills. Stephanie is best classified as: a. structurally unemployed. *b. frictionally unemployed. c. a discouraged worker. d. out of the labor force.
5. Unemployment that occurs because it takes workers and employees time to find
each other is called: a. cyclical unemployment. b. structural unemployment. *c. frictional unemployment. d. discouraged unemployment.
6. People who are in the process of changing jobs are counted in which category?
*a. frictional unemployment b. involuntary unemployment c. structural unemployment d. cyclical unemployment
7. A recent college graduate with a major in economics attends a job fair but has
not yet found a job. This graduate is counted as a: a. structurally unemployed worker. b. seasonally unemployed worker. c. cyclically unemployed worker. *d. frictionally unemployed worker.
8. When the unemployment rate is very low, most of the unemployment tends to be: a. cyclical. *b. frictional. c. seasonal. d. structural.
9. A person who spends time looking for work is: *a. engaged in job search. b. counted as employed. c. counted as out of the labor force. d. usually counted as a discouraged worker.
10. Frictional unemployment exists because of all of these reasons EXCEPT: a. that new jobs are continually being created. b. that some old jobs are always being destroyed. c. that new workers are always entering the labor market. *d. for the minimum wage.
11. A limited amount of frictional unemployment is considered to be: a. bad, because people are not getting a paycheck. b. good, because people learn how others live. *c. good, since that means people may be seeking for jobs that match their job skills. d. bad, because people are out of work.
12. An example of the frictionally unemployed is a(n): a. autoworker who is temporarily laid off because of a decline in sales.
b. geologist who is permanently laid off from an oil company due to a new technological advance. c. worker at a fast-food restaurant who quits work and attends college. *d. real estate agent who leaves a job in Texas and searches for a similar, higher-paying job in California.
13. A worker classified as frictionally unemployed is one who is: a. laid off during a recession. b. discouraged and has dropped out of the labor force. *c. unemployed while looking for a job that demands his or her skills. d. working part-time but would prefer to work full-time.
14. Ron quit his job in retail management and moved to Florida with his wife, a
physician who opened a new practice there. He was not successful in his job search for the next four months. Ron's unemployment is known as: a. structural unemployment. b. cyclical unemployment. *c. frictional unemployment. d. seasonal unemployment.
15. Internet employment agencies have simplified the job search for the applicants.
They have also led to a(n): a. increase in frictional unemployment. b. increase in cyclical unemployment. *c. decrease in frictional unemployment. d. decrease in structural unemployment.
16. Most economists agree that sufficiently high minimum wage laws: *a. actually create more unemployment. b. help lower the unemployment rate. c. decrease the labor force participation rate. d. create an opportunity for discouraged workers.
17. Structural unemployment is: *a. unemployment that results when there are more people seeking jobs than there are jobs available at the current wage rate. b. unemployment experienced by those entering the labor force for the first time. c. zero when the economy is in full employment. d. caused by short-run economic fluctuations.
18. Structural unemployment consists of people who are unemployed because of: a. temporary changes in jobs. b. an excess in the quantity of labor demanded over the quantity of labor supplied. c. the time it takes for employers and workers to find each other. *d. more people seeking jobs in a labor market than there are jobs available at the current wage rate.
19. An example of structural unemployment is a(n): a. autoworker who is temporarily laid off from an automobile company because of a decline in sales. *b. geologist who is permanently laid off from an oil company because of an increase in wages won by labor unions. c. worker at a fast-food restaurant who quits work and attends college. d. real estate agent who leaves a job in Texas and searches for a similar, higher-paying job in California.
20. Sam, who is 55 years old and has been a steelworker for 30 years, is
unemployed because the steel plant in his town closed and moved to Mexico. Sam is experiencing: a. cyclical unemployment. b. permanent unemployment. c. frictional unemployment. *d. structural unemployment.
21. The labor demand curve is negatively sloped because: a. more people are willing to work at lower wages than at higher wages. b. more people are willing to work at higher wages than at lower wages. *c. employers are willing to hire more people at lower wages. d. employers are willing to hire more people at higher wages.
22. The labor supply curve is positively sloped because: a. more people are willing to work at lower wages than at higher wages. *b. more people are willing to work at higher wages than at lower wages. c. employers are willing to hire more people at lower wages. d. employers are willing to hire more people at higher wages.
23. Unemployment that results when there are more people seeking jobs in a labor
market than there are jobs available is called: a. frictional unemployment. *b. structural unemployment. c. cyclical unemployment. d. natural unemployment.
24. Structural unemployment can be caused by all EXCEPT: a. minimum wages. b. labor unions. c. efficiency wages. *d. fluctuations in the business cycle.
25. All of these create structural unemployment EXCEPT: a. a government-mandated price ceiling on the price of labor set above the equilibrium wage. b. collective bargaining efforts that secure higher wages for unionized workers than for nonunionized workers. c. offering high wages in order to attract high-quality workers. *d. granting Social Security benefits to laid-off workers.
26. Structural unemployment means there are: *a. more people seeking work than there are jobs in a particular labor market. b. more jobs than workers in a particular industry. c. wages that are too low in a particular industry. d. people just entering the labor force.
27. Last month Brent lost his job at the auto parts factory because his factory, like
many others, relocated to Asia. Brent has been looking for similar factory jobs in his town but has found no openings. Brent is best classified as: *a. structurally unemployed. b. frictionally unemployed. c. a discouraged worker. d. out of the labor force.
28. Last month Brent lost his job at the auto parts factory because his factory, like
many others, relocated to Asia. Brent and his former co-workers have been looking for similar factory jobs in the town, but they have found no openings. Which best describes what has happened to the labor market in Brent's town?
a. The supply of labor has fallen. b. The supply of labor has risen. c. The demand for labor has risen. *d. The demand for labor has fallen.
29. If a worker becomes unemployed because of an increase in the minimum wage,
that worker is: a. frictionally unemployed. *b. structurally unemployed. c. cyclically unemployed. d. engaged in job search.
30. A binding minimum wage in a labor market is set _____ the equilibrium wage
and creates a _____ of labor. a. below; surplus b. below; shortage *c. above; surplus d. above; shortage
31. Figure: The Minimum Wage
Reference: Ref 14-1
(Figure: The Minimum Wage) Look at the Figure: The Minimum Wage on the labor market. Which of the following is a binding minimum wage? a. P1. b. P2. *c. P3. d. 0.
32. Figure: The Minimum Wage
Reference: Ref 14-1
(Figure: The Minimum Wage) Look at the Figure: The Minimum Wage on the labor market. What is the quantity of labor demanded at a binding minimum wage of P3?
*a. Q1. b. Q2. c. Q3. d. Q4.
33. Figure: The Minimum Wage
Reference: Ref 14-1
(Figure: The Minimum Wage) Look at the Figure: The Minimum Wage on the labor market. What is the quantity of labor supplied at a binding minimum wage of P3? a. Q1. b. Q2. c. Q3. *d. Q4.
34. Figure: The Minimum Wage
Reference: Ref 14-1
(Figure: The Minimum Wage) Look at the Figure: The Minimum Wage on the labor market. The binding minimum wage of P3 leads to unemployment of: a. Q3 – Q1. b. Q3 – Q2. *c. Q4 – Q1. d. Q4 – Q2.
35. Figure: The Minimum Wage
Reference: Ref 14-1
(Figure: The Minimum Wage) Look at the Figure: The Minimum Wage on the labor market. By how much does the quantity of labor supplied rise when the government imposes a binding minimum wage of P3? a. Q4 – Q1. b. Q3 – Q2. c. Q2 – Q1. *d. Q4 – Q2.
36. Figure: The Minimum Wage
Reference: Ref 14-1
(Figure: The Minimum Wage) Look at the Figure: The Minimum Wage on the labor market. By how much does the quantity of labor demanded fall when the government imposes a binding minimum wage of P3? a. Q4 – Q1. b. Q3 – Q2. *c. Q2 – Q1. d. Q4 – Q2.
37. A binding minimum wage does all of these EXCEPT: a. decrease the quantity of labor demanded. b. increase unemployment. c. increase the amount of labor supplied. *d. decrease the amount of labor supplied.
38. Figure: The Effect of a Minimum Wage
Reference: Ref 14-2
(Figure: The Effect of a Minimum Wage) Look at the Figure: The Effect of a Minimum Wage. Suppose the labor market is in equilibrium at E when the government imposes a minimum wage of WF. One problem that may arise is that the quantity of labor supplied would ______, resulting in structural unemployment. a. decrease to QD b. stay at QE *c. increase to QS d. stay at WE
39. Figure: The Effect of a Minimum Wage
Reference: Ref 14-2
(Figure: The Effect of a Minimum Wage) Look at the Figure: The Effect of a
Minimum Wage. Suppose the labor market is in equilibrium at E when the government imposes a minimum wage of WF. Structural unemployment will equal: *a. QS – QD. b. QE – QD. c. QS – QE. d. 0.
40. Figure: The Effect of a Minimum Wage
Reference: Ref 14-2
(Figure: The Effect of a Minimum Wage) Look at the Figure: The Effect of a Minimum Wage. Suppose that after some time with a minimum wage of WF, the government abolishes the minimum wage. Employment would: a. decrease to QE. *b. increase to QE. c. stay at QE. d. decrease to QD.
41. A minimum wage of $7.25 per hour might cause structural unemployment if the
equilibrium wage in that labor market is: a. $7.25. b. $8.00. *c. $6.85. d. $7.30.
42. In the absence of minimum wages, efficiency wages, or labor unions, a decline
in the demand for labor will likely result in which if wages are flexible? a. higher levels of employment b. no changes in employment *c. lower level of employment but likely no change in the unemployment rate d. lower level of employment and a higher unemployment rate
43. When the demand for labor is falling and employers have committed to high
wages, ______ unemployment will result. a. frictional b. cyclical c. permanent *d. structural
44. Firms pay an efficiency wage because: *a. it reduces the risk of losing the best workers. b. it is required by law. c. they don't have to offer health insurance if they pay efficiency wages. d. it reduces the employee's income tax liability.
45. Efficiency wages are usually set by employers to: a. reduce unemployment. b. increase employment. *c. provide an incentive for better performance. d. increase employment and provide better incentives for performance.
46. Efficiency wages are: *a. above equilibrium to encourage better performance. b. below equilibrium to encourage better performance to get a raise. c. responsible for all structural unemployment. d. above equilibrium to encourage better performance and are responsible for all structural unemployment.
47. Efficiency wages encourage: a. workers to look for a better job. b. potential workers to remain out of the labor force. *c. workers to stay in their current job. d. workers to get more job training.
48. Efficiency wages are: a. market equilibrium wages. *b. set above equilibrium wages to act as an incentive for better performance. c. set below the equilibrium wage to increase firm profits. d. wages that are allowed to be below minimum wage.
49. If the actual unemployment rate is 7 percent and the cyclical unemployment rate
is 2 percent, then the natural rate of unemployment is: a. 2 percent. *b. 5 percent.
c. 7 percent. d. 9 percent.
50. If the actual unemployment rate is 7 percent and the natural rate of
unemployment is 5 percent, then the cyclical unemployment rate is: *a. 2 percent. b. 5 percent. c. 7 percent. d. 9 percent.
51. If actual unemployment is 6.2 percent and the natural rate of unemployment is 4
percent, cyclical unemployment is: a. 6.2 percent. b. 10.2 percent. c. 4 percent. *d. 2.2 percent.
52. The natural rate of employment is achieved when: a. the actual rate of unemployment is equal to zero. b. the natural rate of unemployment is equal to the actual rate of unemployment. c. the quantity of labor supplied is equal to the quantity of labor demanded. *d. there is no cyclical unemployment.
53. The natural rate of unemployment is: a. the rate of unemployment that exists during recessions. b. equal to the sum of frictional and cyclical unemployment. *c. equal to the sum of frictional and structural unemployment. d. cyclical unemployment less frictional unemployment.
54. The rate of unemployment that exists when the economy is at full employment
is: a. zero. *b. the natural rate of unemployment. c. the structural rate of unemployment. d. less than full employment rate of unemployment.
55. The deviations in the actual rate of unemployment away from the natural rate of
unemployment is called:
a. seasonal. b. frictional. *c. cyclical. d. structural.
56. Cyclical unemployment is characterized as: a. unemployment that occurs when people are between jobs. b. a lack of good matches between available jobs and the skills people have. c. the normal unemployment around which the actual unemployment rate fluctuates. *d. the deviation in the actual rate of unemployment away from the natural rate.
57. Deviations from the natural rate of unemployment are known as: a. frictional unemployment. b. structural unemployment. c. random unemployment. *d. cyclical unemployment.
58. Which equation describes the calculation of the natural unemployment rate? *a. natural unemployment = frictional unemployment + structural unemployment b. natural unemployment = cyclical unemployment + structural unemployment c. natural unemployment = frictional unemployment + cyclical unemployment d. natural unemployment = frictional unemployment + structural unemployment + cyclical unemployment
59. Which is an example of someone who is cyclically unemployed? *a. an autoworker who is laid off because of a decline in sales caused by a recession b. a geologist who is permanently laid off from an oil company due to a new technological advance c. a worker at a fast-food restaurant who quits work and attends college d. a real estate agent who leaves a job in Texas and searches for a similar, higher-paying job in California
60. Unemployment is at its natural level if there is no: a. unemployment. b. frictional unemployment.
c. structural employment. *d. cyclical unemployment.
61. The sum of the frictional and structural rates of unemployment is called the: a. cyclical rate of unemployment. b. cyclical rate of employment. *c. natural rate of unemployment. d. natural rate of employment.
62. Cyclical unemployment: *a. rises during a recession. b. falls during a recession. c. rises during an expansion. d. is a part of natural unemployment.
63. The natural rate of unemployment is: a. composed of frictional, structural, and cyclical unemployment. b. equal to zero. c. always greater than the actual unemployment rate. *d. composed of structural and frictional unemployment.
64. The natural level of unemployment contains no _________ unemployment. a. minority b. structural c. frictional *d. cyclical
65. Cyclical unemployment is the result of: a. normal job turnover (job searches). b. discrimination. *c. the business cycle. d. the minimum wage.
66. When the economy is at full employment: a. there is no unemployment. *b. cyclical unemployment is zero. c. frictional unemployment is zero. d. the natural rate of unemployment is zero.
67. In February of 2012, the Bureau of Labor Statistics calculated the
unemployment rate to be 8.3 percent. If frictional unemployment was 2 percent and structural unemployment was 3.2 percent, then cyclical unemployment would be: a. 2.5 percent. *b. 3.1 percent. c. 12.5 percent. d. 5.5 percent.
68. In February of 2012, the Bureau of Labor Statistics calculated the
unemployment rate to be 8.3 percent. If frictional unemployment was 3.1 percent and structural unemployment was 3.2 percent, then the natural rate of unemployment would be: a. 4.5 percent. *b. 2.0 percent. c. 1 percent. d. 5.5 percent.
69. The National Bureau of Economic Research announced that the U.S. economic
recession that began in December of 2007 hit a trough in June of 2009. During that period, which type of unemployment increased for sure? a. frictional unemployment b. natural unemployment *c. cyclical unemployment d. structural unemployment
70. According to the Bureau of Labor Statistics, the actual unemployment rate in the
economy was 8.3 percent in February of 2012 and the natural rate of unemployment was 5.2 percent. The: a. frictional unemployment rate was 4 percent. *b. cyclical unemployment rate was 3.1 percent. c. structural unemployment rate was 4 percent. d. cyclical unemployment rate was 14 percent.
71. Which is an example of a cyclically unemployed worker? a. Julio, a statistician, lost his job in a forecasting firm and now does consulting work part time. *b. Jennifer, an accountant, spends her days at home reading The New York Times and mailing out her résumé. c. Ana Maria, a business major, received a job offer during her senior year but has yet to start working. d. Ulysses, a high school dropout, joined the army.
72. Which statement is FALSE? a. Both frictional and structural unemployment can occur even if unemployment is at its natural level. b. Cyclical unemployment is unemployment that is in excess of that associated with the natural level of employment. c. A new college graduate looking for a first professional job may experience frictional unemployment. *d. Efficiency wages may cause frictional unemployment.
73. As the average age of the labor force increased from the end of the 1970s to
the end of the 1990s, the natural rate of unemployment: a. increased. *b. decreased. c. was unaffected. d. was unpredictable.
74. Generous unemployment benefits are likely to have which consequence? a. an increase in the employment level b. a reduction in job search time c. a decrease in the unemployment rate *d. an increase in the unemployment rate
75. Which situation is likely to increase the natural rate of unemployment? *a. the entrance of many new people into the work force b. a decrease in unemployment compensation benefits c. a decrease in job search time due to information advances like the Internet d. the elimination of the minimum wage
76. Since the 1950s, the natural unemployment rate in the United States has: a. remained relatively constant. b. increased steadily over time. c. decreased steadily over time. *d. risen and fallen over time.
77. Suppose that immigration laws are relaxed and many workers from other
nations enter the U.S. labor force. How will this affect the U.S. labor market? a. The demand for labor will increase. b. The demand for labor will decrease. c. The supply of labor will decrease. *d. The supply of labor will increase.
78. Increases in unemployment compensation: a. reduce unemployment. *b. increase unemployment. c. increase the number of jobs available. d. decrease the number of jobs available.
79. When the unemployment rate is high, there is political demand to increase the
length of time for which those laid off can receive benefits. In a standard analysis, this will lead to: a. reductions in unemployment. *b. increases in the unemployment rate. c. more job creation. d. more job destruction.
80. According to the Congressional Budget Office, the natural rate of
unemployment: a. has continually declined since 1950. b. was at its lowest by the end of the 1970s. c. has continually risen since 1950. *d. rose until the end of the 1970s and has declined since then.
81. An example of a factor that causes the natural rate of unemployment to rise is: *a. a population boom that increases the number or young workers joining the labor force. b. the loss of labor union membership across industries. c. because of the loss of retirement funds, more people in the baby boom generation continue to work past the typical retirement age. d. the use of new technology in the workplace that increases labor productivity.
82. The natural rate of unemployment would: a. increase if a larger percentage of the labor force were over 25 years old. b. increase if union membership fell. *c. increase if unemployment benefits were increased. d. always remain fixed.
83. If more women enter or reenter the labor force, the natural rate of
unemployment is expected to:
a. decrease. b. remain unchanged. *c. increase. d. decrease if they are well educated.
84. Recent declines in union membership are likely to cause the natural rate of
unemployment to: a. increase. *b. decrease. c. be unaffected. d. be unpredictable.
85. Which pair of policies is likely to have the effect of reducing the natural rate of
unemployment? *a. job training and employment subsidies b. high minimum wages and generous unemployment benefits c. job training and higher minimum wages d. employment subsidies and policies designed to strengthen labor unions
86. An example of a factor that causes the natural rate of unemployment to fall is: a. a binding minimum wage. *b. the recent proliferation of temporary employment agencies. c. a slowdown in productivity growth. d. the unintended by-product of government policies referred to as Eurosclerosis.
87. The natural rate of unemployment will rise for all of these reasons EXCEPT: a. more generous terms for unemployment compensation. b. an increase in union membership. *c. an increase in labor productivity that translates into greater demand for labor. d. a surge in the number of young and inexperienced workers.
88. Increases in unemployment benefits: *a. increase the natural rate of unemployment. b. decrease the natural rate of unemployment. c. always affect everyone in the economy the same. d. always affect everyone in the economy the same by decreasing the natural rate of unemployment.
89. Unemployment rates are usually higher in Europe than in the United States
because: a. the minimum wage is higher in the United States than in Europe. b. economic policy in the United States is much more effective than European economic policy. c. there are more unskilled, uneducated workers in Europe than in the United States. *d. unemployment benefits are more generous in Europe than in the United States.
90. Figure: The Labor Market
Reference: Ref 14-3
(Figure: The Labor Market) Refer to the Figure: The Labor Market. The equilibrium wage rate is: a. $16. *b. $15. c. $14. d. $17.
91. Figure: The Labor Market
Reference: Ref 14-3
(Figure: The Labor Market) Refer to the Figure: The Labor Market. The level of employment at the equilibrium wage rate is: a. 80,000. b. 110,000. *c. 100,000. d. 90,000.
92. Figure: The Labor Market
Reference: Ref 14-3
(Figure: The Labor Market) Refer to the Figure: The Labor Market. The size of the labor force at equilibrium wage rate is:
a. 80,000. b. 110,000. *c. 100,000. d. 200,000.
93. Figure: The Labor Market
Reference: Ref 14-3
(Figure: The Labor Market) Refer to the Figure: The Labor Market. The unemployment rate at the equilibrium wage rate is: *a. 0 percent. b. 50 percent. c. 80 percent. d. 15 percent.
94. Figure: The Labor Market
Reference: Ref 14-3
(Figure: The Labor Market) Refer to the Figure: The Labor Market. What will be the level of employment if firms decide to pay an efficiency wage of $16? *a. 80,000 b. 100,000 c. 110,000 d. 200,000
95. Figure: The Labor Market
Reference: Ref 14-3
(Figure: The Labor Market) Refer to the Figure: The Labor Market. What is the size of the labor force at an efficiency wage of $16? a. 80,000 b. 100,000 *c. 110,000 d. 200,000
96. Figure: The Labor Market
Reference: Ref 14-3
(Figure: The Labor Market) Refer to the Figure: The Labor Market. What is the unemployment rate at an efficiency wage of $16? a. 10 percent b. 20 percent *c. 27 percent d. 73 percent
97. Long-term unemployment is usually frictional unemployment. a. True *b. False
98. A binding minimum wage causes structural unemployment. *a. True b. False
99. Both binding minimum wages and union wages may cause structural unemployment. *a. True b. False
100. The minimum wage is higher in the United States than in most Western European countries. a. True *b. False
101. When the actual rate of unemployment is equal to the natural rate of unemployment, we conclude that there is no cyclical unemployment. *a. True b. False
102. Frictional and structural unemployment are a part of the natural rate of unemployment. *a. True b. False
103. Cyclical unemployment is a result of recessions and economic downturns and is not considered a part of the natural rate of unemployment.
*a. True b. False
104. Frictional unemployment is a special type of structural unemployment. a. True *b. False
105. If the government increases the length and amount of unemployment benefits, the unemployment rate will fall. a. True *b. False
106. If the labor force becomes younger, the natural rate of unemployment will fall. a. True *b. False
107. The unemployment rate in Western Europe has been higher than the unemployment rate in the United States in recent years. *a. True b. False
108. If a labor market is in equilibrium at a wage where the quantity of labor demanded equals the quantity of labor supplied, how can there still be unemployment in the labor market? Correct Answer:
Even when a labor market is in equilibrium, there will be frictionally unemployed persons. These are individuals who are temporarily between jobs. These might be workers who have voluntarily quit a job or who have just entered the labor force looking for a job. 109. Minimum wages and efficiency wages are both above the equilibrium market wage. Briefly describe each type of wage. Do they have similar results in the labor market? Correct Answer:
The minimum wage is set by the government because the market wage is believed to be too low. Employers would like to offer lower wages, but legally cannot. The efficiency wage is a wage set by firms above the market wage as an incentive to get
more effort and productivity from workers. Both wages, because they are above the market wage, create a surplus of labor and structural unemployment. 110. What do economists mean by the natural rate of unemployment? How would this natural rate of unemployment be affected by a permanent influx of younger, predominantly unskilled, immigrant workers? Correct Answer:
The natural rate of unemployment is the normal rate of unemployment around which the actual unemployment rate fluctuates. It is equal to the frictionally unemployed plus the structurally unemployed. Because younger workers, and unskilled workers, are groups that historically have higher rates of unemployment, this demographic change would likely increase the natural rate. 111. Kelli is a server at a casual restaurant in a small town. In each of the following situations, explain what type of unemployment Kelli is experiencing. A) The local economy is experiencing a minor recession and the restaurant lays Kelli off. The owner assures her that she will be rehired when business picks up again. B) A large factory, the major employer in the town, permanently closes and this hurts all restaurants in town. The restaurant fires Kelli because the owner can only afford to stay open on the weekends. C) Kelli is dissatisfied with her schedule at the restaurant and quits her job. She is qualified to work at other restaurants and immediately begins to send her resumé to restaurants all over town. Correct Answer:
A) This is cyclical unemployment because it is due to the temporary dip in the business cycle. B) This is structural unemployment because of a permanent decrease in the demand for this labor. At the current wage, there is now a surplus of labor. C) This is frictional unemployment because she is voluntarily seeking a better match for her skills and needs in the labor market.
112. Structural changes in an economy as well as changes in consumer tastes are
reasons for: *a. job creation and job destruction. b. job searches. c. unemployment during recessions. d. unemployment during expansions.
113. Frictional unemployment: a. occurs only during expansions. *b. is due to time workers spend in job search.
c. is the difference between cyclical unemployment and the natural rate of unemployment d. hasn't occurred since the 1930s.
114. Radhika just graduated from college. She recently quit her part time job to
focus on finding a full time job that better uses the skills she has acquired in college. Radhika is considered to be: a. structurally unemployed. *b. frictionally unemployed. c. cyclically unemployed. d. employed since she is focusing on finding a full time job.
115. Structural unemployment occurs when: a. new workers enter the work force. *b. there is a surplus of labor at the current wage rate. c. there is an expansion in the economy. d. there is cyclical unemployment.
116. An effective minimum wage can lead to: a. frictional unemployment. *b. structural unemployment. c. a decrease in wages. d. a shortage of workers in that labor market.
117. When labor unions successfully bargain for wage rates for their workers that
are: a. lower than the equilibrium wage rate, may unintentionally cause frictional unemployment. b. equal to the equilibrium wage rate, may cause shortages in that labor market. *c. higher than the equilibrium wage rate, may also cause an increase in structural unemployment. d. higher than the equilibrium wage rate, may cause shortages in that labor market.
118. A wage offered by an employer as an incentive for greater work effort and
performance and that exceeds the equilibrium wage rate is known as a(n): a. minimum wage. b. equilibrium wage. *c. efficiency wage. d. union wage.
119. In a particular labor market, the demand for labor is given by W = 20 –
(1/100)L and the supply of labor is given by W = 4 + (1/100)L where W is the wage rate, and L is the number of workers. What is the equilibrium wage and number of workers in this market? a. The equilibrium wage is $10, and the equilibrium number of workers is 1000. *b. The equilibrium wage is $12, and the equilibrium number of workers is 800. c. The equilibrium wage is $8, and the equilibrium number of workers is 1200. d. The equilibrium wage is $20, and the equilibrium number of workers is 1000.
120. In a particular labor market, the demand for labor is given by W = 20 –
(1/100)L and the supply of labor is given by W = 4 + (1/100)L where W is the wage rate, and L is the number of workers. Suppose government decides to impose a minimum wage of $15 in this market. What effect will this minimum wage have on the market? a. The wage will have no impact since it is below the equilibrium wage. b. The wage will create a shortage of workers since it is above the equilibrium wage. *c. The wage will create surplus of workers since it is above the equilibrium wage. d. The wage will result in increases in wages for workers who were employed at the equilibrium wage only.
121. A binding minimum wage results in: a. higher wages for those who were working prior to the minimum wage implementation. *b. greater amounts of structural unemployment. c. a decrease in the amount of cyclical unemployment. d. lower actual unemployment rates since higher wages encourage more people to enter the work force.
122. An efficiency wage: a. can only be secured with the help of a labor union. b. is one that causes greater frictional unemployment. *c. is offered by an employer to encourage workers to work harder. d. results in a less productive work force.
123. The sum of frictional and structural unemployment make up the:
a. actual unemployment level. b. cyclical amount of unemployment. *c. natural rate of unemployment. d. amount of unemployment in an economy during a recession.
124. The natural rate of unemployment: a. equals zero. *b. equals the actual rate of unemployment when cyclical unemployment equals zero. c. equals cyclical and actual rates of unemployment. d. fluctuates around the actual rate of unemployment.
125. Analysts believe that generous unemployment benefits in Europe are
associated with: a. low unemployment rates in Europe. *b. high unemployment rates in Europe. c. weak labor unions in Europe. d. relatively constant levels of unemployment in Europe.
126. The natural rate of unemployment changes when: a. the cyclical unemployment changes. b. actual rate of unemployment changes. *c. there are changes in labor market institutions. d. government policies remain the same.
1. If deflation occurs and your income is fixed, your real income: a. will fall. *b. will go up. c. will still be equal to your nominal income. d. is constant.
2. Over the past year, Eli has been working very hard. His employer has taken
notice and is giving Eli a 6 percent raise in salary. During this past year, overall prices in the economy have increased by 4 percent. Given this information, Eli's real wage has: a. stayed constant. b. increased by 6 percent. *c. increased by 2 percent. d. decreased by 4 percent.
3. If money income remains the same while the average price level doubles, then: a. nominal income will fall. *b. real income will fall. c. interest rates will fall. d. purchasing power will increase.
4. The wage divided by the price level is known as the: a. standard wage. b. effective wage. c. living wage. *d. real wage.
5. The increase in the price level that has happened in the United States since the
1960s has: a. made Americans richer. b. made Americans poorer. *c. also raised incomes by the same amount. d. increased the purchasing power of the dollar.
6. In 2002, France replaced its national currency, the franc, with the: *a. euro. b. U.S. dollar. c. British pound. d. Chinese yuan.
7. If the U.S. dollar was replaced with a “new dollar” at an exchange rate of 1 new
dollar for 5 old dollars, then a loan of $10,000 would become a debt of _______ new dollars. a. 50,000 b. 10,000 c. 9995 *d. 2000
8. If the U.S. dollar was replaced with a “new dollar” at an exchange rate of 1 new
dollar for 8 old dollars, then a mortgage of $100,000 would become a debt of _______ new dollars. *a. 12,500 b. 99,992 c. 100,000 d. 800,000
9. If the U.S. dollar was replaced with a “new dollar” at an exchange rate of 1 new
dollar for 4 old dollars, then an hourly wage of $10 would become an hourly wage of _______ new dollars. *a. 2.50 b. 6 c. 10 d. 60
10. The real wage is the wage rate: a. plus the price level. b. minus the price level. *c. divided by the price level. d. multiplied by the price level.
11. Income divided by the price level is: a. personal income. *b. real income. c. disposable income. d. national income.
12. If the wage rate is $9 per hour and the price level is 2, then the real wage is: a. $18. b. $11. c. $7. *d. $4.50
13. If Jim's income is $80,000, and the price level is 4, then Jim's real income is: *a. $20,000. b. $320,000. c. $84,000. d. $80,000.
14. If the price level increases, real wages will: a. increase. *b. decrease. c. remain constant. d. fluctuate randomly.
15. If the price level decreases, real income will: *a. increase. b. decrease. c. remain constant. d. fluctuate randomly.
16. Increases in the average level of prices are called: a. depreciation. b. deflation. *c. inflation. d. expectations.
17.
Reference: Ref 15-1
[Table: The Consumer Price Index (CPI)] According to the Table: The Consumer Price Index (CPI), the inflation rate between 2011 and 2012 is: a. 10 percent. b. 3 percent. *c. 1.4 percent. d. 24.6 percent.
18.
Reference: Ref 15-1
[Table: The Consumer Price Index (CPI)] According to the Table: The Consumer
Price Index (CPI), the consumer price index in 2009 was 212.2. In 2010, it was 216.7. What was the rate of inflation from 2009 to 2010? a. 12.2 percent b. 4.5 percent *c. 2.1 percent d. 16.7 percent
19. The consumer price index in 1979 was 72.6. In 1980 it was 82.4. What was the
rate of inflation from 1979 to 1980? *a. 13.5 percent b. 11.89 percent c. 17.6 percent d. 9.8 percent
20. The inflation rate a. is equal to the price level. *b. is the annual rate of increase in the price level. c. is always increasing when the overall price level is increasing. d. will be zero when prices are increasing at a constant rate.
21. The inflation rate is the: a. price level in the current year minus the price level in the previous year. b. price level in the current year plus the price level in the previous year. *c. percentage change in the price level from one year to the next. d. price level in the current year multiplied by the price level in the previous year.
22. Since 1960 in the United States, the price level has: a. fluctuated randomly by large amounts. b. remained the same. c. decreased. *d. increased.
23. Since 1960 in the United States, the rate of inflation has: *a. fluctuated. b. remained the same. c. decreased.
d. increased.
24. Since the 1960s, in the United States the price level has _______, and the
inflation rate has _______. a. remained constant; increased *b. increased; fluctuated c. decreased; decreased d. fluctuated; remained constant
25. Table: Price Levels
2011 2012 2013 2014
221.3 227.7 232.2 234.8
Reference: Ref 15-2
(Table: Price Levels) Given the price levels in the Table: Price Levels, calculate the rate of inflation between 2011 and 2012. a. 0 percent *b. 2.9 percent c. 4.5 percent d. 6.4 percent
26. Table: Price Levels
2011 2012 2013 2014
221.3 227.7 232.2 234.8
Reference: Ref 15-2
(Table: Price Levels) Given the price levels in the Table: Price Levels, calculate the rate of inflation between 2012 and 2013. a. 6.4 percent b. 4.5 percent c. 2.9 percent *d. 2.0 percent
27. Table: Price Levels
2011 2012 2013 2014
221.3 227.7 232.2 234.8
Reference: Ref 15-2
(Table: Price Levels) Given the price levels in the Table: Price Levels, calculate the rate of inflation between 2013 and 2014. *a. 1.1 percent b. 2.6 percent c. 2.9 percent d. 2.0 percent
28. Shoe-leather costs refer to the: a. effect of inflation on the prices of food, clothes, and other necessities. *b. increased cost of transactions due to inflation. c. high price of leather goods. d. effect of inflation on transportation costs.
29. Which is a LIKELY response to inflation? a. People choose to carry higher money balances. b. People tend to make fewer transactions. *c. People tend to make more transactions. d. People tend to hold on to fewer interest-bearing assets.
30. When hyperinflation forces Emily to visit her bank very frequently to keep her
cash holdings to a minimum, economists say that Emily is experiencing a: *a. shoe-leather cost. b. menu cost. c. unit-of-account cost. d. Fisher effect.
31. The invention of ATMs reduced the: a. menu costs of inflation. *b. shoe-leather costs of inflation. c. unit-of-account costs of inflation. d. seignorage.
32. Shoe-leather costs refer to the costs of: a. the raw material used in production. *b. the increased number of transactions as inflation increases. c. living adjustments as inflation increases. d. the raw material used in production, the increased number of transactions as inflation increases, and living adjustments as inflation increases.
33. The costs that arise from the way inflation makes money a less reliable unit of
measurement are known as: a. shoe-leather costs. b. menu costs. *c. unit-of-account costs. d. medium of exchange costs.
34. When hyperinflation forces Pedro to change the price stickers on the books in
his bookstore very frequently to keep up with the aggregate price level, economists say that Pedro is experiencing a: a. shoe-leather cost. *b. menu cost. c. unit-of-account cost. d. debt deflation.
35. Suppose that a country has a progressive income tax code, where taxable
income is calculated in nominal terms but the schedule of income tax rates is NOT indexed to inflation. An individual whose income keeps up with inflation will find that over time he or she will pay: a. the alternative minimum tax. b. a lower percentage of income in taxes over time. c. the same percentage of income in taxes over time. *d. a higher percentage of income in taxes over time.
36. Unit-of-account costs of inflation are the: *a. costs associated with money being a less reliable unit of measurement. b. costs of transactions associated with avoiding the inflation tax. c. costs associated with businesses changing prices. d. transfers the government gets from printing money.
37. Menu costs of inflation are the: a. costs associated with money being a less reliable unit of measurement. b. costs of transactions associated with avoiding the inflation tax. *c. costs associated with businesses changing prices. d. revenue the government gets from printing money.
38. All are costs of inflation EXCEPT: a. menu costs. b. shoe-leather costs. c. unit-of-account costs. *d. efficiency wage costs.
39. Menu costs refer to the increased cost: a. of food in a time of inflation. b. eating out when inflation increases. *c. of changing listed prices. d. the minimum wage.
40. Unit-of-account costs refer to the: a. increase in prices during inflation. b. decrease in the value of money during inflation. *c. loss of the reliability of money as a relative unit of measurement. d. increased costs of servicing bank accounts during inflation.
41. Menu costs are the: a. costs of money becoming less reliable. *b. real costs of changing listed prices. c. increase in the transaction costs caused by inflation. d. adjustments to the cost of living.
42. During rapid price inflation, firms must frequently change prices. The cost of
changing listed prices is known as the: *a. menu cost. b. real interest rate cost. c. shoe-leather cost. d. unit-of-account cost.
43. An increase in the price level that is extremely rapid (say 400 percent per year)
is called: *a. hyperinflation. b. inflation. c. deflation. d. hyperdeflation.
44. Which annual rate of inflation would definitely be called hyperinflation?
a. 5 percent b. 13 percent c. 25 percent *d. 2000 percent
45. When there is deflation in the economy, the: *a. general price level falls. b. general price level increases. c. interest rate rises. d. general price level becomes negative.
46. Increased costs of transactions caused by inflation are known as *a. shoe-leather costs. b. menu costs. c. unit-of-account costs. d. implicit costs.
47. Costs associated with changing a listed price are known as: *a. menu costs. b. implicit costs. c. unit-of-account costs. d. shoe-leather costs.
48. Costs arising from the way inflation makes money a less reliable unit of
measurement are known as: a. shoe-leather costs. b. menu costs. c. implicit costs. *d. unit-of-account costs.
49. The use of online banking would ________ the ________ cost of a high inflation
rate. a. increase; menu *b. decrease; shoe leather c. increase; unit of account d. decrease; unit of account
50. Annie's credit union charges a fee for transferring funds from her money market
account to her checking account. The rate of inflation has been 12 percent lately, so Annie has transferred funds from her money market account to her checking account
more often than usual. This cost is an example of the ________ cost of high inflation. a. unit of account b. menu *c. shoe leather d. redistributive
51. Between 1921 and 1923 Germany experienced: a. deflation. b. disinflation. c. an increase in the purchasing power of their currency. *d. hyperinflation.
52. During Brazil's hyperinflation of the 1990s, the economy lost real resources
when the _______ sector grew so large in order to cope with the consequences of the high rate of inflation. *a. banking b. transportation c. government d. manufacturing
53. During periods of high inflation, stores that publish catalogs find it necessary to
revise prices and publish new catalogs monthly instead of quarterly. This is an example of ________ costs. a. unit of account *b. menu c. shoe leather d. redistributive
54. Unanticipated inflation: *a. reduces the value of money. b. increases the value of future obligations. c. increases certainty about the future. d. helps lenders.
55. Deflation is a(n): a. decrease in the purchasing power of a unit of money. b. appreciation of the nation's currency. *c. decrease in the average level of prices. d. increase in the average level of prices.
56. When inflation rises quickly: a. borrowers will be hurt and lenders will benefit. *b. lenders will be hurt and borrowers will benefit. c. both borrowers and lenders will be hurt. d. both borrowers and lenders will benefit.
57. Which statement is true? a. Unexpected inflation benefits lenders and hurts borrowers. *b. Unexpected inflation benefits borrowers and hurts lenders. c. Unexpected inflation benefits borrowers but does not affect lenders. d. Unexpected deflation benefits lenders but does not affect borrowers.
58. Unanticipated inflation: a. increases the value of money. b. decreases uncertainty about the future. *c. reduces the real value of debt. d. helps lenders.
59. Unanticipated inflation does all EXCEPT: a. reduce the value of money. b. reduce the value of debt. c. create uncertainty about the future. *d. cause disinflation.
60. Unanticipated inflation: a. helps those on fixed incomes. b. hurts borrowers and helps lenders. *c. helps borrowers and hurts lenders. d. causes interest rates to decrease.
61. Suppose that the nominal rate of interest is 7 percent and the inflation rate is 3
percent. The real rate of interest is equal to: a. 3 percent. *b. 4 percent. c. 10 percent. d. 7 percent.
62. If the actual inflation rate is less than the expected inflation rate, then: *a. the lenders gain and the borrowers lose. b. the borrowers gain and the lenders lose. c. everyone benefits from the inflation. d. everyone is worse off from unexpected inflation.
63. Suppose the real interest rate is 2.1 percent and the nominal interest rate is 5.4
percent. The inflation rate is: a. 7.5 percent. *b. 3.3 percent. c. –3.3 percent. d. 2.1 percent.
64. Suppose banks are issuing personal loans at an interest rate of 9 percent. If
expected inflation is 3 percent, then the: a. nominal interest rate is 6 percent and the real interest rate is 9 percent. *b. real interest rate is 6 percent and the nominal interest rate is 9 percent. c. real interest rate is 3 percent and the nominal interest rate is 9 percent. d. nominal interest rate is 6 percent and the real interest rate is 12 percent %.
65. Suppose that a bank wishes to make a 5 percent rate of return on a one-year
loan but expects that inflation over the course of the loan will be roughly 3 percent. Which is TRUE? a. As long as the bank charges a nominal interest rate of at least 5 percent, it will earn its expected return. b. If the bank charges an interest rate of 8 percent or higher, this will guarantee it to earn the expected return. *c. If the bank charges 8 percent and the inflation rate is less than 3 percent, then the bank will have earned a larger rate of return than expected. d. If the bank charges 8 percent and the inflation rate is more than 3 percent, then the bank will have earned a larger rate of return than expected.
66. Which statement is TRUE concerning interest rates? a. The nominal interest rate can be negative. b. The real interest rate cannot be negative. c. The real interest rate can only be positive. *d. The real interest rate can be zero, positive, or negative.
67. Which lending agreement represents the highest real rate of return for a bank
when it lends its money to a customer? *a. a nominal interest rate of 8 percent with 1 percent inflation b. a nominal interest rate of 11 percent with 5 percent inflation c. a nominal interest rate of 12 percent with 7 percent inflation d. a nominal interest rate of 19 percent with 15 percent inflation
68. The nominal interest rate equals the real interest rate: a. times the rate of inflation. b. minus the rate of inflation. *c. plus the rate of inflation. d. when inflation is correctly anticipated.
69. The threat of future inflation: *a. makes people reluctant to lend money for long periods. b. makes people eager to lend money for long periods. c. has no effect on lending money. d. increases the value of money paid back in the future.
70. You have gone to the bank to borrow money for one year. The nominal annual
interest rate is 7.5 percent. The real rate of interest is 4 percent. Over the course of the year, overall prices increased by 4 percent. This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated rate of inflation. a. borrower; lower b. borrower; higher *c. lender; higher d. lender; lower
71. If the nominal interest rate is 9 percent and the inflation rate is 5 percent, then
the real interest rate is: a. 14 percent. *b. 4 percent. c. 9 percent. d. 5 percent.
72. If the actual inflation rate is higher than expected, *a. borrowers gain at the expense of lenders. b. lenders gain at the expense of borrowers. c. both lenders and borrowers gain.
d. both lenders and borrowers lose.
73. Unexpected deflation: a. allows borrowers to gain at the expense of lenders. b. makes it easier for borrowers to repay their loans. *c. makes it harder for borrowers to repay their loans. d. reduces the real value of outstanding debt.
74. A drop in the inflation rate is called: *a. disinflation. b. deflation. c. stagflation. d. hyperinflation.
75. Disinflation is: a. the process of a decline in the overall price level. b. easily achieved with known policy measures. c. the same thing as deflation. *d. the process of bringing about a decline in the inflation rate.
76. In 2002, the French adopted the British pound as their national currency. a. True *b. False
77. In 2002, the French adopted the euro as their national currency. *a. True b. False
78. When the price level increases, everyone becomes wealthier. a. True *b. False
79. When the price level increases, everyone becomes poorer. a. True *b. False
80. If the U.S. dollar was replaced with a “new dollar” at an exchange rate of 1 new dollar for 8 old dollars, then a mortgage of $200,000 would become a debt of 25,000 new dollars. *a. True b. False
81. If the U.S. dollar was replaced with a “new dollar” at an exchange rate of 1 new dollar for 4 old dollars, then an hourly wage of $12 would become an hourly wage of three new dollars. *a. True b. False
82. The real wage is the wage multiplied by the price level. a. True *b. False
83. Real income is income divided by the price level. *a. True b. False
84. If the wage rate is $20 per hour and the price level is 2, then the real wage is $40 per hour. a. True *b. False
85. If Jenny's income is $120,000, and the price level is 4, then Jenny's real income is $30,000. *a. True b. False
86. The inflation rate for the current year is the price level in the current year minus the price level in the previous year. a. True *b. False
87. The inflation rate for the current year is the percentage change in the price level in the current year from the previous year. *a. True b. False
88. Since 1960 the price level in the United States has decreased in most years. a. True *b. False
89. Since 1960 the price level in the United States has increased in most years. *a. True b. False
90. The U.S. inflation rate was lower in the 2000s than it was in the 1970s. *a. True b. False
91. The U.S. inflation rate was higher in the 2000s than it was in the 1970s. a. True *b. False
92. If the price level at the end of year 1 is 150, and the price level at the end of year 2 is 160, the inflation rate in year 2 is 10 percent. a. True *b. False
93. If the price level at the end of year 1 is 150, and the price level at the end of year 2 is 160, the inflation rate in year 2 is 6.67 percent. *a. True b. False
94. The use of online banking would increase the unit of account cost of a high inflation rate. a. True *b. False
95. The increased availability of ATM machines has decreased the shoeleather costs of high inflation. *a. True b. False
96. When the rate of inflation is high, people usually transfer money from interest bearing accounts into checking accounts more often than when inflation is low. This is an example of a menu cost. a. True *b. False
97. Between 1921 and 1923 Germany experienced a period of hyperinflation. *a. True b. False
98. During Brazil's hyperinflation of the 1990s the economy lost real resources when the transportation sector grew so large in order to cope with the consequences of the high rate of inflation. a. True *b. False
99. During periods of high inflation, stores that publish catalogs find it necessary to revise prices and publish new catalogs monthly instead of quarterly. This is an example of unit of menu costs. *a. True b. False
100. Unit of account costs are the real costs that arise when inflation makes it necessary to change listed prices very often. a. True *b. False
101. Unit of account costs arise from the way inflation makes money a less reliable unit of account. *a. True b. False
102. Shoe-leather costs may be especially important in the tax system when inflation distorts the measures of income on which taxes are collected. a. True *b. False
103. Unit of account costs may be especially important in the tax system when inflation distorts the measures of income on which taxes are collected. *a. True b. False
104. During the mid-1980s, Israel experienced a high rate of inflation during which prices often rose by more than 10 percent per month. *a. True b. False
105. The severe inflation in Israel during the mid-1980s was due to a war, an unstable government, and civil unrest in the country. a. True *b. False
106. During times of high inflation people hold less cash and make more withdrawals so banks often open new branches. *a. True b. False
107. The real interest rate is the nominal interest rate less the rate of inflation. *a. True b. False
108. Unless deflation occurs, the nominal interest rate will always be greater than or equal to the real interest rate. *a. True b. False
109. Inflation causes nominal interest rates to decrease. a. True
*b. False
110. In periods of inflation, lenders benefit because the money that they are repaid has more purchasing power than the money they loaned initially. a. True *b. False
111. In 1896 presidential candidate William Jennings Bryan wanted the U.S. to abandon the gold standard and print more money, which would raise the price level and benefit farmers who were deeply in debt. *a. True b. False
112. If the nominal interest rate is 4 percent and the rate of inflation is 1 percent, then the real interest rate is 5 percent. a. True *b. False
113. If the real interest rate is 4 percent and the rate of inflation is 1 percent, then the nominal interest rate is 5 percent. *a. True b. False
114. The real rate of interest is the nominal rate of interest times the inflation rate. a. True *b. False
115. Real interest rates can either be positive, zero, or negative, but nominal interest rates can only be zero or positive. *a. True b. False
116. When policies cause the inflation rate to drop from 10 percent to 5 percent, the economy is undergoing disinflation. *a. True b. False
117. Disinflation is a drop in the price level. a. True *b. False
118. Explain the difference between shoe-leather costs of inflation and menu costs of inflation. Correct Answer:
Shoe-leather costs are the costs society faces when consumers spend valuable time and resources to search for lower prices or making more trips to and from the bank. A menu cost is the cost society faces when firms must frequently change and post new prices of goods and services. 119. Ted is looking to borrow money from a local bank. He is told that the nominal rate is 8 percent and that includes an inflation expectation of 5 percent and a real interest rate of 3 percent. If there were unexpectedly high inflation over the term of this loan, would Ted be hurt or would the bank be hurt? Explain your answer. Correct Answer:
Ted and the bank entered into this contract with an expectation that inflation would be 5 percent. If inflation is higher, the bank receives payments that have lost purchasing power. The bank, as lender, is losing due to this unexpectedly high inflation. Ted is repaying the loan with dollars that have a lower real value than had been expected.
120. High rates of inflation often result in people spending inordinate amounts of
time trying to make transactions and finding ways to keep the real value of their money from decreasing. This is an example of _______ costs. *a. shoe-leather b. menu c. efficiency wage d. unit-of-account
121. Unit-of-account costs refer to the problem associated with high inflation rates
that: a. cause people to expend extra effort to reduce their holdings of money. b. result in increased costs associated with necessary changes in the list price of items. *c. makes money a less reliable unit of measurement. d. decrease the costs associated with holding less money.
122. Anticipated inflation affects:
a. borrowers only. b. lenders only. *c. all aspects of the economy. d. only business firms involved in investment spending.
123. Alex expects the inflation rate to be 4 percent. If Alex borrows money at a
nominal interest rate of 5 percent, his real interest rate is: a. greater than the nominal interest rate. *b. less than the nominal interest rate. c. equal to the nominal interest rate. d. negative.
124. In periods of unexpected inflation: *a. borrowers benefit since they repay their loans in dollars with lower real value. b. lenders benefit since they are repaid in dollars with a higher real value. c. neither borrowers nor lenders are affected by the inflation rate since their nominal interest rate stays the same. d. lenders benefit since the nominal interest rate does not change.
125. When disinflation occurs: a. the natural rate of unemployment rises. *b. and inflationary expectations do not change, an economy may experience a recession. c. and inflationary expectations do not change, unemployment rates will fall. d. with inflationary expectations unchanging, aggregate output will rise.
1. The aggregate price level is the: a. average price of shares on the stock market. b. average price of commodities. *c. overall level of prices in the economy. d. average rate of inflation.
2. The measure that summarizes the aggregate price level is: *a. a price index. b. GDP. c. the unemployment rate. d. a consumption bundle.
3. Inflation is a(n): *a. rising aggregate price level. b. expansion of output. c. rise in wages. d. rise in the unemployment rate.
4. A price index: a. always includes a base year. b. measures the cost of purchasing a market basket of output across different years. c. is normalized to 100 for the base year. *d. always includes a base year, measures the cost of purchasing a market basket of output across different years, and is normalized to 100 for the base year.
5. In a market basket of goods: *a. the quantities stay constant and the prices may change. b. the quantities may change and the prices are held constant. c. both the prices and the quantities are held constant. d. both the prices and the quantities may change.
6. Scenario: Price Index
Suppose that in the base period a college student buys 20 gallons of gasoline at $2 per gallon, 2 CDs for $13 each, and 4 movie tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon, CDs cost $12.50 each, and the price of a movie ticket is $7.50. Reference: Ref 16-1
(Scenario: Price Index) According to the Scenario: Price Index, the price index for the second month is:
a. 94. *b. 106.4. c. 100. d. 93.6.
7. Scenario: Price Index
Suppose that in the base period a college student buys 20 gallons of gasoline at $2 per gallon, 2 CDs for $13 each, and 4 movie tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon, CDs cost $12.50 each, and the price of a movie ticket is $7.50. Reference: Ref 16-1
(Scenario: Price Index) According to the Scenario: Price Index, the change in prices from the first to the second month is: a. 7.6 percent. b. 94 percent. *c. 6.4 percent. d. –6 percent.
8. In the country of Sildavia, a market basket of goods and services cost $130 in
2009, $140 in 2010, and $160 in 2011. Based on this information and considering 2009 to be the base year, the price index in 2011 was: a. 100. b. 107.69. *c. 123.07. d. 130.
9. In the country of Sildavia, a market basket of goods and services cost $130 in
2009, $140 in 2010, and $160 in 2011. Based on this information and considering 2009 as the base year, inflation from 2009 to 2011 was: a. 7.14 percent. b. 7.69 percent. c. 14.28 percent. *d. 23.07 percent.
10.
Reference: Ref 16-2
(Table: Market Basket of School Supplies) The Table: Market Basket of School
Supplies shows the prices of three common school supplies in 2010 and 2011 and the quantities of each school supply that consumers bought in 2010, the base year. If we were to construct a school supply index in 2011, it would be equal to: a. 81.8. b. 100. *c. 122.2. d. 112,500.
11.
Reference: Ref 16-2
(Table: Market Basket of School Supplies) The Table: Market Basket of School Supplies shows the prices of three common school supplies in 2010 and 2011 and the quantities of each school supply that consumers bought in 2010, the base year. If we were to construct a school supply index (SSI) to measure the rate at which average school supply prices have changed, we would find an inflation rate of: *a. 22 percent. b. 122 percent. c. 82 percent. d. 18 percent.
12. If the cost of a market basket is $200 in year 1 and $230 in year 2, the price
index for year 2 using year 1 as the base is: a. 100. *b. 115. c. 130. d. 200.
13. If the cost of a market basket is $150 in year 1 and $200 in year 2, the price
index for year 1 using year 2 as the base is: *a. 75. b. 100. c. 133. d. 150.
14. Suppose that the market basket for the university student price index (USPI)
consists of 5 textbooks and 100 gallons of gasoline. In 2010, the base year for this index, textbooks cost $50 each and gas costs $1 per gallon. In 2011, textbooks cost $80 each and gasoline costs $3 per gallon. The USPI for 2011 is: a. 100. b. 150. *c. 200. d. 250.
15. Suppose that the market basket for the University Student Price Index (USPI)
consists of 4 textbooks and 100 gallons of gasoline. In 2010, the base year for this index, textbooks cost $50 each and gas costs $1 per gallon. In 2011, textbooks still cost $50 each and gasoline costs $4 per gallon. The USPI for 2011 is: a. 250. *b. 200. c. 150. d. 100.
16. The inflation or deflation rate is: *a. the change in a price index divided by the initial value of the index. b. the change in a price index divided by the new index number. c. the difference between the initial price index number and the new price index number. d. computed by dividing the old price index number by the new price index number.
17. Inflation can be measured by the: *a. percentage change in the CPI. b. absolute change in the CPI. c. absolute change in the GDP deflator. d. percentage change in GDP.
18. If the CPI is 120 in year 1 and 150 in year 2, then the rate of inflation from year
1 to year 2 is: a. 10 percent. b. 20 percent. *c. 25 percent. d. 50 percent.
19. Table: The Consumer Price Index
Reference: Ref 16-3
(Table: The Consumer Price Index) According to the Table: The Consumer Price Index, the approximate rate of inflation in year 3 is:
*a. 5 percent. b. 10 percent. c. 19 percent. d. 20 percent.
20. Table: The Consumer Price Index Reference: Ref 16-3
(Table: The Consumer Price Index) According to the Table: The Consumer Price Index, the approximate rate of inflation in year 5 is: a. 5 percent. b. 10 percent. c. 19 percent. *d. 20 percent.
21. Table: The Consumer Price Index Reference: Ref 16-3
(Table: The Consumer Price Index) According to the Table: The Consumer Price Index, the approximate rate of inflation in year 2 is: a. 10 percent. b. 19 percent. c. 20 percent. *d. 25 percent.
22. If the CPI changes from 120 to 125 between December 2009 and December
2010, the: *a. inflation rate for 2010 is 4.2 percent. b. inflation rate for 2010 is 5 percent. c. deflation rate for 2010 is 5 percent. d. deflation rate for 2010 is 4.2 percent.
23. If the price index in year 1 is 146 and in year 2 is 163, the rate of inflation
between year 1 and year 2 is: a. 8.2 percent. b. 10.43 percent. *c. 11.64 percent. d. 15.0 percent.
24. If the CPI is 180 in year 1 and 190 in year 2, the inflation rate between year 1
and year 2 is about: a. 5.26 percent. *b. 5.56 percent. c. 6.5 percent. d. 10 percent.
25. Assume that the CPI for 2009 was 72.6 and for 2010 was 82.4. What was the
inflation rate between the two years? a. 0.88 percent b. 1.13 percent c. 11.9 percent *d. 13.5 percent
26. Assume that the CPI for 2009 was 103.9 and for 2010 was 107.6. What was the
inflation rate between the two years? a. 0.97 percent b. 1.04 percent *c. 3.56 percent d. –3.70 percent
27. Assume that the CPI for 2009 was 124.0 and for 2010 was 130.7. What was the
inflation rate between the two years? a. 0.95 percent *b. 5.40 percent c. 6.70 percent d. 3.20 percent
28. If the CPI for 2009 was 148.3 and for 2010 was 152.5, what was the inflation
rate between the two years? a. 0.97 percent *b. 2.83 percent c. 4.20 percent d. 9.72 percent
29. If the CPI for 2010 was 160.6 and for 2011 was 163.1, what was the inflation
rate between the two years? a. 0.25 percent *b. 1.56 percent c. 2.59 percent d. 5.00 percent
30. You read in the newspaper that the CPI in 2011 was 120. You conclude that a
typical market basket in 2011 would have cost: a. 20 percent more than the same market basket purchased in 2010. b. 120 percent more than the same market basket purchased in 2010. *c. 20 percent more than the same market basket purchased in the base year. d. 120 percent more than the same market basket purchased in the base year.
31.
Reference: Ref 16-4
(Table: Price Index) Consider the information in the Table: Price Index provided. Which year is most likely to be the base year? a. 2009 b. 2011 c. 2010 *d. 2008
32.
Reference: Ref 16-4
(Table: Price Index) Consider the information in the Table: Price Index provided. What is the inflation rate between the years 2010 and 2011? *a. 6.8 percent b. 4 percent c. –1 percent d. 6 percent
33. Reference: Ref 16-5
(Table: CPI) According to the Table: CPI, suppose only three goods are produced in this economy: bread, laptops, and movies. Calculate the CPI of 2012, using 2008 as the base year.
a. 81.9 b. 100 *c. 75.8 d. 95
34.
Reference: Ref 16-6
(Table: CPI II) According to the Table: CPI II,how much did prices change between 2010 and 2011? a. Prices fell by 5 percent. *b. Prices fell by 4 percent. c. Prices increased by 4 percent. d. Prices increased by 5 percent.
35. A hypothetical consumption bundle, used to measure changes in overall prices,
is known as a(n): a. expenditure package. b. shopping cart. *c. market basket. d. aggregate indicator.
36. A _______________ is constructed by using a market basket in conjunction
with a base year. a. consumption bundle *b. price index c. benefit index d. benefit calculator
37. A price index is a: a. means of forecasting GDP growth. b. method of determining which sectors of the economy contribute most to output. c. source of information about how income is allocated among rent, wages, interest, and profits. *d. normalized measure of the overall price level.
38. The annual percent change in an official price index is called the: *a. inflation rate.
b. rate of economic growth. c. growth index. d. adjustment index.
39. Over a period of years in which the inflation rate is constant, what is happening
to the overall price level? a. It is constant. *b. It is increasing at a constant rate. c. It is increasing at an increasing rate. d. It is decreasing.
40. Suppose the price index in Year 1 is 152 and the price index in Year 2 is 170.
What is the inflation rate between Year 1 and Year 2? a. 1.18 percent *b. 11.8 percent c. 18.0 percent d. 10.5 percent
41. Suppose the price index in Year 1 is 116 and the price index in Year 2 is 123.
What is the inflation rate between Year 1 and Year 2? *a. 6 percent b. 7 percent c. 16 percent d. 23 percent
42. Suppose the price index in Year 1 is 116 and the price index in Year 2 is 110.
What is the inflation rate between Year 1 and Year 2? a. 6 percent b. 0 percent c. –10 percent *d. –5.2 percent
43. What is the value of the price index during the base year? a. 0 *b. 100 c. 10 d. It depends on what the inflation rate is in the base year.
44. Table: Peanut Butter and Jelly
Price in 2012
Price in 2013
Price in 2014
Peanut Butter Jelly
$1.00 $2.00
$1.10 $2.25
$1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. What is the value of the market basket in 2012? a. $3 *b. $40 c. $42 d. $44.50
45. Table: Peanut Butter and Jelly
Peanut Butter Jelly
Price in 2012 $1.00 $2.00
Price in 2013 $1.10 $2.25
Price in 2014 $1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. What is the value of the market basket in 2013? a. $3.35 b. $40 c. $42 *d. $44.50
46. Table: Peanut Butter and Jelly
Peanut Butter Jelly
Price in 2012 $1.00 $2.00
Price in 2013 $1.10 $2.25
Price in 2014 $1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. What is the value of the market basket in 2014? a. $62 *b. $49 c. $42 d. $44.50
47. Table: Peanut Butter and Jelly
Peanut Butter Jelly
Price in 2012 $1.00 $2.00
Price in 2013 $1.10 $2.25
Price in 2014 $1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. If 2012 is the base year, what is the value of the price index in 2012? a. 0 b. 90 *c. 100 d. 111.25
48. Table: Peanut Butter and Jelly
Peanut Butter Jelly
Price in 2012 $1.00 $2.00
Price in 2013 $1.10 $2.25
Price in 2014 $1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. If 2012 is the base year, what is the value of the price index in 2013? a. 0 b. 90 c. 100 *d. 111.25
49. Table: Peanut Butter and Jelly
Peanut Butter Jelly
Price in 2012 $1.00 $2.00
Price in 2013 $1.10 $2.25
Price in 2014 $1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. If 2012 is the base year, what is the value of the price index in 2014? *a. 122.5 b. 111.25 c. 90 d. 81.6
50. Table: Peanut Butter and Jelly
Peanut Butter Jelly
Price in 2012 $1.00 $2.00
Price in 2013 $1.10 $2.25
Price in 2014 $1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. If 2012 is the base year, what is the rate of inflation between 2012 and 2013? a. 4.5 percent *b. 11.25 percent c. 22.5 percent d. 44.5 percent
51. Table: Peanut Butter and Jelly
Peanut Butter Jelly
Price in 2012 $1.00 $2.00
Price in 2013 $1.10 $2.25
Price in 2014 $1.20 $2.50
Reference: Ref 16-7
(Table: Peanut Butter and Jelly) Refer to the Table: Peanut Butter and Jelly. Suppose a market basket consists of the following two goods: 20 jars of peanut butter and 10 jars of jelly. If 2012 is the base year, what is the rate of inflation between 2013 and 2014? a. 4.9 percent b. 11.25 percent c. 22.5 percent *d. 10.1
52. The price index in a given year is the cost of the market basket in that year: *a. divided by the cost of the market basket in the base year times 100. b. multiplied by the cost of the market basket in the base year times 100. c. minus the cost of the market basket in the base year times 100. d. added to the cost of the market basket in the base year times 100.
53. If the cost of the market basket in the base year is $2000, and the cost of the
market basket in 2014 is $2100, the price index for 2014 is: a. 2100 *b. 105 c. 100 d. 95
54. Which decade was characterized by accelerating inflation in the United States?
a. 1950s b. 1980s c. 1990s *d. 1970s
55. The ______ is the most widely used measure of inflation in the United States. a. producer price index *b. CPI c. GDP deflator d. national income account
56. The CPI reflects: *a. changes in the prices of goods and services typically purchased by consumers. b. the level of prices for intermediate goods and services purchased by business. c. the level of prices for raw materials. d. the prices of all goods and services computed from the ratio of nominal GDP to real GDP.
57. Which is not true concerning the CPI? The CPI: a. reflects changes in the prices of goods typically purchased by consumers. b. contains thousands of goods and services. c. is calculated by the Bureau of Labor Statistics. *d. changes only in the base year, every five to seven years.
58. In the CPI of the United States: a. the current cost of a basket of goods is compared to the baseperiod cost of the same basket of goods. b. calculation of the base-period index is always equal to 100. c. the base period is 1982–1984. *d. the current cost of a basket of goods is compared to the base-period cost of the same basket of goods, the calculation of the base-period index is always equal to 100, and the base period is 1982–1984.
59. The consumer price index is calculated using: a. a market basket of purchases made by low-income families. b. the items representing the largest expenditures at grocery stores. *c. a market basket that reflects purchases made by the typical urban family.
d. a market basket that reflects purchases made by senior citizens.
60. Which category accounts for the largest portion of the CPI market basket? *a. housing b. food c. transportation d. clothing
61. Which statement correctly represents the situation of the typical urban
household when the inflation rate is 3 percent annually? a. If household income is rising at 3 percent annually, the typical household is able to increase its standard of living substantially. b. If household income is rising at 5 percent annually, the typical household will see a decline in its standard of living. *c. If household income is unchanged, the typical household will see a decline in its standard of living. d. If household income is unchanged, the typical household will maintain its standard of living.
62. Which government agency calculates the CPI? a. U.S. Treasury *b. Bureau of Labor Statistics c. Department of Commerce d. Congressional Research Service
63. What is the base period for current calculations of the CPI? a. 1970 *b. 1982–1984 c. 1999–2000 d. 2002
64. Approximately how many prices are used to calculate the CPI each month? a. 9 b. 1000 *c. 80,000 d. 1,000,000
65. Which price index measures the cost of living?
a. producer price index b. wholesale price index *c. CPI d. GDP deflator
66. The GDP deflator is equal to: *a. nominal GDP / real GDP × 100 b. real GDP / nominal GDP × 100 c. real GDP × nominal GDP × 100 d. [(real GDP × nominal GDP) / real GDP] × 100
67.
Reference: Ref 16-8
(Table: GDP II) Using the information in the Table: GDP II, calculate the GDP deflator for 2010. *a. 111 b. 104 c. 90 d. 96
68.
Reference: Ref 16-8
(Table: GDP II) Using the information in the Table: GDP II, calculate the GDP deflator for 2011. a. 111 *b. 104 c. 90 d. 96
69. Which statistics are used to measure changes in the prices that firms pay for
goods and services? *a. producer price index b. CPI c. GDP deflator d. cost of living index
70. Which statement is true concerning the producer price index? a. The producer price index is just another term for the GDP deflator.
b. Changes in the producer price index generally follow changes in the CPI. *c. The producer price index measures the cost of a basket of goods typically purchased by producers. d. The producer price index shows how the cost of all purchases by urban families changes.
71. The major difference between the CPI and the producer price index is that the
producer price index: a. is based on retail prices and CPI is based on wholesale prices. b. measures the cost of living of self-employed workers and the CPI measures the cost of living of salaried workers. c. generally registers a higher rate of inflation than the CPI. *d. is based on the cost of a basket typically purchased by producers, while the CPI is based on the cost of a basket typically purchased by consumers.
72. The producer price index is often regarded as a warning sign of inflation
because: *a. commodity producers are relatively quick to raise prices. b. producers are more likely to have monopoly control over prices. c. consumers have to pay the prices charged. d. commodity producers can sell whatever they want at higher prices.
73. The purpose of indexing Social Security payments to the CPI is to: a. increase corporate profits. b. justify continued government funding of the Bureau of Labor Statistics. c. avoid the privatization of Social Security. *d. maintain the purchasing power of retirees.
74. Which statement is FALSE? a. In the base year, the value of the price index is 100. b. The GDP deflator, the consumer price index, and the producer price index tend to move together over time. *c. The most widely used price index is the producer price index. d. The producer price index fluctuates more than the GDP deflator or the consumer price index.
75. Which measures changes in the cost of a market basket of raw commodities,
such as steel, electricity, and coal?
a. GDP deflator b. Dow Jones Industrial Average c. Consumer Price Index *d. Producer Price Index
76. Which measure is likely to respond more quickly to price changes? a. GDP deflator b. Dow Jones Industrial Average c. Consumer Price Index *d. Producer Price Index
77. The GDP deflator for a given year is 100 times: *a. nominal GDP for that year divided by real GDP for that year. b. real GDP for that year divided by nominal GDP for that year. c. nominal GDP for that year minus real GDP for that year. d. real GDP for that year plus nominal GDP for that year.
78. The aggregate price level is the average of stock prices on the New York Stock Exchange. a. True *b. False
79. The aggregate price level is a measure of the overall level of prices in the economy. *a. True b. False
80. Economists include the prices of only the most important consumer goods, such as food and energy, in the aggregate price level. a. True *b. False
81. The price index in the base year is normalized so that it equals 100 in the base year. *a. True b. False
82. If the price index in year 1 is 110 and the price index in year 2 is 115, then the inflation rate is exactly 5 percent from year 1 to year 2. a. True *b. False
83. The inflation rate is measured as the percentage change per year in a price index. *a. True b. False
84. If the CPI increases from 125 to 130 in one year, the rate of inflation is 5 percent. a. True *b. False
85. A market basket used to measure the aggregate price level is a group of stocks that the wealthiest investors own. a. True *b. False
86. A market basket is a hypothetical set of consumer purchases of goods and services. *a. True b. False
87. The price index in the current year is the cost of the market basket in the base year divided by the cost of the market basket in the current year. a. True *b. False
88. The price index in the current year is the cost of the market basket in the current year divided by the cost of the market basket in the base year. *a. True b. False
89. If the cost of the market basket in the base year is $1000, and the cost of the market basket in 2013 is $1080, the price index for 2013 is 80. a. True *b. False
90. If the cost of the market basket in the base year is $5000, and the cost of the market basket in the current year is $5100, the price index for the current year is 102. *a. True b. False
91. The CPI is intended to measure the cost of all goods purchased in the economy over time. a. True *b. False
92. Payments to Social Security recipients are indexed to the rate of inflation, as
measured by the Consumer Price Index. This means that when the rate of inflation increases, the: a. market basket for Social Security recipients increases. b. market basket for Social Security recipients decreases. *c. payments to the Social Security recipients increase. d. payments to the Social Security recipients decrease.
93. The Consumer Price Index measures the cost of the consumption of a family of four living below the poverty line. a. True *b. False
94. The Consumer Price Index measures the cost of the consumption of a family of four living in a typical American city. *a. True b. False
95. The base period for the Consumer Price Index is 1941-1945. a. True *b. False
96. The base period for the Consumer Price Index is 1982-1984.
*a. True b. False
97. The Consumer Price Index is calculated by the Congressional Budget Office. a. True *b. False
98. The Consumer Price Index is calculated by the Bureau of Labor Statistics. *a. True b. False
99. Spending on medical care represents the largest portion of the Consumer Price Index. a. True *b. False
100. Spending on housing represents the largest portion of the Consumer Price Index. *a. True b. False
101. The producer price index and the CPI are both examples of price indexes. *a. True b. False
102. The producer price index usually responds to price changes more quickly than the CPI. *a. True b. False
103. The GDP deflator is another name for the CPI. a. True *b. False
104. Income tax brackets are indexed to the CPI.
*a. True b. False
105. The GDP deflator measures changes in the cost of a market basket of raw commodities, such as steel, electricity, and coal. a. True *b. False
106. The producer price index measures changes in the cost of a market basket of raw commodities, such as steel, electricity, and coal. *a. True b. False
107. The producer price index is also known as the wholesale price index. *a. True b. False
108. The Dow Jones Industrial Average is likely to respond more quickly to price changes than the other indexes so it is regarded as a warning sign of inflation. a. True *b. False
109. The producer price index is likely to respond more quickly to price changes than the other indexes so it is regarded as a warning sign of inflation. a. True *b. False
110. The GDP deflator for a given year is equal to 100 times nominal GDP for that year minus real GDP for that year. a. True *b. False
111. The GDP deflator for a given year is equal to 100 times nominal GDP for that year divided by real GDP for that year expressed in prices of a selected base year. *a. True
b. False
112. Suppose the CPI was 180.5 last year and this year is 202.2. What is the rate of inflation between last year and this year? What is the rate of inflation between the base year and this year? Correct Answer:
Inflation between last year and this year = (202.2 – 180.5) / 180.5 = 12 percent. We don't need to know how many years separate this year from the base year because the CPI is always 100 in the base year. So inflation since the base year is = (202.2 – 100) / 100 = 102.2 percent. 113.
Reference: Ref 16-9 (Table: Muffin Price Index) A college town has many small coffee shops, and each coffee shop offers a variety of muffins for sale. As an economics project you have been assigned to create a muffin price index (MPI). The Table: Muffin Price Index summarizes price data for recent years. The base year is 2009. Use these data to compute the MPI for each year. Correct Answer:
The first step is to calculate the cost of the market basket of muffins in the base year 2009. The cost of muffins in 2009 = 4 × $1.10 + 1 × $1.10 + 2 × $1.25 = $8. Now using the market basket quantities in 2009 and prices in 2010, we compute the cost of muffins in 2010 as: = 4 × $1.15 + 1 × $1.10 + 2 × $1.45 = $8.60. The MPI in 2010 is = (8.60/8) × 100 = 107.5. Following the same steps for 2011, the cost of muffins in 2011 is: = 4 × $1.25 + 1 × $1.20 + 2 × $1.50 = $9.20. The MPI in 2011 is = (9.20/8) × 100 = 115. 114. Reference: Ref 16-9 (Table: Muffin Price Index) A college town has many small coffee shops, and each coffee shop offers a variety of muffins for sale. As an economics project you have been assigned to create a muffin price index (MPI). The Table: Muffin Price Index summarizes price data for three years. The base year is 2009. Use these data to compute the rate of inflation in the MPI between: A) 2009 and 2010. B) 2008 and 2011. Correct Answer:
A) The first step is to calculate the cost of the market basket of muffins in the base year 2009. The cost of muffins in 2009 is 4 × $1.10 + 1 × $1.10 + 2 × $1.25 = $8. The MPI in the base year is 100. Now using the market basket quantities in 2009
and prices in 2010, we compute the cost of muffins in 2010 as 4 × $1.15 + 1 × $1.10 + 2 × $1.45 = $8.60. The MPI in 2010 is (8.60 / 8) × 100 = 107.5. Thus the rate of inflation is (107.5 – 100)/100 = 0.075, or 7.5 percent. B) The rate of inflation between 2010 and 2011 is the percentage change in the MPI between the two years: (115 – 107.5) / 107.5 = 0.07, or 7 percent. 115. Explain the difference between the CPI and the producer price index. Which is likely to be the first to indicate inflation? Correct Answer:
The CPI measures the overall price level of typical goods and services that consumers and households consume. The producer price index measures the overall price level of typical goods and services, like raw materials, that firms (producers) are likely to consume. The producer price index is likely to be the first to indicate inflation in the economy because producers of commodities can often more quickly identify changes in the demand for their goods. These changes in the price of raw materials will eventually result in changes in the prices of consumer goods. 116.
Reference: Ref 16-10
(Scenario: Market Basket) According to the Scenario: Market Basket, what is the value of the price index in 2011? a. 100 b. 90 *c. 111 d. 132
117.
Reference: Ref 16-10
(Scenario: Market Basket) According to the Scenario: Market Basket, what is the rate of inflation between 2010 and 2011? a. –10 percent *b. 11 percent c. 32 percent d. 0 percent
118.
Reference: Ref 16-10
(Scenario: Market Basket) According to the Scenario: Market Basket, what is the value of the price index in 2010? *a. 100 b. 111 c. 90 d. 0
119. The GDP deflator is: a. a price index. *b. equal to 100 in the base year. c. the ratio of real GDP for year X divided by nominal GDP for year X × 100. d. a measure that tracks price changes for consumer goods.
1. A key statistic to measure economic growth is: a. the size of the government's budget. *b. real GDP per capita. c. life expectancy. d. the Dow Jones stock market index.
2. Which is an important measure of economic growth over time? a. inflation *b. increases in real per capita GDP c. decline in real interest rates d. increases in the available labor supply
3. The best currently available measure of the standard of living in a country is the: a. nominal GDP per capita. *b. real GDP per capita. c. unemployment rate. d. growth rate of productivity.
4. A key measure used to track economic growth is: *a. real GDP per capita. b. nominal GDP. c. real GDP. d. nominal GDP per capita.
5. If a country has a population of 1000, an area of 100 square miles, and a GDP of
$5 million, then its GDP per capita is: a. $500. *b. $5000. c. $50,000. d. $5 million.
6. Real GDP per capita in the United States increased almost ______ between
1900 and 2010. a. twofold. b. threefold. *c. eightfold. d. tenfold.
7. Today, more than ________ of the world's population lives in countries poorer
than the United States was a century ago.
a. one-fifth b. one-third *c. one-half d. two-fifths
8. A typical family in the United States in 1900 had a purchasing power equal to
_____ of the real U.S. GDP per capita in 2010. a. 1 percent *b. 13 percent c. 70 percent d. 136 percent
9. Output per capita in the United States in 2010 was about how many times as
great as in 1900? a. twice as high b. three times as high *c. eight times as high d. ten times as high
10. In the popular press we see many pictures of affluent people in Chinese cities.
Yet the average person in China today is poorer than the average person in America was in: a. 2000. b. 1970. c. 1950. *d. 1900.
11. The standard of living in a country can be best measured by: a. nominal GDP per capita. *b. real GDP per capita. c. the productivity growth rate. d. the business cycles.
12. The ___________ in an economy whose aggregate real output is growing faster
than the total population. *a. real GDP per capita is rising b. standard of living is declining c. national income is falling d. nominal GDP per capita is rising
13. Economists use real GDP per capita to measure economic growth: a. because it is measured by almost all the countries in the world, thus this can be readily used. b. because poor nations have larger populations and richer nations are experiencing a decline in their population. *c. because it represents the inflation-adjusted value of a country's production of goods and services corrected for the effects of changes in a country's population. d. even though the real GNP per capita is a far superior measure of economic growth.
14. Table: South Korea's Real GDP per Capita
Reference: Ref 17-1
(Table: South Korea's Real GDP per Capita) According to the Table: South Korea's Real GDP per Capita, as a percentage of real GDP per capita in 1960, approximately how much did South Korea produce in 2000? a. 10 percent b. 15 percent c. 151 percent *d. 1011 percent
15. Table: South Korea's Real GDP per Capita Reference: Ref 17-1
(Table: South Korea's Real GDP per Capita) According to the Table: South Korea's Real GDP per Capita, as a percentage of real GDP per capita in 2000, approximately how much did South Korea produce in 1960? *a. 10 percent b. 15 percent c. 151 percent d. 1011 percent
16. China has a much higher rate of growth than the United States, but the average
Chinese household is: a. as well off as a typical U.S. household, because China's real GDP per capita is catching up with that of the United States.
b. richer than a typical U.S. household, because China's real GDP per capita is much higher than that of the United States. c. still a bit poorer than a typical U.S. household, but China's real GDP per capita is growing faster to equal that of the United States in a matter of few years. *d. still far poorer than a typical U.S. household, because China's real GDP per capita is much lower than that of the United States.
17. U.S. real GDP per capita in 2010 was _____ as much per person as in 1900. a. 16 percent b. 129 percent c. 46 percent *d. 745 percent
18. The key statistic used to track economic growth over time is a. the size of the workforce. b. nominal GDP. *c. real GDP per capita. d. the poverty rate.
19. We use real GDP, rather than nominal GDP, in order to adjust for changes in: *a. the overall price level. b. size of the population. c. size of the workforce. d. the poverty threshold.
20. In the United States, real GDP per capita in 2010 was ______ times as great as
it was in 1900. a. 3 b. 5 *c. 7 d. 10
21. In 2010, the median household income in the United States was approximately: a. $65,000 *b. $50,000 c. $40,000 d. $30,000
22. Suppose a panel of economists predicts that a nation's real GDP per capita will
double in approximately 20 years. Based upon the rule of 70, what must be the predicted annual growth rate of real GDP per capita? a. 140 percent *b. 3.5 percent c. 2.85 percent d. 14 percent
23. Suppose a panel of economists predicts that a nation's real GDP per capita will
have an average annual growth rate of 2 percent. Based upon the rule of 70, how many years will it take for this nation's real GDP per capita to double? *a. 35 b. 70 c. 140 d. 20
24. The rule of 70 indicates that a 6 percent annual increase in the potential level of
real GDP would lead to the potential output doubling in _______ years. a. 6 *b. 12 c. 24 d. 30
25. The rule of 70 states that a variable's approximate doubling time equals: a. 70 times the growth rate. b. the growth rate divided by 70. c. 70 divided by the doubling time. *d. 70 divided by the growth rate.
26. The formula for the rule of 70, where n is number of years and r is growth rate,
is expressed as: a. n × 70 = r. b. n ÷ r = 70. c. r ÷ n = 70. *d. n × r = 70.
27. The rule of 70 is most useful in: a. identifying the causes of economic growth. b. identifying the sources of economic growth. c. estimating the productivity of labor.
*d. estimating the doubling time of real GDP for a given growth rate.
28. If real GDP grows at an annual rate of 1 percent, it will double in approximately
_______ years. a. 11 b. 23 c. 35 *d. 70
29. If real GDP grows at an average rate of 3 percent per year, it will double in
approximately _______ years. a. less than 10 b. 20 *c. 23 d. 36
30. If real GDP doubles in 35 years, its average annual growth rate is
approximately: a. 1 percent. *b. 2 percent. c. 3 percent. d. 4 percent.
31. If real GDP doubles in 12 years, its average annual growth rate is
approximately: *a. 6 percent. b. 5 percent. c. 4 percent. d. 3 percent.
32. Scenario: Growth Rates in Two Countries
India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500, while the United States is growing at a rate of 3% per year, and its real GDP per capita is about $47,000. Reference: Ref 17-2
(Scenario: Growth Rates in Two Countries) Given the information provided in the Scenario: Growth Rates in Two Countries, how long will it take India to double its real GDP per capita? *a. 7.8 years b. 10.2 years
c. 14.6 years d. 90 years
33. Scenario: Growth Rates in Two Countries
India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500, while the United States is growing at a rate of 3% per year, and its real GDP per capita is about $47,000. Reference: Ref 17-2
(Scenario: Growth Rates in Two Countries) According to the Scenario: Growth Rates in Two Countries, how long will it take the United States to double its real GDP per capita? a. 10.5 years *b. 23.3 years c. 30 years d. 50 years
34. Scenario: Growth Rates in Two Countries
India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500, while the United States is growing at a rate of 3% per year, and its real GDP per capita is about $47,000. Reference: Ref 17-2
(Scenario: Growth Rates in Two Countries) According to the Scenario: Growth Rates in Two Countries, about how much will India's real GDP per capita be in 20 years? *a. $19,600 b. $56,000 c. $14,000 d. $28,000
35. Scenario: Growth Rates in Two Countries
India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500, while the United States is growing at a rate of 3% per year, and its real GDP per capita is about $47,000. Reference: Ref 17-2
(Scenario: Growth Rates in Two Countries) According to the Scenario: Growth Rates in Two Countries, about how much will U.S. real GDP per capita be in 14 years? *a. $71,000 b. $28,000 c. $112,000 d. $224,000
36. Scenario: Growth Rates
Suppose that the current real GDP per capita of the United States is $32,000 and its growth rate is 2 percent per year. The real GDP per capita of China is $4000, and its annual growth rate is 7 percent. Reference: Ref 17-3
(Scenario: Growth Rates) According to the Scenario: Growth Rates, how long will it take the real GDP per capita of the United States to double? *a. 35 years b. 50 years c. 2.25 years d. 14 years
37. Scenario: Growth Rates
Suppose that the current real GDP per capita of the United States is $32,000 and its growth rate is 2 percent per year. The real GDP per capita of China is $4000, and its annual growth rate is 7 percent. Reference: Ref 17-3
(Scenario: Growth Rates) According to the Scenario: Growth Rates, how long will it take China's real GDP per capita to double? a. 14 years *b. 10 years c. 35 years d. 50 years
38. Scenario: Growth Rates
Suppose that the current real GDP per capita of the United States is $32,000 and its growth rate is 2 percent per year. The real GDP per capita of China is $4000, and its annual growth rate is 7 percent. Reference: Ref 17-3
(Scenario: Growth Rates) According to the Scenario: Growth Rates, how many years will it take for China's real GDP per capita to be larger than real GDP per capita in the United States? a. between 70 and 75 years *b. between 40 and 45 years c. between 15 and 20 years d. between 5 and 10 years
39. Scenario: Growth Rates
Suppose that the current real GDP per capita of the United States is $32,000 and its growth rate is 2 percent per year. The real GDP per capita of China is $4000, and its annual growth rate is 7 percent. Reference: Ref 17-3
(Scenario: Growth Rates) According to the Scenario: Growth Rates, using the rule of 70, how large will China's real GDP per capita be in 20 years? a. $5600 b. $8000 *c. $16,000 d. $28,000
40. The rule of 70 states that: a. the average score on standardized tests is normally distributed with a mean of 70 and a standard deviation of 10. b. everyone should retire by age 70. *c. the number of years for a variable to double equals 70 divided by its annual growth rate. d. Social Security benefits should increase when people reach 70.
41. If output is growing at 5 percent annually, how many years will it take for output
to quadruple? a. 14 years b. 10 years c. 20 years *d. 28 years
42. Real GDP per capita, growing at a constant rate over a 35-year period, doubles
in size at the end of that period. What must the annual growth rate of real GDP per capita be for this economy? a. 1 percent *b. 2 percent c. 4 percent d. 15 percent
43. If real GDP per capita grows at a rate of 5 percent per year consistently over
time, how many years will it take for it to double in size? a. 5 b. 10 *c. 14 d. 70
44. There are two countries on a peninsula. The first has a real GDP per capita
annual growth rate of 2 percent and its neighbor to the south has an annual growth rate of 5 percent. How much sooner will the country in the south double its GDP per capita than its neighbor in the north?
a. 5 years b. 10 years c. 15 years *d. 21 years
45. According to the rule of 70, if a country doubles its level of real GDP per capita
every 35 years, that country must be growing at an annual rate of: *a. 2 percent. b. 3.5 percent. c. 35 percent. d. 70 percent.
46. According to the rule of 70, if a country's real GDP per capita grows at an
annual rate of 2 percent instead of 3 percent, it will take _____ additional years for that country to double its level of real GDP per capita. a. 35 *b. 11.67 c. 23.3 d. 30
47. To find the approximate number of years it takes the economy to double, one
would: a. divide its growth rate by 70. *b. divide 70 by its growth rate. c. divide its growth rate by 100. d. multiply its growth rate by 20.
48. Using the rule of 70, if real GDP per capita is growing at 2 percent a year, in 100
years it will have increased by how much? a. about 4 times *b. about 8 times c. almost 30 times d. almost 60 times
49. The rule of 70 applies: a. only to GDP. b. only to GDP per capita. *c. to any growth rate. d. only to developed countries.
50. Of the countries listed, the one with the fastest growth rate of real GDP per
capita between 1980 and 2010 was: a. the United States. b. Ireland. *c. China. d. France.
51. Of the countries listed, the country with the lowest growth rate of real GDP per
capita between 1980 and 2010 was: a. Ireland. b. France. c. Argentina. *d. Zimbabwe.
52. Over the past century, the annual rate of growth of per capita GDP has
averaged *a. 1.9 percent. b. 2.3 percent. c. 2.9 percent. d. 3.5 percent.
53. Using the rule of 70, we can determine that, if real GDP per capita is growing at
a rate of 2.5 percent per year, it will double in approximately _______ years. a. 35 *b. 28 c. 20 d. 15
54. Using the rule of 70, we can determine that, if real GDP per capita is growing at
a rate of 1.6 percent per year, it will double in approximately _______ years. a. 24 b. 30 c. 35 *d. 44
55. Economists say that long-run economic growth is almost entirely due to: *a. rising productivity. b. population growth. c. a democratically elected government. d. a balanced budget.
56. Long-run economic growth depends almost entirely on: *a. labor productivity growth. b. population growth. c. agricultural production growth. d. the number of hours worked.
57. Productivity declines when: a. the number of hours worked exceeds the number of workers. *b. population growth exceeds real GDP growth. c. the ratio of adult civilians employed outside the home rises. d. real GDP growth exceeds the population growth.
58. Productivity is equal to: *a. real GDP divided by the number of workers. b. real GDP divided by the population. c. the number of workers per machine. d. the total output produced.
59. Over the course of the twentieth century, the real GDP per capita in the United
States rose mostly as a result of: a. rising population. b. rising employment. *c. rising productivity. d. reduced vacation time.
60. The primary ingredient necessary for long-run economic growth is: *a. rising labor productivity. b. an increasing population size. c. a strong military. d. a strong currency.
61. Which change would contribute to a nation's rapid long-run economic growth? *a. faster technological progress b. faster population growth c. less physical capital per worker d. lower levels of average human capital
62. Labor productivity growth can be attributed to:
*a. improvement in technological process. b. a decline in university attendance. c. an increase in population growth. d. a decline in the physical capital per worker.
63. The term human capital describes improvement: a. made possible by better machines and the equipment available. b. in the technology available to the work force. *c. in a worker's skills made possible by education, training and knowledge. d. in the robotics technology that can substitute for a human worker.
64. The most important driver for economic growth appears to be: a. increases in physical capital. b. increases in human capital. *c. technological progress. d. foreign investment.
65. Human capital is: *a. the improvement in labor created by education and knowledge that is embodied in the workforce. b. the machinery and tools that each individual worker owns. c. robots that can perform tasks that only humans could do in the past. d. not as important as physical capital.
66. Which will NOT increase the productivity of labor? a. technological improvements b. an increase in the capital stock c. improvements in education *d. an increase in the size of the labor force
67. Which will NOT increase labor's productivity? a. education b. technology c. new capital *d. growth in the population
68. Human capital refers to:
a. output per worker. *b. the education and knowledge embodied in the workforce. c. society's investment in capital goods. d. people working with capital goods.
69. The skills, training, and education possessed by workers that contribute to
economic growth are known as: a. saving. *b. human capital. c. natural resources. d. output of labor.
70. The improvement in labor created by education and knowledge that is
embodied in the work force is known as: a. physical capital. *b. human capital. c. financial capital. d. real capital.
71. For developed countries, which would be considered the most important driver
in productivity growth? a. the level of educational attainment b. the amount of physical capital *c. technological progress d. the abundance of natural resources
72. All are factors that drive productivity growth EXCEPT: *a. growth convergence. b. physical capital. c. technological progress. d. human capital.
73. Rising high school graduation rates are an example of an increase in: a. technological progress. *b. human capital. c. population stock. d. fertility rates.
74. Technological progress allows workers to produce more: a. because it increases the amount of physical capital available.
b. because it increases the amount of human capital available. *c. even when the amount of physical capital and human capital do not change. d. only if the amount of physical capital grows at the same rate.
75. All are reasons the average worker in the United States today produces more
than her or his counterpart a century ago EXCEPT that the modern worker: a. is better educated. b. has more physical capital to work with. c. has better technology to work with. *d. works longer hours.
76. An example of physical capital would be: *a. a truck a company purchases for work. b. a worker who physically learns to work on a truck his company buys. c. a truck a worker buys for personal use like hunting, going to work, or going to the beach. d. a truck a company purchases for work, a worker who physically learns to work on a truck his company buys, or a truck a worker buys for personal use like hunting, going to work, or going to the beach.
77. If technology advances, then: *a. more output can be obtained from the same inputs. b. more inputs are needed to produce the same output. c. less output can be obtained from the same inputs. d. less output can be produced even with more inputs.
78. Workers today are more productive than workers in the past because: a. workers now are physically stronger on average. *b. workers now have more physical capital embodying better technology to work with. c. there are more workers now working with the same number of machines than in the past. d. they are paid more.
79. Physical capital includes: a. the education or knowledge a worker has in his or her physical being. *b. the tools a worker has to work with. c. the money available for the worker to use. d. shares of stock.
80. An example of human capital is the: a. money a person has. *b. job skills a person has. c. capital goods or machines a person owns. d. stocks and bonds in an individual's portfolio.
81. If technology advances: a. GDP per capita declines. b. physical capital is less productive. *c. workers can produce more even with fixed amounts of physical and human capital. d. human capital is less useful.
82. To acquire human capital a person would: a. save to buy a printing press. b. purchase a printing press rather than use his or her money on consumption. *c. learn to use a printing press. d. sell the books that the printing press produces.
83. Workers now are more productive than in the past because workers today: a. have more natural resources to use. b. work four-day weeks. *c. are better educated and so have more human capital. d. are physically larger than their parents.
84. Which sector is responsible for most of the growth that took place in the United
States during the 1990s? a. service sector b. manufacturing sector c. mining sector *d. retail sector
85. According to the text, productivity is driven by all EXCEPT: a. physical capital. b. human capital. c. technological progress. *d. natural resources.
86. Which would NOT qualify as physical capital? a. shovel b. factory c. backhoe *d. mineral deposits
87. Manufactured resources such as buildings and machines are known as a. natural resources. b. variable resources. c. variable inputs. *d. physical capital.
88. The improved capabilities of labor arising from education and knowledge are
known as *a. human capital. b. physical capital. c. knowledge capital. d. knowledge resources.
89. Technology refers to: a. advances in electronic communications. b. advances in transportation. *c. the technical means for producing goods and services. d. the collection of knowledge workers have about their firms.
90. Nation A's real GDP increased from $100 billion to $106 billion between 2010
and 2011. Nation A's population grew from 50 million to 51 million between 2010 and 2011. As a result, real GDP per capita: a. increased because the real GDP increased at a slower rate than the population. *b. increased because the real GDP increased at a faster rate than the population. c. decreased because the real GDP increased at a slower rate than the population. d. decreased because the real GDP increased at a faster rate than the population.
91. Nation A's real GDP increased from $100 billion to $106 billion between 2010
and 2011. Nation A's population grew from 50 million to 51 million between 2010 and 2011. The annual growth rate in real GDP per capita in nation A was approximately:
a. 1 percent. b. –3 percent. *c. 4 percent. d. 6 percent.
92.
Reference: Ref 17-4
(Table: Kenya's Economy in 2010) According to the Table: Kenya's Economy in 2010, aggregate output per capita in Kenya at the beginning of 2010 was: a. $5000. b. $10,000. *c. $775. d. $7750.
93.
Reference: Ref 17-4
(Table: Kenya's Economy in 2010) According to the Table: Kenya's Economy in 2010, aggregate output in Kenya at the end of 2010, assuming no changes in the price level, was about: a. $326 billion. *b. $32.632 billion. c. $3635 billion. d. $6500 billion.
94.
Reference: Ref 17-4
(Table: Kenya's Economy in 2010) According to the Table: Kenya's Economy in 2010, the population in Kenya at the end of 2010 was about: a. 400 million. *b. 41 million. c. 14.002 million. d. 401,000,200.
95.
Reference: Ref 17-4
(Table: Kenya's Economy in 2010) According to the Table: Kenya's Economy in 2010, aggregate output per capita in Kenya at the end of 2010, assuming no changes in the price level, was: a. $7000. b. $7005. *c. $795. d. $7490.
96. Scenario: Growth Rates
Suppose that the current real GDP per capita of the United States is $32,000 and its growth rate is 2 percent per year. The real GDP per capita of China is $4000, and its annual growth rate is 7 percent. Reference: Ref 17-3
(Table: Kenya's Economy in 2010) According to the Table: Kenya's Economy in 2010, during 2010, and assuming no changes in the price level, aggregate output per capita in Kenya grew at a rate of: a. 0.6 percent. *b. 2.6 percent. c. 5.2 percent. d. 7.8 percent.
97. More than 50 percent of the world's population live in countries whose population is poorer than the United States population was in 1907. *a. True b. False
98. As a result of the long-term growth between 1900 and 2010, the output per person in the United States was about twice as large in 2010 as it was in 1900. a. True *b. False
99. According to the rule of 70, a 10 percent annual increase in real GDP would lead to a doubling of real GDP in 7 years. *a. True b. False
100. If an economy experiences a real GDP per capita growth rate of 2 percent, it will take 14 years for GDP per capita to double. a. True *b. False
101. If an economy experiences a doubling in its growth rate in per capita GDP over a 14-year period, then the growth rate in per capital GDP could have averaged 5 percent in each of those years. *a. True b. False
102. A rise in real GDP that is the same as the rate of population growth leaves the average standard of living unchanged. *a. True b. False
103. Long-run economic growth depends almost entirely on one ingredient: rising productivity. *a. True b. False
104. Increases in human capital will promote economic growth. *a. True b. False
105. The three main reasons that the average U.S. worker today produces far more than his or her counterpart a century ago are more physical capital, more human capital, and a great deal of technological progress. *a. True b. False
106. If technology improves, then it takes more inputs to produce the same output as the last period. a. True *b. False
107. Physical capital consists of human-made resources like machines and buildings. *a. True b. False
108. When tracking economic growth, why do economists prefer real GDP per capita over: A) real GDP? B) nominal GDP per capita? Correct Answer:
A) Tracking real GDP would ignore the impact of changes in the population and would not allow for meaningful comparisons between nations of different populations. By dividing by population, we get a sense of each person's share of the national output.
B) Nominal GDP per capita would fail to account for changes in the value of a nation's total output that are attributed to simply changes in the price level. 109. A nation's real GDP per capita increased from $250 billion to $275 billion in one year. Calculate the nation's growth rate. Correct Answer: The growth rate is = (275 - 250) / 250 = 0.10 or 10 percent.
110. A nation's real GDP increased from $250 billion to $265 billion in one year. In that same year, the nation's population increased from 125 million to 130 million. Calculate the nation's real GDP per capita growth rate. Correct Answer:
Real GDP per capita in year 1 = ($250 billion) / (125 million) = $2000. Real GDP per capita in year 2 = ($265 billion) / (130 million) = $2038.46. The growth rate from year 1 to year 2 is = ($2038.46 – $2000) / $2,000 = 0.019, or 1.9 percent. 111. A nation's real GDP increased from $225 billion to $230 billion in one year. In that same year, the nation's population increased from 125 million to 126 million. A) Calculate the nation's real GDP per capita growth rate. B) If this nation maintained this growth rate, how many years would it take for real GDP per capita to double? Correct Answer:
A) Real GDP per capita in year 1 = ($225 billion) / (125 million) = $1800. Real GDP per capita in year 2 = ($230 billion) / (126 million) = $1825.40. The growth rate from year 1 to year 2 is = ($1825.40 – $1800) / $1800 = 0.0141 or 1.41 percent. B) Using the rule of 70, the number of years = 70 / 1.41 = 50 years.
112. The value of real GDP divided by population for a given country: *a. is referred to as the real GDP per capita. b. is always increasing in value for any country. c. remains constant for developing countries. d. is referred to as per capita GDP.
113. If the population and GDP increase by the same percentage, then real GDP
per capita: *a. stays the same. b. increases. c. decreases. d. may change, but one cannot be sure of the direction.
114. In 2010, the median U.S. household income was approximately: *a. $50,000. b. $8000. c. $16,000. d. $25,000.
115. In the past 30 years, both China and India have experienced substantial
economic growth: a. and as a result, they are almost as rich as the United States today. *b. but India is still poorer than the United States was in 1900, and China only now matches that level of income. c. which was fueled by both countries' increases in consumption. d. which came about because of their relatively low levels of saving.
116. The rule of 70 tells us that: a. it takes most countries 70 years to experience an increase in real GDP growth. *b. the number of years it takes for a variable to double is equal to 70 divided by the annual growth rate of the variable. c. the number of years for real GDP per capita to double is the current growth rate plus 70. d. only 70 countries can experience real GDP growth at any given time.
117. If real GDP in country A is $500 billion one year and is $540 billion the
following year, this means the growth rate for this country between the two years is: a. 4 percent. *b. 8 percent. c. 0.8 percent. d. 10 percent.
118. According to the rule of 70, if a country experiences an average growth rate of
7 percent, its real GDP per capita will double in: a. 7 years. *b. 10 years. c. 14 years. d. 2 years.
119. Long-run economic growth has been mostly dependent on:
*a. rising productivity. b. a low unemployment rate. c. an increase in the population which eventually leads to an increase in the labor population. d. countries following the rule of 70.
120. Education's effect on productivity: a. is believed to be less important than the amount of physical capital with which a worker has to work. *b. is an even more important determinant of growth than increases in physical capital. c. has fallen in the past century in the United States. d. depends on the wealth of the country.
121. Factors that influence productivity and therefore growth are: *a. physical and human capital per worker and technological advances. b. government independence. c. more government intervention in the marketplace. d. increased consumption and less investment spending.
122. Historically, one finds that the development of a new technology often: a. results in immediate increases in productivity. *b. leads to increases in productivity only once firms learn how to effectively use the new technology. c. requires a complementary increase in physical and human capital. d. has had no impact on changes in productivity.
123. Technological change: *a. results in increases in total factor productivity. b. is not as important as infrastructure maintenance. c. shifts the aggregate production function downward. d. relies on consumption increases at the expense of saving.
1. On which does the aggregate production function does NOT depend? a. the quantity of physical capital per worker b. human capital per worker c. the state of technology *d. the amount of natural resources
2. Diminishing returns to physical capital implies that when the human capital per
worker and the state of technology remain fixed, each successive increase in physical capital leads to: *a. a smaller increase in productivity. b. a larger increase in productivity. c. a decrease in productivity. d. negative productivity.
3. During the latter half of the twentieth century, the Soviet Union made more
physical capital available to its workers, but this increase in capital resulted in successively smaller increases in worker productivity. This can be explained by: a. diminishing returns to human capital. b. a decline in technology. c. a declining standard of living. *d. diminishing returns to physical capital.
4. Investment in human capital shifts the aggregate production function: a. downward. b. leftward. *c. upward. d. rightward.
5. The aggregate production function exhibits: *a. diminishing returns to physical capital. b. constant returns to physical capital. c. increasing returns to physical capital. d. negative returns to physical capital.
6. An increase in the amount of physical capital per worker _________, while
technological progress ________. a. makes the aggregate production function steeper; changes the slope of the aggregate production function b. makes the aggregate production function steeper; makes the aggregate production function flatter
*c. moves the economy along the aggregate production function; shifts up the aggregate production function d. shifts up the aggregate production function; moves the economy along the aggregate production function
7. Diminishing returns to physical capital means that when the amount of human
capital per worker and the state of technology are held fixed, each increase in the amount of physical capital per worker leads to: *a. a smaller increase in the marginal product of labor. b. a decrease in the total amount of output produced. c. negative marginal product. d. a constant amount of total output.
8. An aggregate production function will show how productivity depends on: a. prices, costs, and profit. *b. technology, human capital per worker, and physical capital per worker. c. population and natural resources. d. technology and natural resources.
9. When there are diminishing returns to physical capital, *a. each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity. b. each successive increase in the amount of physical capital per worker leads to a larger increase in productivity. c. increasing the amount of physical capital in the production process will not increase output. d. improvements in technology will not be effective in improving output.
10. Diminishing returns to physical capital may disappear if we: a. look only at high-tech industries. b. look only at low-tech industries. *c. also increase the level of technology and human capital per worker. d. allow a long time period for adjustment.
11. What technique do economists use to identify the contribution made to
economic growth by each of the individual factors in the aggregate production function? a. productivity metrics b. technology accounting
*c. growth accounting d. capital assessment
12. Total factor productivity is a measure of the: *a. amount of output that can be produced with a given amount of factor inputs. b. cost of technology inputs. c. cost of human capital inputs. d. cost of incorporating new technology in the production process.
13. When total factor productivity increases: *a. an economy can produce more output with a given amount of inputs. b. the cost of inputs will increase. c. the cost of output will increase. d. individual firms are affected, but there is little impact on the country's overall growth rate.
14. Growth accounting allows us to calculate the: a. time it takes for output per worker to double. b. time it takes for real GDP to rise by more than the rate of population growth. *c. effects of greater physical and human capital per worker on economic growth. d. cost of technological progress.
15. A country's economic growth: *a. is heavily dependent on its total factor productivity. b. will be determined primarily by its endowment of natural resources. c. is independent of its human capital per worker. d. is independent of its physical capital per worker.
16. Technological progress is best measured by: a. physical capital per worker. b. human capital per worker. c. population growth. *d. total factor productivity.
17. Which accurately describes what is happening along a typical aggregate
production function? a. At some point, increasing the amount of physical capital per worker will reduce productivity. b. Increases in physical capital per worker will always bring about an increase in productivity that is worth the cost of the additional physical capital. *c. Due to diminishing returns, increasing the amount of physical capital per worker will eventually bring smaller and smaller increases in productivity. d. Adding workers results in real GDP per worker rising at an increasing rate throughout the function.
18. Table: Hypothetical Relationship
Reference: Ref 18-1
(Table: Hypothetical Relationship) The Table: Hypothetical Relationship represents a hypothetical relationship between physical capital per worker and the growth rate of productivity. This economy is experiencing: a. increasing returns to physical capital per worker. b. decreasing total productivity. c. constant total productivity. *d. diminishing returns to physical capital per worker.
19. Due to the presence of diminishing returns to capital, doubling the amount of
physical capital available for one worker to use will: a. decrease output by less than a factor of two. *b. increase output by less than a factor of two. c. increase output by exactly a factor of two. d. increase output by more than a factor of two.
20. Diminishing returns to physical capital means that as more and more physical
capital is combined with a fixed amount of human capital and a fixed technology, eventually: a. aggregate output or real GDP declines. b. aggregate output or real GDP grows. *c. additions to aggregate output or real GDP decline. d. additions to aggregate output or real GDP increase.
21. Growth accounting estimates the: a. increase in the population rate over time. b. increase in the inflation rate over time. *c. contribution of each major factor in the aggregate production function to economic growth. d. contribution of the technology factor in the aggregate production function to economic growth.
22. Figure: Productivity
Reference: Ref 18-2
(Figure: Productivity) An improvement in technology with everything else remaining unchanged is shown on the Figure: Productivity as a movement from: a. B to A. b. A to B. *c. B to C. d. A to C.
23. Figure: Productivity
Reference: Ref 18-2
(Figure: Productivity) An increase in physical capital per worker with everything else remaining unchanged is shown on the Figure: Productivity as a movement from: a. B to C. b. A to C. *c. A to B. d. B to A.
24. Scenario: The Aggregate Production Function
After holding the human capital per worker and technology unchanged, the estimated aggregate production function in Jamaica is: Y / L = 50 × K / L, where Y = real output, L = number of workers, and K = quantity of physical capital. Reference: Ref 18-3
(Scenario: The Aggregate Production Function) According to the Scenario: The Aggregate Production Function, if the quantity of physical capital per worker or K / L = $81, then the real GDP per worker is:
*a. $4050. b. $4000. c. $4096. d. $40,500.
25. Scenario: The Aggregate Production Function
After holding the human capital per worker and technology unchanged, the estimated aggregate production function in Jamaica is: Y / L = 50 × K / L, where Y = real output, L = number of workers, and K = quantity of physical capital. Reference: Ref 18-3
(Scenario: The Aggregate Production Function) According to the Scenario: The Aggregate Production Function, if the real GDP per worker equals $3200, the physical capital per worker equals: a. $81. *b. $64. c. $49. d. $100.
26. Figure: Technological Progress and Productivity Growth
Reference: Ref 18-4
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, if there is a significant increase in human capital per worker (all other factors remaining unchanged), it would be best indicated by a move from: a. A to B. b. B to A.
c. C to B. *d. B to C.
27. Figure: Technological Progress and Productivity Growth
Reference: Ref 18-4
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, if there is an increase in physical capital per worker (all other factors remaining unchanged), it would be best indicated by a move from: *a. A to B. b. B to A. c. C to B. d. B to C.
28. Figure: Technological Progress and Productivity Growth
Reference: Ref 18-4
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, if there is significant technological progress (all other factors remaining unchanged), it would be best indicated by a move from: a. A to B. b. B to A. c. C to B. *d. B to C.
29. Growth accounting enables us to: a. calculate how long it takes the economy to grow. *b. calculate the effects of technological progress on economic growth. c. compare growth rates across countries. d. better calculate real GDP per capita.
30. An increase in capital stock would: a. shift the production function upward. b. shift the production function inward. c. shift the production function downward. *d. cause a movement to the right along a stationary production function.
31. Which would shift the production function upward? a. an increase in the price of oil *b. an improvement in technology c. a decrease in the supply of labor d. a decline in the birth rate
32. Scenario: Technological Progress and Productivity Growth in Techland
Holding technology and human capital fixed in Techland, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000 during the 1980 to 2010 period. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that the actual increase in real GDP per worker during the 1980 to 2010 period was from $40,000 to $320,000. Reference: Ref 18-5
(Scenario: Technological Progress and Productivity Growth in Techland) According to the Scenario: Technological Progress and Productivity Growth in Techland, what was the growth rate of real GDP per capita in Techland during the 1980 to 2010 period? a. 2.0 percent b. 4.5 percent *c. 6 percent d. 17.5 percent
33. Scenario: Technological Progress and Productivity Growth in Techland
Holding technology and human capital fixed in Techland, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000 during the 1980 to 2010 period. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that the actual increase in real GDP per worker during the 1980 to 2010 period was from $40,000 to $320,000. Reference: Ref 18-5
(Scenario: Technological Progress and Productivity Growth in Techland) According to the Scenario: Technological Progress and Productivity Growth in Techland, what was the growth rate of real GDP per capita in Techland attributable to increasing physical capital per worker during the 1980 to 2010 period? *a. 2.0 percent b. 4.5 percent c. 8.75 percent d. 17.5 percent
34. Scenario: Technological Progress and Productivity Growth in Techland
Holding technology and human capital fixed in Techland, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000 during the 1980 to 2010 period. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that the actual increase in real GDP per worker during the 1980 to 2010 period was from $40,000 to $320,000. Reference: Ref 18-5
(Scenario: Technological Progress and Productivity Growth in Techland) According to the Scenario: Technological Progress and Productivity Growth in Techland, what was the growth rate of real GDP per capita in Techland attributable to higher total factor productivity during the 1980 to 2010 period? a. 2.0 percent *b. 4 percent c. 8.75 percent d. 6.5 percent
35. Experts attribute much of the productivity surge that took place in the United
States in the late twentieth century to: a. the growth of transportation companies. b. growth accounting. c. the growth of manufacturing companies. *d. information technology.
36. The popular press loves to talk about new technology. What is the most
important aspect of new technology for economic growth? a. It enables scientists to discover still more new things. b. It enables people to work faster. c. It leads business people to increase capital spending. *d. It leads business people to alter the way they do business.
37. In the 25 years following the development of the first microprocessor in 1971,
the rate of growth of productivity was low because: a. computers were too expensive for most people to buy. *b. it took some time for people to change their way of doing business to take advantage of the new technology. c. there were many flaws in the method of measuring GDP. d. labor morale was low because machines replaced many workers.
38. The United States experienced a slump in productivity growth from:
a. the Great Depression until the early 1960s. *b. the early 1970s through the middle of the 1990s. c. 1947 to 1957, a period known as “the Long Slowdown.” d. the late 1960s to the mid 1980s, a period known as the “the Great Slack.”
39. Although modern information technology began with the development of the first
microprocessor in 1971, productivity growth did NOT begin to accelerate dramatically until the: a. second half of the 1970s. b. mid-1980s. c. first half of the 1990s. *d. second half of the 1990s.
40. Computers started to become more common in the 1970s in the United States.
From this time until the mid-1990s: a. the economy started to grow rapidly. b. real GDP per person increased quickly and then slowed down. c. nominal GDP per person increased quickly. *d. very little happened to productivity.
41. As a result of the fall-off in productivity growth that began in the early 1970s and
continued into the early 1990s: a. diminishing returns from capital set in. b. human capital decreased. *c. economic growth slowed down. d. natural resources became overexploited.
42. Information technology was widely introduced in the economy at the same time
the growth rate of labor productivity slowed down. A possible explanation for this is that: a. the world supply of electricity could not keep up with the increased use of computers. b. one-story factories were poorly suited to accommodate the new technology. c. microprocessors were so slow that they actually hampered, rather than helped, work. *d. for new technologies to increase productivity, they have to be used in new ways.
43. Which country would NOT be characterized by abundant farmland and mineral
deposits?
a. United States b. Canada c. Argentina *d. Japan
44. In 1798, the English economist Thomas Malthus predicted that: a. countries with a large supply of natural resources would always enjoy economic growth. b. the recently independent American colonies would rejoin the British empire out of economic necessity. c. the French Revolution would improve the economies of most European countries. *d. rising population growth would cause productivity to fall.
45. According to Thomas Malthus's work, which is true concerning his pessimistic
prediction of future productivity? a. As population grew, so would output per worker. b. The amount of capital per worker would fall. c. Technology could be counted on to increase output per worker. *d. The amount of land per worker would eventually decline.
46. An international comparison today shows that: a. natural resources are the most important determinant of economic growth. b. population growth is the most important determinant of economic growth. *c. natural resources are less important than human and physical capital per worker in determining productivity. d. resource-rich nations consistently have a higher standard of living than nations where natural resources are sparse.
47. In 1798, Thomas Malthus made the prediction that: a. increases in human capital would improve the standard of living for everyone. *b. any improvements in productivity would be offset by the pressure of an increasing population. c. continual improvements in productivity would improve the standard of living for everyone. d. future production would not be characterized by diminishing marginal returns.
48. In the time since Malthus wrote his book:
a. his predictions have proven true. b. the average standard of living has declined. *c. advances in technology and increases in physical capital have more than offset the effects of a rising population. d. productivity has declined.
49. Malthus's predictions were based on the idea of: a. investments in human capital. b. increased international trade. c. improvements in total factor productivity. *d. diminishing returns to labor.
50. In 1798, the Essay on the Principle of Population was published by: a. Adam Smith. b. Karl Marx. *c. Thomas Malthus. d. David Ricardo.
51. The fundamental argument in the Essay on the Principle of Population was that
improvements in technology or increases in physical capital would lead to only temporary improvements in productivity because they would always be offset by: a. rising human capital demands. b. falling land values. *c. the pressure of rising population and more workers on the supply of land. d. falling birthrates.
52. Natural resources are: a. more important determinants of productivity today than ever before. b. the reason behind the fast development of countries like Japan. c. the reason behind the slow development of countries like Nigeria. *d. less reliable indicators of productivity today than they were a century ago.
53. Thomas Malthus: a. was President Reagan's primary economic advisor. b. successfully predicted the nationalization of the insurance company AIG. *c. predicted that limited land supplies would prevent large increases in real incomes per capita.
d. wrote The Limits to Growth in 1972.
54. The main source of Kuwait's wealth is ________, while the main source of
Germany's wealth is _______. *a. oil; manufacturing b. manufacturing; oil c. tourism; manufacturing d. information technology; tourism
55. Before the twentieth century, the most important determinant of productivity
was: *a. technology. b. natural resources. c. physical capital per worker. d. human capital per worker.
56. Long-run growth is sustainable if: *a. it can continue in the face of limited natural resources and the impact of growth on the environment. b. people continue to buy enough goods and services. c. energy prices are low. d. environmental concerns are ignored during global recessions.
57. Long-run economic growth will be sustainable: a. because pollution and urban sprawl are not real problems. b. because there are plenty of natural resources still left and these can be consumed in the future. *c. if it can continue in spite of the limited supply of natural resources and the impact of growth on environment. d. because the natural resource scarcity and other environmental issues are not really as serious as they seem.
58. In their book, The Limits to Growth, The Club of Rome argued that: a. free trade could make world growth sustainable. b. the World Bank needed to establish a global currency. c. the convergence hypothesis was invalid. *d. limited supplies of natural resources made long-run growth unsustainable.
59. Economists are optimistic that growth can continue in the face of resource
scarcity because:
a. the level of oil reserves is vastly understated by the oil industry. b. prices of scarce resources fall and provide incentives to use more of those resources. *c. prices of scarce resources rise and provide incentives to find alternative energy sources. d. resource scarcity no longer limits economic growth in the twenty-first century.
60. In general, the growth in real GDP per capita: a. was smaller than the growth of per capita oil consumption before 1973. b. fluctuated above and below the growth of per capita oil consumption before 1973. *c. was greater than the growth of per capita oil consumption after 1973. d. was smaller than the growth of per capita oil consumption after oil prices began to increase in 2004.
61. During the 1990s: a. high oil prices encouraged consumers to buy smaller, fuelefficient cars. *b. low oil prices encouraged consumers to buy larger cars and SUVs that were generally less fuel efficient. c. high oil prices encouraged the development of alternative energy sources. d. low oil prices led to decreases in real GDP.
62. Greenhouse gas emissions are an example of a: *a. negative externality. b. public good. c. positive externality. d. private good.
63. Economists mostly agree that the problem of climate change should involve
government action in the form of market-based incentives such as: a. tax rebates to those helping the environment. b. a reduction in the personal income tax for being green. *c. a carbon tax or a cap and trade system. d. a reduction in the price of green cars and appliances.
64. The biggest global environment issue is:
*a. the impact of fossil-fuel consumption on the world's climate. b. the availability of coal. c. how to determine who has the property rights to wind power. d. how to extract oil from Canadian tar sands.
65. As a limit to economic growth, environmental problems are more difficult to
solve than resource problems because: *a. environmental problems don't automatically provide incentives for changed behavior. b. resource problems don't automatically provide incentives for changed behavior. c. the opportunity cost of solving environmental problems in terms of GDP sacrificed is larger. d. most scientists haven't determined the relationship between greenhouse gas emissions and climate change.
66. A negative externality is: a. not as costly as a positive externality. *b. a cost that individuals or firms impose on others without having to offer compensation. c. immune to economic incentives. d. an unavoidable consequence of budget deficits.
67. A cap and trade system: *a. reduces climate change by requiring individuals and firms to buy licenses in order to emit greenhouse gases. b. encourages fair trade by limiting the amount of many vegetables that can be imported from Mexico. c. was used in nineteenth-century England to limit coal consumption. d. exempts Chinese imports from FDA regulations.
68. Economists generally agree that are the best way for governments to reduce
greenhouse gases to address climate change. a. military actions *b. market-based incentives c. direct pollution controls d. subsidies for offshore oil exploration
69. The aggregate production function typically increases at an increasing rate with additions to capital. a. True *b. False
70. Diminishing returns to physical capital means that as more and more physical capital is added to fixed amounts of human capital with a fixed technology, eventually real GDP per worker declines. a. True *b. False
71. According to estimates of the aggregate production function, each 1 percent increase in physical capital, holding human capital and technology constant, raises labor productivity by 0.33 percent. *a. True b. False
72. Growth accounting estimates the contribution of each major factor in the aggregate production function to economic growth. *a. True b. False
73. Figure: The Aggregate Production Function
Reference: Ref 18-6 (Figure: The Aggregate Production Function) The Figure: The Aggregate Production Function shows a nation's aggregate production function. Does this production function exhibit diminishing returns to physical capital? Explain. Correct Answer:
Yes. At first, when the nation's stock of physical capital per worker is low, a one-unit increase will cause a large increase in real GDP per capita. However as the nation's physical capital per worker grows, a one-unit increase will cause a smaller increase in real GDP per capita. Graphically this is seen as a positive but declining slope of the production function. 74. Figure: Nations A and B
Reference: Ref 18-7 (Figure: Nations A and B) The Figure: Nations A and B shows the aggregate production function of two nations, A and B. Suppose that in 1960 each nation had $100 of physical capital for each worker and in 2010 each nation had $400 of physical capital per worker. Compute the growth of real GDP per capita for both nations. Correct Answer:
Nation A: ($5000 – 3000) / 3000 = 67 percent Nation B: ($2000 – 1000) / 1000 = 100 percent 75. Figure: Nations A and B Reference: Ref 18-7 (Figure: Nations A and B) The Figure: Nations A and B shows the aggregate production function of two nations, A and B. Suppose that in 1960 each nation had $100 of physical capital for each worker and in 2010 each nation had $400 of physical capital per worker. Clearly in both 1960 and in 2010 Nation A was producing more real output per capita with the same amount of physical capital per worker. What could explain the difference in these aggregate production functions? Correct Answer:
Nation A might have a population with more human capital than Nation B; Nation A might have better technology; or Nation A might have a more developed infrastructure or a more stable political system. 76. The supply of fossil fuels like coal and petroleum will become scarcer and scarcer in the next 50 years. With a growing global demand for energy and the looming threat of rising global temperatures, it would seem to be a recipe for a dramatic decrease in the growth rate of economic activity. Why do many economists believe that economies can continue to grow even in the face of resource scarcity? Correct Answer:
As fossil fuels become scarcer, prices will rise. Economists firmly believe that consumers and producers will seek out low-price substitutes for more expensive sources of energy and that higher prices will spur conservation. So both the switch to lower-priced sources of energy and the reduced use of fossil fuels will allow economies to grow while reducing global climate change.
77. Diminishing returns to physical capital suggests that: *a. when the amount of human capital per worker and the state of technology are fixed, successive increases in the amount of physical capital per worker lead to a smaller increase in productivity.
b. physical capital increases lead to drops in productivity when the amount of human capital per worker and the state of technology are fixed. c. increases in technological progress lead to decreases in productivity. d. physical capital must be increased less than human capital and technological progress in order for growth to occur.
78. Diminishing returns to physical capital suggests that: *a. at some point, increasing the amount of physical capital per worker is not worth the cost of the additional amount of capital. b. after some point, increasing the amounts of physical capital per worker will lead to decreases in productivity. c. increasing the amounts of physical capital per worker is always worth the cost of the capital. d. there are increasing returns to technology and human capital.
79. Total factor productivity: *a. is the amount of output produced from a given amount of factor inputs. b. is not an essential element in long-run growth. c. is less important than technological progress. d. cannot be used to explain how contributions of factors of production affect a country's growth.
80. Based on historical economic growth, economists have noted that the estimated
aggregate production function: a. exhibits constant returns to physical capital. *b. shows that when holding the amount of human capital and the state of technology fixed, successive increases in the amount of physical capital per worker lead to smaller increases in productivity. c. depends primarily on physical capital and technology advances. d. shows the negative relationship between physical capital and productivity.
81. When a country utilizes more physical capital per worker over time, there will
be: a. lower and eventually zero growth rate of productivity. b. higher growth rates of productivity. c. no change in the growth rate of productivity. *d. lower but always positive growth rates of productivity.
82. Scenario: Capital
An economy initially has 200 units of physical capital per worker. Each year it increases the amount of physical capital by 10 percent. According to the aggregate production function for this economy, each 1 percent increase in physical capital per worker, holding human capital and technology constant, increases output per worker by one-fourth of 1 percent, or 0.25 percent. Reference: Ref 18-8
(Scenario: Capital) According to the Scenario: Capital, in three years' time, what is the level of physical capital per worker in this economy? a. 220 units of physical capital per worker b. 242 units of physical capital per worker *c. 266.2 units of physical capital per worker d. 200 units of physical capital per worker
83. Scenario: Capital
An economy initially has 200 units of physical capital per worker. Each year it increases the amount of physical capital by 10 percent. According to the aggregate production function for this economy, each 1 percent increase in physical capital per worker, holding human capital and technology constant, increases output per worker by one-fourth of 1 percent, or 0.25 percent. Reference: Ref 18-8
(Scenario: Capital) According to the Scenario: Capital, if there is no inflation in this economy and output per worker is initially $1000, what does the estimated output per worker equal after one year? a. $1250 b. $2500 c. $1225 *d. $1025
84. Natural resources: a. are still the most important factor in determining the productivity of human or physical capital for all countries. b. are the only factor which consistently shows a positive impact on productivity for wealthy countries. *c. are a less significant source of productivity growth in most countries today than in earlier times. d. can be used to explain the differences in productivity growth among countries.
85. Many economists view resource scarcity as a: a. major obstacle to long-run economic growth. *b. problem resolved fairly well by the market mechanism. c. primary reason for poor countries' lack of economic growth.
d. problem for wealthy countries but not for poorer countries.
86. Many economists agree that environmental damage from economic growth: a. is extensive and must be addressed through economic channels. *b. occurs but can be contained with market-based incentives and concerted government action. c. results in a lack of growth in some countries. d. occurs only in poorer countries.
1. In the long run, an increase in saving will generally: a. reduce the rate of economic growth. b. leave the rate of economic growth unchanged. *c. increase the rate of economic growth. d. increase consumption simultaneously.
2. Economic growth will likely involve: a. a reduction in investment. b. a decrease in the capital stock. *c. higher saving. d. lower saving.
3. All else equal, a nation that has a high rate of ____ will have a high rate of _____
and therefore a higher growth rate of _____ capital. a. investment; savings; human b. savings; investment; natural *c. savings; investment; physical d. savings; consumption; physical
4. The sources of funds for investment spending are: *a. savings by households, government, and foreigners. b. taxes and transfer payments. c. always equal to U.S. spending on imports. d. directed to their most productive uses by the U.S. government.
5. Technological progress is advanced through: *a. research and development. b. government regulation. c. consumption. d. infrastructure.
6. A country's growth rate depends very highly on how it has invested in its physical
capital. Generally, countries that have: a. used foreign direct investment as a source of their capital have exhibited the highest growth rate. *b. used domestic saving as a source of their investment on physical capital have exhibited the highest growth rate. c. used foreign portfolio investment as a source of their capital have exhibited the highest growth rate. d. used contracted globalization as a source of their capital have exhibited the highest growth rate.
7. In 1820, Mexico had a higher real GDP per capita than Japan. Yet, now Japan is
one of the richer countries in the world and Mexico is a poorer nation. Japan's high rate of economic growth can be explained by all EXCEPT a high: a. investment in physical capital. b. investment in human capital. c. investment in technological progress. *d. level of government interference.
8. Economies with higher growth rates tend to be those that increase their: a. government regulation. *b. human capital. c. consumption. d. resources.
9. Economists believe that the best way to stimulate investment in physical capital
is to encourage: a. higher rates of investment in human capital. b. more spending on infrastructure. c. the conservation of natural resources. *d. higher rates of national savings.
10. Who created the first research and development (R&D) laboratory? a. Galileo *b. Thomas Edison c. Thomas Malthus d. Franklin Roosevelt
11. In the early phases of its industrialization, the United States financed its
investment: a. without any reliance on foreign funds. b. with minimal reliance on foreign funds. *c. with heavy reliance on foreign funds. d. exclusively with domestic savings.
12. Typically, countries in which investment accounts for a large share of GDP: *a. have a high domestic savings rate. b. experience low growth rates. c. experience declining productivity. d. borrow heavily from other countries.
13. Research and development is defined as the process of: a. improving existing products. b. making basic scientific discoveries. c. discovering new uses for old products. *d. creating new technologies and preparing them for practical use.
14. Research and development is typically paid for by: a. private sources only. b. government funds only. *c. a combination of private and government funds. d. international aid organizations.
15. Roads, telephone lines, power facilities, and schools are examples of a nation's: a. technostructure. *b. infrastructure. c. physiostructure. d. sociostructure.
16. Ireland's recent economic growth and improving living standard are due
primarily to: a. its refusal to join the European Union and abandon its own currency for the euro. b. the capture and imprisonment of Sinn Fein leader Gerry Adams. c. the large number of immigrants to the nation from Eastern Europe. *d. an excellent physical and human infrastructure, including a good education system, airports, telecommunications, and shipping facilities.
17. From the standpoint of economic growth, banks are important to: a. fight inflation. b. keep interest rates low. *c. channel savings into investment. d. channel investment into savings.
18. Which CANNOT properly be called a part of infrastructure? a. power lines b. roads and bridges
*c. human capital d. seaports
19. All are examples of government policies aimed at promoting economic growth
EXCEPT: a. building infrastructure and providing public goods. *b. implementing a monetary policy that increases inflation. c. subsidizing education. d. providing political stability and protecting property rights.
20. Example(s) of infrastructure is (are): *a. the water supply system. b. government bonds. c. corporate stock. d. the water supply system, government bonds, and corporate stock.
21. Which is NOT an example of infrastructure? a. roads *b. iron ore deposits c. power plants that generate electricity d. cell phone towers
22. Ireland's recent economic growth and improving living standards are due
primarily to its investment in all of these types of physical and human infrastructure EXCEPT: a. a good education system. b. airports. c. telecommunications. *d. a more open election process.
23. Which institution is important in channeling savings into investment? a. schools b. religious institutions *c. banks d. the federal government
24. Which can properly be called a part of infrastructure? a. robots on an assembly line b. professors
*c. the Golden Gate bridge d. a Broadway show
25. Which is an example of a government policy aimed at promoting economic
growth in the United States? *a. building infrastructure and providing public goods. b. implementing a monetary policy that increases inflation. c. implementing a fiscal policy that increases inflation. d. increasing the interest rate charged on student loans.
26. An example of infrastructure is: *a. New York City's public transportation system. b. corporate bonds. c. private equity firms. d. the water supply system, government bonds and corporate stock.
27. Among the public goods important for economic growth is (are): a. publicly held companies like Ford. *b. political stability. c. public regulation of businesses. d. low taxes.
28. Among the factors that are important for economic growth are: *a. property rights. b. growth accounting. c. natural resources. d. convergence.
29. Government spending is like investment in each case EXCEPT when it: a. goes to help pay for education. b. helps provide infrastructure for the economy. c. is used for public health measures. *d. is used for a personal income tax rebate.
30. Long-run economic growth is: a. higher in countries with a weak rule of law and excessive government intervention. b. lower in countries with a strong government and independent judiciary.
c. lower in countries whose courts enforce property rights and whose government protects its citizens. *d. higher in countries with a strong rule of law and political stability.
31. The role of the government can explain growth differences among countries. All
are government actions that contribute to differences in growth EXCEPT: a. an active government role in building infrastructure. b. significant cost sharing by the government for higher education. *c. excessive government intervention in business practices and licensing. d. pronounced emphasis on research and development projects.
32. It took India more than 40 years to exhibit high economic growth after it gained
independence from British rule in 1947. This faster rate of growth resulted from: a. a more stable government. b. better infrastructure. c. higher investment in human capital. *d. a reduction in the burden of corruption.
33. Which may lead to lower productivity because of a lack of incentives? a. a stable political system b. protection of property rights *c. government subsidies d. public education
34. Economies with higher growth rates tend to be those that have: a. large amounts of natural resources. *b. a stable government that protects property rights. c. high levels of government regulation. d. a large defense budget.
35. One factor frequently cited for slow growth in India until the 1990s is: a. a reliance on the drug trade. b. too little government intervention in the economy. c. a dependence of foreign capital flows. *d. corruption by government officials.
36. When the government invests in building roads, ports, and a reliable power grid,
the government is investing in a nation's:
a. private property. b. human capital. c. technological progress. *d. infrastructure.
37. Government spending on education contributes directly to: a. the development of physical capital. *b. the development of human capital. c. research and development. d. total factor productivity.
38. When the government invests resources in a nation's educational system, the
government is said to be investing in: a. private property. *b. human capital. c. political stability. d. infrastructure.
39. Until a quarter of a century ago, the land in the cerrado of Brazil was considered
useless. All changed that conclusion EXCEPT: a. technological progress due to research and development. b. improved economic policies. c. additional physical capital. *d. additional labor supply due to increases in the population.
40. The main reason South Korea has grown so rapidly is that because it was so
poor: a. it could take advantage of international financial aid for poor countries. b. people left to go to more prosperous countries. *c. it could skip forward, or leapfrog, to use new-generation technology as it developed. d. it could import highly trained engineers from other countries.
41. Since the 1960s, nations like South Korea have been a part of the so-called
East Asian economic miracle because: a. high rates of human capital growth have offset slow savings rates. b. of high rates of national savings that offset the slower rate of technological progress.
c. of high savings rates, greater quantities of physical capital per worker, and slower growth of human capital. *d. of the combination of rapid technological progress, high savings rates, and rapid improvement in human capital.
42. The convergence hypothesis helps explain why: a. highly educated people converge in high-income countries. b. high-income individuals marry other high-income individuals. c. high-income countries continue their high growth rates. *d. the income of high-income and lower-income countries get closer.
43. The idea that relatively poor nations should have higher rates of growth of real
GDP per capita than relatively rich nations is known as the: a. East Asian miracle. b. Industrial Revolution. c. sustainable development hypothesis. *d. convergence hypothesis.
44. The convergence hypothesis states that international differences in real GDP
per capita: a. tend to diverge over time. b. tend to fluctuate over time. c. remain constant over time. *d. tend to narrow over time.
45. The East Asian countries have exhibited tremendous economic growth during
the last 40 years because of all EXCEPT: a. a significant increase in physical capital per worker made possible by very high rate of saving. b. a significant increase in human capital made possible by very good basic education. c. a substantial achievement in technological progress. *d. intervening governments with lots of regulations.
46. The convergence hypothesis says that: *a. differences in real GDP per capita among countries tend to narrow over time. b. differences in real GDP per capita among countries tend to increase over time. c. differences in real GDP per capita do not have much effect on living standards in the long run.
d. aggregate production functions in different countries will all be the same in the long run.
47. The convergence hypothesis says that international differences in GDP per
capita tend to: *a. narrow over time. b. expand over time. c. remain steady over time. d. narrow and then expand over time.
48. Since 1975, East Asia's annual rate of GDP per capital growth has been a. 2 percent. b. 3 percent. c. 5 percent. *d. 6 percent.
49. Throughout the twentieth century, nations in Latin America experienced
disappointing growth rates primarily due to: *a. low rates of national savings, political instability, and little emphasis on education. b. low rates of investment in physical capital that offset a strong emphasis on education. c. abundant natural resources, rapid technological progress, and political instability. d. low rates of national savings, a scarcity of natural resources, and political instability.
50. The book cites which factor for slow growth in Latin America countries? a. their reliance on the drug trade *b. excessive government intervention in the economy c. an overly high birth rate d. excessive reliance on America for foreign trade
51. Which is one reason for Latin America's lack of economic growth since 1920? a. The governments spent too much money on education. b. Latin American industries could not compete with all of the imported products. *c. Savings and investment spending have been low because government policies have led to inflation, bank failures, and other disruptions. d. Latin America has very few natural resources.
52. All are potential reasons for the economic stagnation of Latin America during
the last century EXCEPT: a. irresponsible government policies that fueled high levels of inflation. b. low rates of savings. c. lack of public support for education. *d. excessively large flows of foreign investment.
53. Latin American growth since the 1920s has been relatively slow due to all
EXCEPT: a. a lack of savings to finance investment. b. a lack of a solid education system. c. a lack of political stability. *d. U.S. intervention.
54. The key factor explaining the poor growth performance of the African continent
is probably: *a. the lack of political stability within countries. b. the lack of natural resources. c. overpopulation. d. the prevalence of military conflicts among neighboring countries.
55. The main reason sub-Saharan Africa is so poor is because: a. settlers from Europe own all the land. b. the diamond merchants took all the money away to other countries. *c. of political instability and civil wars. d. all the bright people move to other countries.
56. The economic growth situation in sub-Saharan Africa has been dismal. Which is
NOT a reason for sub-Saharan Africa's problem? *a. stable governments b. government corruption c. a lack of property rights d. a lack of infrastructure
57. The convergence hypothesis is: a. wrong, because the Latin American and African countries have not been able to grow.
*b. not wrong, but education, infrastructure, and the rule of law are not equal among nations. c. not wrong, but because poorer nations are involved in so many destabilizing incidents like wars, disease, and famines, they will never be able to catch up with the rest of the world. d. wrong, because poorer nations' income seems to get worse over time and the richer nations' income gets better.
58. Conditional convergence suggests that poorer: a. countries are still catching up to richer countries. *b. countries' GDP may not catch up to those of richer countries without changes in education and infrastructure. c. countries' growth rates are conditional on their ties to a richer country. d. countries' growth rates are conditional on their birth rates.
59. The convergence hypothesis fits the data only when the factors that affect
growth are held equal across countries. These factors include all EXCEPT: a. education. b. infrastructure. c. favorable policies and institutions. *d. GDP per capita.
60. Which factor does NOT necessarily have to exist for convergence to occur
between two countries? a. equal access to education b. equal access to infrastructure *c. a common language between the two countries d. similar policies and institutions
61. Between which pairing of economies would you expect to see convergence? a. Mexico and Ghana *b. France and Germany c. Brazil and the United Kingdom d. Mexico and Ghana or Brazil and the United Kingdom
62. Albania has a real GDP per capita of $25,000, while England has a real GDP
per capita of $50,000. If real GDP per capita in Albania grows at a 7 percent rate and England's real GDP per capita grows at a 3.5 percent rate, how long will it take for real GDP per capita in the two nations to converge? a. 10 years *b. 20 years
c. 25 years d. 35 years
63. Sweden has a real GDP per capita of $50,000, while Chile has a real GDP per
capita of $250,000. If real GDP per capita in Sweden grows at a 2 percent rate and Chile's real GDP per capita grows at a 4 percent rate, how long will it take for real GDP per capita in the two nations to converge? a. 10 years b. 20 years c. 25 years *d. 35 years
64. Suppose that South Korea is growing at 7 percent per year and is producing
real GDP per capita of about $28,000, while Norway is growing at 3.5 percent per year and is producing real GDP per capita equal to $56,000. If all else stays equal, the real GDP per capita for these two countries will converge in: a. 40 years. *b. 20 years. c. 10 years. d. 4 years.
65. Figure: Technological Progress and Productivity Growth
Reference: Ref 19-1
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, which change in real GDP would have been most likely to result from an increase in domestic savings?
*a. A to B b. B to A c. C to B d. C to A
66. Figure: Technological Progress and Productivity Growth
Reference: Ref 19-1
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, which change in real GDP could have resulted from an increase in foreign investment spending? a. A to B b. B to C c. B to A *d. both A to B and B to C
67. Figure: Technological Progress and Productivity Growth
Reference: Ref 19-1
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, which change in real GDP would be most likely to result from an increase in the quality (as well as quantity) of government spending on education? a. A to B b. B to A *c. B to C d. C to B
68. Figure: Technological Progress and Productivity Growth
Reference: Ref 19-1
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, which change in real GDP would be most likely to result from an increase in the quality (as well as quantity) of public health measures? a. A to B *b. B to C c. B to A d. C to B
69. Figure: Technological Progress and Productivity Growth
Reference: Ref 19-1
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, which change in real GDP would be most likely to result over time from excessive government intervention that results in a decline in property rights? a. A to B b. B to C *c. C to B d. C to A
70. Figure: Technological Progress and Productivity Growth
Reference: Ref 19-1
(Figure: Technological Progress and Productivity Growth) According to the Figure: Technological Progress and Productivity Growth, which change in real GDP would be most likely to result over time from the deterioration of the nation's infrastructure? a. A to B b. B to C c. C to B *d. B to A
71. Which contribute (contributes) to economic development? a. low saving and investment rates b. a command socialist economic system *c. investment in infrastructure d. complete absence of government involvement
72. Most of the rapidly growing Asian nations, though poor, have increased their productivity by providing a very good basic education for their citizens. *a. True b. False
73. Research and development is what we call spending to create and implement new technologies.
*a. True b. False
74. An example of a public good that encourages economic growth is public health services, such as vaccinations. *a. True b. False
75. To encourage an increase in economic growth rates, governments should increase regulation of the economy. a. True *b. False
76. The convergence hypothesis says that international differences in real GDP per capita tend to become greater over time. a. True *b. False
77. According to Jeff Sachs of Columbia University, Africa is politically unstable because Africa is poor and not the other way around. *a. True b. False
78. Two politicians are debating the best ways to spur long-term growth in the nation's real GDP per capita. Candidate X says that we should lower income taxes so that households have more money to spend on goods and services. Candidate Y says that we should lower taxes on interest income so that households have more incentive to save a larger share of their income. Which candidate has the right idea? Correct Answer:
While candidate X has a policy that will get people shopping, the better long-term strategy is the one advocated by candidate Y. When a nation increases its savings rate, the nation is investing in the long-term growth of the stock of physical capital. When households save more, banks have more deposits, and banks will look for ways in which to lend those funds. Many of those borrowers will be firms that need funds to invest in physical capital to grow their companies and increase productivity. 79. Many impoverished nations struggle with diseases like malaria. How would a reduction or the elimination of malaria contribute to long-run economic growth?
Correct Answer:
We might consider a healthier population to be an improvement in the nation's infrastructure and in human capital, both of which increase long-term productivity. If the nation's public health system is better equipped to prevent and cure illnesses, its population can be more productive. A working adult who is healthier misses fewer days of work and is thus more productive. A healthier child misses fewer days of school and thus acquires a better education and is a more productive adult.
80. Investment spending: a. must be paid for by the consumption of domestic households. *b. comes from either the savings from domestic households or the savings of foreign households. c. is paid for by capital outflows. d. must be paid for by government spending.
81. Large technological gains for an economy often result: a. in rapid growth for an economy the moment a new innovation occurs. b. only if the innovation is broad and monumental. *c. from modest as well as large innovations. d. from deliberate attempts at specific types of innovation.
82. Japan's economy: *a. had a higher real GDP per capita than that of most European countries in 2010. b. relied on high consumption to spur its economic growth. c. grew but not as fast as Mexico's economy over the long run. d. had the same real GDP per capita as Mexico in 1820.
83. In 2010, China saved: a. less than the United States saved. *b. more and spent more on investment as a percentage of its GDP than the United States. c. less and spent less on investment as a percentage of its GDP than the United States. d. more but still experienced an economic growth rate which was less than that of the United States.
84. One of the most important types of infrastructure that a government can provide
is: a. a good tax system.
*b. basic health measures such as a clean water supply and disease control. c. the kind that private companies would provide if they were allowed. d. greater intervention in the market mechanism.
85. An action that would hinder growth would be: a. a government's provision of basic health measures. b. a government's support for research and development endeavors. *c. the lack of government oversight for property rights. d. a government's encouragement of increased saving.
86. Factors contributing to differences in countries' growth rates include all
EXCEPT: *a. adherence to the rule of 70. b. differences in savings and investment rates. c. the amount of physical capital available. d. a lack of spending on infrastructure.
87. The convergence hypothesis: a. apparently applies only to wealthy countries. *b. seems to hold only when other things such as education and infrastructure are held equal. c. suggests that relatively poor countries will continue to be poor regardless of their level of saving. d. states that countries' growth depends upon the amount of government intervention in the marketplace.
1. A relatively low saving rate affects productivity growth by: *a. depriving investment spending of the funds needed to increase the physical capital. b. promoting consumption spending and depriving investment in human capital of the funds needed for tuition. c. reducing the tax base and preventing the government from providing public goods. d. stimulating imports and increasing the trade deficit.
2. Facebook's primary type of investment spending is the purchase of: *a. “server farms,” which are arrays of linked computers. b. health care for its employees. c. stock in Yahoo and Google. d. U.S. Treasury securities.
3. Which is (are) source(s) of funds for Facebook's investment spending?
I. investors who purchase shares of stock in the company II. borrowing from savers a. I only b. II only *c. Both I and II d. Neither I nor II
4. Which is considered investment spending in macroeconomics? *a. GM builds a new plant to manufacture automobiles. b. Ryan Jones buys some GM stock. c. Ryan Jones buys some GM bonds. d. Ryan Jones buys some GM stock and bonds.
5. Which does economists view as investment spending? a. stocks b. bonds *c. spending on physical capital d. mutual fund investing
6. Investment spending refers to: a. buying stocks. b. buying newly issued shares of stock. *c. adding to physical capital. d. adding to one's retirement account.
7. Which is considered to be investing in a physical asset? a. purchasing shares of stock in IBM b. selling shares of stock in IBM c. buying a bond issued by IBM *d. buying a new factory that produces IBM handheld devices
8. Which is an example of investment spending? a. The owner of a Domino's Pizza store has employed two students to deliver pizzas. b. The manager of a local Domino's Pizza store has taken some cash to the bank to make a deposit. *c. A local Domino's Pizza store has purchased a new pizza oven. d. The owner of the Domino's Pizza store has used some of her salary to buy shares of stock in the Domino's corporation.
9. The sources of financing of physical capital, with the exception of infrastructure,
include mainly: a. domestic consumption. b. taxes. *c. private investment spending. d. government spending.
10. Most human capital is provided by:
I. governments through public education II. investment spending by private sector firms *a. I only b. II only c. Both I and II d. Neither I nor II
11. Most physical capital, except for infrastructure, is provided by:
I. governments through public education II. investment spending by private sector firms a. I only *b. II only c. Both I and II d. Neither I nor II
12. Which are sources of funding for private investment spending?
I. savings of the owners of a family business II. profits of a large corporation III. borrowing a. I only b. II only c. III only *d. I, II, and III
13. Physical capital is purchased through investment spending, which in turn is
mostly financed out of: a. taxes. *b. domestic and foreign savings. c. import tariffs. d. consumption expenditure.
14. Private savings is equal to: *a. income after taxes minus consumption. b. taxes minus government spending on goods and services. c. the total amount of savings accounts plus stocks plus bonds owned by households. d. income plus investment.
15. Scenario: Closed Economy S = I
GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Reference: Ref 20-1
(Scenario: Closed Economy S = I) According to the Scenario: Closed Economy S = I, how much is private saving? a. $4 trillion b. $2.5 trillion *c. $3.5 trillion d. –$0.5 trillion
16. Scenario: Closed Economy S = I
GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Reference: Ref 20-1
(Scenario: Closed Economy S = I) According to the Scenario: Closed Economy S = I, what is the government budget balance?
a. a surplus of $1.5 trillion *b. a deficit of $1.5 trillion c. a surplus of $0.5 trillion d. a deficit of $0.5 trillion
17. Scenario: Closed Economy S = I
GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Reference: Ref 20-1
(Scenario: Closed Economy S = I) According to the Scenario: Closed Economy S = I, how much is national saving? a. $3.5 trillion b. $3 trillion c. $2.5 trillion *d. $2 trillion
18. Scenario: Closed Economy S = I
GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Reference: Ref 20-1
(Scenario: Closed Economy S = I) According to the Scenario: Closed Economy S = I, how much is investment spending? a. $3.5 trillion b. $3 trillion c. $2.5 trillion *d. $2 trillion
19. In a simple closed economy, all investment spending must come from: *a. savings. b. money creation. c. debt issuance. d. foreign borrowing.
20. The budget balance is equal to: a. taxes plus government spending. *b. taxes minus government spending. c. consumption plus investment. d. imports minus exports.
21. A budget surplus exists when which occurs?
*a. Taxes are greater than government spending. b. Taxes are less than government spending. c. Taxes are less than government spending plus investment. d. Investment is less than government spending less taxes.
22. National savings is the sum of private savings and: a. private consumption. b. government tax revenue. *c. the budget balance. d. trade surplus.
23. In a closed economy, all investment spending must come from: a. government. *b. national savings. c. foreign savings. d. government, domestic savings and foreign savings.
24. The savings-investment spending identity says that: a. each person in the economy must invest as much as he or she saves. *b. savings and investment spending are always equal for the economy as a whole. c. savings must equal government investment for the economy as a whole. d. each person in the economy must save as much as he or she invests.
25. In a closed economy, investment spending, I, must equal: *a. GDP – C – G. b. GDP – C. c. GDP – C – G – X. d. GDP – [C × G].
26. The government saves when it: a. has a balanced budget. b. has a budget deficit. *c. has a budget surplus. d. borrows by selling bonds.
27. The government saves when tax revenue:
a. is smaller than government spending. *b. is larger than government spending. c. equals government spending. d. is positive.
28. National savings in a closed economy is all EXCEPT: a. the sum of private savings plus the government budget balance. b. the total savings generated within the economy. c. GDP – C – G. *d. government spending minus consumption.
29. One difference between a closed and an open economy is that in: *a. an open economy, foreign savings complement domestic savings in financing investment spending. b. an open economy, the government is more open to the idea of financing investment spending than in the former. c. a closed economy, foreign savings complement domestic savings in financing investment spending. d. a closed economy, foreign savings finance more investment spending than in the latter.
30. The savings-investment spending identity says that savings and investment
spending are: a. always equal because private savings match government savings. b. equal as long as there is no trade surplus or deficit. *c. always equal for the economy as a whole. d. equal as long as there is not government budget deficit or surplus.
31. In a closed economy, the savings-investment spending identity is: a. I = GDP – C – G + (IM – NX). b. NS = GDP + I. c. NS = GDP + (C – T + TR) + (T – TR – G). *d. I = GDP – C – G.
32. In a closed economy government spending was $30 billion, consumption was
$70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending was $10 billion. As a result: a. private savings were equal to $10 billion. b. the government's budget balance was equal to a surplus of $10 billion. c. net savings were equal to $0. *d. private savings were equal to $20 billion.
33. According to the savings-investment spending identity: *a. savings equals investment spending. b. government spending equals tax receipts. c. total income equals consumption spending plus savings. d. savings equals investment spending plus consumption spending.
34. In a closed economy, national savings is equal to private savings: a. minus consumption spending. *b. plus the budget balance. c. minus investment spending. d. minus tax receipts.
35. In a closed economy, national savings is equal to: a. (disposable income minus consumption spending) minus (tax receipts minus government spending). b. (disposable income minus consumption spending) plus (government spending minus tax receipts). *c. (disposable income minus consumption spending) plus (tax receipts minus government spending). d. (consumption spending minus disposable income) plus (government spending minus tax receipts).
36. In an open economy, total investment is equal to: *a. national savings plus capital inflow. b. private savings plus national savings plus capital inflow. c. private savings plus capital inflow. d. national savings minus private savings minus capital inflow.
37. Scenario: Open Economy S = I
In an open economy the GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. Reference: Ref 20-2
(Scenario: Open Economy S = I) According to the Scenario: Open Economy S = I, how much is private saving? a. $4 trillion b. $2.5 trillion *c. $3.5 trillion d. $1.5 trillion
38. Scenario: Open Economy S = I
In an open economy the GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. Reference: Ref 20-2
(Scenario: Open Economy S = I) According to the Scenario: Open Economy S = I, what is the government budget balance? a. a surplus of $1.5 trillion *b. a deficit of $1.5 trillion c. a deficit of $0.5 trillion d. a surplus of $3.5 trillion
39. Scenario: Open Economy S = I
In an open economy the GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. Reference: Ref 20-2
(Scenario: Open Economy S = I) According to the Scenario: Open Economy S = I, how much is national saving? a. $4 trillion b. $3.5 trillion *c. $2 trillion d. $5.5 trillion
40. Scenario: Open Economy S = I
In an open economy the GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. Reference: Ref 20-2
(Scenario: Open Economy S = I) According to the Scenario: Open Economy S = I, how much is the net capital inflow? a. $1 trillion *b. $2 trillion c. $3 trillion d. $4 trillion
41. Scenario: Open Economy S = I
In an open economy the GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. Reference: Ref 20-2
(Scenario: Open Economy S = I) According to the Scenario: Open Economy S = I, how much is investment spending? a. $2 trillion b. $3 trillion c. $3.5 trillion *d. $4 trillion
42.
Reference: Ref 20-3
(Table: Investment Spending, Private Spending, and Capital Inflows) According to the Table: Investment Spending, Private Spending, and Capital Inflows, what is the budget balance as a percentage of GDP in Northlandia? a. –10 percent b. 0 percent *c. 10 percent d. 20 percent
43.
Reference: Ref 20-3
(Table: Investment Spending, Private Spending, and Capital Inflows) According to the Table: Investment Spending, Private Spending, and Capital Inflows, what is the budget balance as a percentage of GDP in Southlandia? a. –10 percent *b. 0 percent c. 10 percent d. 20 percent
44.
Reference: Ref 20-3
(Table: Investment Spending, Private Spending, and Capital Inflows) According to the Table: Investment Spending, Private Spending, and Capital Inflows, Northlandia has a ______, while Southlandia has a ________. a. balanced budget; budget deficit b. budget deficit; balanced budget *c. budget surplus; balanced budget d. balanced budget; balanced budget
45. Scenario: A Small Economy
Suppose there is no trade and no government in a small economy. The GDP is equal to $25 trillion, and consumption spending is equal to $18 trillion this year. Reference: Ref 20-4
(Scenario: A Small Economy) According to the Scenario: A Small Economy, what is the level of private saving? *a. $7 trillion b. $18 trillion c. -$2 trillion d. –$7 trillion
46. Scenario: A Small Economy
Suppose there is no trade and no government in a small economy. The GDP is equal to $25 trillion, and consumption spending is equal to $18 trillion this year. Reference: Ref 20-4
(Scenario: A Small Economy) According to the Scenario: A Small Economy, what is the level of investment spending? a. $18 trillion *b. $7 trillion c. $25 trillion d. –$7 trillion
47. Scenario: A Small Economy
Suppose there is no trade and no government in a small economy. The GDP is equal to $25 trillion, and consumption spending is equal to $18 trillion this year. Reference: Ref 20-4
(Scenario: A Small Economy) According to the Scenario: A Small Economy, there is a new government, and it imposes taxes on its citizens in order to spend on infrastructure. Taxes are equal to $2 trillion and government spending is equal to taxes. What is the level of private saving now? a. $11 trillion b. $7 trillion *c. $5 trillion d. $18 trillion
48. Scenario: A Small Economy
Suppose there is no trade and no government in a small economy. The GDP is equal to $25 trillion, and consumption spending is equal to $18 trillion this year. Reference: Ref 20-4
(Scenario: A Small Economy) According to the Scenario: A Small Economy, there is a new government and it imposes taxes on its citizens in order to spend on
infrastructure. Taxes are equal to $2 trillion and government spending is equal to taxes. What is the level of investment spending now? a. $7 trillion *b. $5 trillion c. $18 trillion d. –$4 trillion
49. Which is an accurate formula for the budget balance? *a. The budget balance equals taxes minus government spending. b. The budget balance equals transfers minus government spending. c. The budget balance equals taxes plus government spending. d. The budget balance equals savings plus taxes.
50. National savings is equal to: a. private savings plus consumption spending. b. trade balance plus the budget balance. *c. private savings plus the budget balance. d. government spending plus taxes.
51. Capital inflow is equal to: a. GDP plus exports minus imports. b. the growth in capital stock minus investment spending. c. foreign direct investment. *d. the total inflow of foreign funds minus the total outflow of domestic funds.
52. The correct relationship between taxes and private savings is given by taxes
equal: a. government spending plus private savings. b. total spending minus consumption minus investment minus private savings. *c. total income minus consumption minus private savings. d. consumption plus private savings plus total income.
53. The relationship between the government's budget deficit and its spending is: a. the budget deficit equals tax revenues plus transfer payments. b. government spending equals private savings plus the budget deficit. c. tax revenues equal national savings plus the budget deficit. *d. the budget deficit equals government spending minus tax revenues.
54. Capital inflows represent the: *a. net inflow of funds into a country. b. net outflow of funds from a country. c. amount that domestic savings exceeds foreign savings. d. excess of domestic physical capital exported minus the amount of physical capital imported.
55. Assume that I = Sprivate + Sgovernment + (IM – X). Furthermore, imports are
equal to exports. Given this situation, which is true? a. Private savings plus government savings exceed investment. b. Private savings exceed investment. c. Private savings plus government savings are less than investment. *d. Private savings plus government savings are equal to investment.
56. Net capital inflows equal: a. national savings. *b. imports minus exports. c. consumption. d. consumption plus government spending.
57. In an open economy where government spending was $30 billion, consumption
was $70 billion, taxes were $20 billion, and GDP was $100 billion this year, investment spending was $10 billion. As a result, there was: *a. a net capital inflow of $10 billion. b. capital inflows of $10 billion and capital outflows of $20 billion. c. a trade surplus of $20 billion and a financial deficit of $20 billion. d. a net capital outflow of $10 billion.
58. If a country has a trade surplus, we can conclude that it also has a: a. budget surplus. *b. net capital outflow. c. net capital inflow. d. budget deficit.
59. In an open economy, savings can come from all EXCEPT:
a. domestic sources. b. foreign sources. c. government sources. *d. consumption.
60. A capital inflow into a country is associated with: *a. imports exceeding exports. b. a decreased source of funds available for domestic investment. c. imports equaling exports. d. imports less than exports.
61. The government can increase savings by: *a. taxing more than it spends. b. spending more than it taxes. c. increasing inflation. d. increasing the deficit.
62. Governments can save when: a. taxes are less than expenditures. *b. taxes are greater than expenditures. c. the government borrows to finance its expenditures. d. the president insists that Congress balance the budget.
63. Which accounting identities is NOT true for a simplified economy without
government and without interaction with the rest of the world? a. Total income = Total spending *b. Total income + Savings = Consumption spending c. Total income = Consumption spending + Savings d. Total spending = Consumption spending + Investment spending
64. In a simplified economy with no government and no interaction with the rest of
the world, savings will always be: a. greater than investment spending. b. less than investment spending. *c. equal to investment spending. d. equal to consumption spending.
65. A budget surplus arises when a. consumption spending exceeds investment spending. *b. there is government-generated savings.
c. savings are equal to consumption. d. tax revenues fall short of government expenditures.
66. A budget deficit arises when a. consumption spending exceeds investment spending. b. there is government-generated savings. c. savings are equal to consumption. *d. tax revenues fall short of government expenditures.
67. Which statement is FALSE for an economy that has no interactions with the rest
of the world? a. A budget surplus means that the budget balance is positive. b. A budget deficit means that the budget balance is negative. c. National savings is equal to the sum of private savings plus the budget balance. *d. If the budget balance is negative, private savings must also be negative.
68. In an economy with a positive capital inflow: *a. some investment spending is funded by the savings of foreigners. b. some portion of national savings is used to finance investments in foreign countries. c. investment will be less than national savings. d. the budget balance must be zero.
69. In an economy with a negative capital inflow: a. some investment spending is funded by the savings of foreigners. *b. some portion of national savings is used to finance investments in foreign countries. c. investment will exceed national savings. d. savings rates will be low, compared with the level of investment.
70. In 2012, the United States experienced a net capital: a. outflow of $273 billion. b. outflow of $195 billion. *c. inflow of $432 billion. d. inflow of $108 billion.
71. In an open economy, savings is equal to: a. the budget balance plus net capital outflow. b. investment spending plus consumption. *c. national savings plus new capital inflow. d. capital inflow minus capital outflow.
72. According to the savings-investment spending identity: *a. savings and investment spending are always equal for the economy as a whole. b. savings must be greater than investment spending for the economy as a whole to experience long-run economic growth. c. savings must be less than investment spending for the economy as a whole to experience long-run economic growth. d. the identity of savers and investors is important in encouraging long-run economic growth.
73. GDP is the value of: a. consumption spending by consumers plus investment spending plus government purchases of goods and services plus the value of exports plus spending on imports. *b. consumption spending by consumers plus investment spending plus government purchases of goods and services plus the value of exports minus spending on imports. c. consumption spending by consumers plus investment spending minus government purchases of goods and services minus the value of exports plus spending on imports. d. consumption spending by consumers minus investment spending minus government purchases of goods and services plus the value of exports plus spending on imports.
74. Table: National Income Accounts
Trillions of dollars GDP $15.9 Consumption 11.3 Government spending 3.0 Exports 2.2 Imports 2.7 Budget balance –1.2 Reference: Ref 20-5
(Table: National Income Accounts) Given the values in the Table: National Income Accounts, the value of investment spending is: a. $15.9 trillion. b. $4.9 trillion. *c. $2.1 trillion.
d. -$0.5 trillion.
75. Table: National Income Accounts
Trillions of dollars GDP $15.9 Consumption 11.3 Government spending 3.0 Exports 2.2 Imports 2.7 Budget balance –1.2 Reference: Ref 20-5
(Table: National Income Accounts) Given the values in the Table: National Income Accounts, the value of national savings is: a. $15.9 trillion. b. $4.9 trillion. c. $2.1 trillion. *d. $1.6 trillion.
76. Table: National Income Accounts
Trillions of dollars GDP $15.9 Consumption 11.3 Government spending 3.0 Exports 2.2 Imports 2.7 Budget balance –1.2 Reference: Ref 20-5
(Table: National Income Accounts) Given the values in the Table: National Income Accounts, the value of tax revenue is: *a. $1.8 trillion. b. $4.9 trillion. c. $2.1 trillion. d. $1.6 trillion.
77. Table: National Income Accounts
Trillions of dollars GDP $15.9 Consumption 11.3 Government spending 3.0 Exports 2.2
Imports 2.7 Budget balance –1.2 Reference: Ref 20-5
(Table: National Income Accounts) Given the values in the Table: National Income Accounts, the value of net capital inflow is: a. $1.8 trillion. *b. $0.5 trillion. c. $4.9 trillion. d. $1.6 trillion.
78. Table: National Income Accounts
Trillions of dollars GDP $15.9 Consumption 11.3 Government spending 3.0 Exports 2.2 Imports 2.7 Budget balance –1.2 Reference: Ref 20-5
(Table: National Income Accounts) Given the values in the Table: National Income Accounts, the value of private savings is: a. $1.8 trillion. b. $0.5 trillion. *c. $2.8 trillion. d. $1.6 trillion.
79. Currently, the United States is a net recipient of foreign savings. a. This has never happened before in the United States. b. This is bad because we are borrowing money from overseas. c. This is bad because we are losing control over our own destiny. *d. This has been true since the 1980s.
80. As a percentage of GDP in 2007, national savings in the United States was: a. –5 percent b. 0 percent *c. 14 percent d. 50 percent
81. Since the 1980s national savings in the United States have been low primarily
because of:
a. large government budget deficits. b. large government budget surpluses. c. higher income tax rates. *d. low private savings.
82. One reason that UnitedStates private savings are low compared to many other
countries is that: *a. consumers have easier access to credit in the United States than elsewhere. b. it is more difficult for consumers to borrow money in the United States than in other countries. c. U.S. income tax rates are higher than tax rates in most other countries. d. inefficiencies in the financial system in the United States discourage private savings.
83. One reason that U.S. private savings are low compared to many other countries
is that: a. consumers have less access to credit in the United States than elsewhere. b. it is more difficult for consumers to borrow money in the United States than in other countries. c. U.S. income tax rates are lower than tax rates in most other countries. *d. the Social Security system, by providing guaranteed income for retirees, reduces the incentive for private saving.
84. Facebook's primary type of investment spending is the purchase of “server farms,” which are arrays of linked computers that track and process social media information. *a. True b. False
85. Most of Facebook's investment spending is for scholarships for its employees to study the latest social media technology. a. True *b. False
86. The financial system contributes to long-run economic growth by channeling funds from savers to businesses for investment spending. *a. True b. False
87. Investment spending contributes to economic growth. *a. True b. False
88. Most human capital is provided by private investment for private education. a. True *b. False
89. Most human capital is provided by the government through public education. *a. True b. False
90. Most physical capital, except infrastructure, is created through private investment spending by individuals and businesses. *a. True b. False
91. Investment spending in a closed economy must equal GDP minus consumption minus government spending. *a. True b. False
92. The government saves when it runs a budget deficit. a. True *b. False
93. A budget deficit occurs when tax revenue is greater than government spending plus government transfers. a. True *b. False
94. The saving-investment spending identity says that savings and investment spending are always equal for the economy as a whole. *a. True b. False
95. If a country's capital inflow exceeds outflow, then foreigners are contributing to the domestic country's investment spending. *a. True b. False
96. A capital inflow has the same effect on the national economy as national savings. a. True *b. False
97. According to the savings-investment spending identity, savings and investment spending are the most essential components of GDP. a. True *b. False
98. According to the savings-investment spending identity, savings and investment spending are always equal for the economy as a whole. *a. True b. False
99. In 2007 savings as a percentage of GDP in the United States was higher than savings as a percentage of GDP in Italy. a. True *b. False
100. In 2007 savings as a percentage of GDP in the United States was lower than the savings as a percentage of GDP in Japan. *a. True b. False
101. In 2007 savings as a percentage of GDP in the United States was higher than the savings as a percentage of GDP in any other wealthy country. a. True *b. False
102. Since the 1980s national savings in the United States has been low primarily because of large government budget deficits.
a. True *b. False
103. Since the 1980s national savings in the United States has been low primarily because of low private savings. *a. True b. False
104. One reason that U.S. private savings are low compared to many other countries is that it is more difficult for consumers to borrow money in the United States than in other countries. a. True *b. False
105. One reason that U.S. private savings are low compared to many other countries is that consumers have more access to credit in the United States than elsewhere. *a. True b. False
106. One reason that U.S. private savings are low compared to many other countries is that inefficiencies in the financial system in the United States discourage private savings. a. True *b. False
107. One reason that U.S. private savings are low compared to many other countries is that the Social Security system, by providing guaranteed income for retirees, reduces the incentive for private saving. *a. True b. False
108. Suppose the federal government has a budget deficit and the economy is closed. Using the savings-investment spending identity, explain how this affects investment spending. Correct Answer:
National savings are equal to private savings plus the budget balance. If the budget is in a state of deficit, then the budget balance is a negative number and national savings are falling. Through the identity, if national savings are falling, investment spending must also be falling.
109. Suppose the federal government has a balanced budget, the economy is open, and there is a positive capital inflow from foreign citizens. Using the savings-investment spending identity, explain how this affects investment spending. Correct Answer:
National savings are equal to private savings plus the budget balance plus capital inflow. If the budget is balanced, then the budget balance is actually zero, but with positive capital inflow, national savings are rising. Through the identity, if national savings are rising, investment spending must also be rising. 110. Assume that an economy is open to capital inflows and that capital inflows are equal to the difference between imports and exports (IM – X). Answer each of these questions. a. Budget balance = –$20; X = $60; IM = $90; Private saving = $150. Calculate investment spending. b. Private saving = $200; Investment = $220; Budget balance = –$30. Calculate (IM – X). Correct Answer:
Use the savings-investment spending identity. a. I = Private spending + budget balance + (IM – X). I = 150 – 20 + 30; I = $160. b. I = Private spending + budget balance + (IM – X). 220 = 200 – 30 + (IM – X); (IM – X) = $50.
111. Human capital development often comes from: a. financial markets. *b. government and private spending for education. c. the private sector, but only in capitalist economies. d. investment spending by businesses.
112. This year, Alan purchases a home built in the 1950s. Alan's purchase: a. counts as residential investment spending in this current year. b. counts as government spending in this current year. *c. does not count as investment spending in this current year. d. is considered business fixed investment in this current year.
113. Human capital refers to: a. changes in inventories. *b. the education or training which workers possess. c. funds available for investment spending. d. spending on physical capital, such as machines which aid workers.
114. Domestic savings and foreign savings are: *a. sources of funds for investment spending. b. equal to each other in terms of the composition of total savings. c. used for investment spending only when there is unplanned investment spending. d. not necessary for investment spending, since government funds this spending.
115. If an economy is closed: *a. its only source of funding for investment spending is domestic saving. b. its sources of funding for investment spending are domestic and foreign saving. c. the only source of funding for investment spending is government spending. d. the government will increase taxes to provide for investment spending.
116. In an open economy, which is true? *a. GDP = C + I + G + X – IM b. GDP = C + I + G c. GDP = T – TR – G d. GDP = Sprivate + Sgovernment
117. When government spending is less than net taxes: a. there is a budget deficit. b. government savings is negative. *c. there is budget surplus. d. the economy is moving toward a balanced budget.
118. The budget balance is equal to: *a. taxes minus government spending. b. taxes plus government spending. c. GDP minus consumption and government spending. d. GDP plus taxes.
119. National savings is the sum of: *a. private savings plus the budget balance.
b. private savings and government spending. c. investment spending plus consumption. d. consumption spending minus government spending.
120. If capital inflow is negative, then a country is: a. borrowing more than it is lending to other countries. *b. lending more than it is borrowing from other countries. c. experiencing balanced trade. d. importing more than it exports.
121. If a country has a positive capital inflow, it is: *a. borrowing more than it is lending to foreigners. b. experiencing an inflow amount equal to its X + IM. c. lending more than it is borrowing from foreigners. d. experiencing an outflow amount equal to its X + IM.
122. In an open economy: a. a country with a positive capital inflow will also have X greater than IM. *b. savings of foreigners may be supporting investment spending. c. capital inflows are always negative. d. investment spending equals national savings.
123. A government has a budget deficit in an open economy. This means: a. the government is spending less than its tax revenue. b. exports minus imports are zero. c. exports minus imports are positive. *d. the government is spending more than its tax revenue.
124. When portions of investment spending are financed by a capital inflow: a. interest is being paid to the government of the country receiving the capital inflow for the use of those funds. *b. interest is being paid to a foreigner for use of those funds. c. consumers will need to cut back on spending. d. taxes will be raised to pay for this capital inflow.
1. Economists use _____ as a model to explain how savers and borrowers come
together to determine the equilibrium rate of interest. a. the money market *b. the market for loanable funds c. aggregate demand and aggregate supply d. the financial system
2. The loanable funds market maximizes the: a. interest rate to savers. b. rate of return by borrowers. *c. gains from trade between lenders and borrowers. d. amount of investment spending in the economy.
3. The price in the loanable funds market is the: a. rate of return of a project. b. price level. *c. interest rate. d. consumer price index.
4. The price determined in the market for loanable funds is the: a. margin call. b. profit rate. c. transaction fee. *d. interest rate.
5. The model of the loanable funds market represents interactions between: a. taxpayers and government entities. *b. borrowers and lenders. c. exporters and importers. d. households and firms.
6. A business will want to borrow to undertake an investment project when the rate
of return on that project is: a. lower than the interest rate. *b. higher than the interest rate. c. higher than the exchange rate. d. equal to the inflation rate.
7. The demand for loanable funds is _____ sloping because _____ respond to
lower interest rates by _____ their quantity demanded of loanable funds.
*a. downward; investors; increasing b. downward; savers; increasing c. upward; investors; decreasing d. upward; savers; decreasing
8. Figure: Demand for Loanable Funds
Reference: Ref 21-1
(Figure: Demand for Loanable Funds) According to the Figure: Demand for Loanable Funds, when the interest rate is 6 percent, the quantity demanded of loanable funds will equal: a. $30 billion. b. $40 billion. *c. $50 billion. d. $60 billion.
9. A firm does NOT want to borrow money for a project when the: *a. interest rate is higher than the rate of return on the project. b. interest rate is lower than the rate of return on the project. c. interest rate is positive. d. rate of return on the project is positive.
10. A business will want a loan when: *a. interest rate is less than the rate of return on a project. b. rate of return on a project is less than the interest rate. c. rate of return on a project minus the interest rate is less than 0. d. the interest rate is greater than the rate of return on a project.
11. The demand curve for loanable funds slopes: a. upward, since it takes a higher rate of return to get more funds. b. downward, because there are more potential projects that yield 10 percent than yield 5 percent.
c. upward, because higher rates of return are necessary to cover higher costs. *d. downward, because the demand is lower when the price to borrow money is higher.
12. Table: Investment Projects
Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate is 15 percent, the last project undertaken is: a. F. b. G. *c. H. d. I.
13. Table: Investment Projects Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate is 11 percent, the last project undertaken is: a. G. b. H. c. I. *d. J.
14. Table: Investment Projects Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate is 13 percent, the amount of planned investment spending is: a. $200. b. $800. c. $1000. *d. $2000.
15. Table: Investment Projects Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate is 9 percent, the amount of planned investment spending is: a. $1800. b. $2000. c. $4000. *d. $5500.
16. Table: Investment Projects Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate is 17 percent, the amount of investment demanded is: a. $200. *b. $800. c. $1000. d. $2000.
17. Table: Investment Projects Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate is 11 percent, the amount of investment demanded is: a. $800. b. $1000. c. $2000. *d. $4000.
18. Table: Investment Projects Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate declines from 15 percent to 11 percent, then the amount of investment demanded will increase by: a. $200. b. $1000. c. $2000. *d. $2200.
19. Table: Investment Projects Reference: Ref 21-2
(Table: Investment Projects) According to the Table: Investment Projects, if the market interest rate declines from 15 percent to 13 percent, then the amount of investment demanded will increase by: *a. $200. b. $1000. c. $2000. d. $2200.
20. Higher rates of interest tend to _______ the quantity of loanable funds
demanded, and lower rates of interest tend to _______ it. a. increase; reduce b. reduce; reduce c. increase; increase *d. reduce; increase
21. There is a _______ relationship between the amount of loanable funds
demanded and the rate of interest. a. positive b. direct *c. negative d. both negative and positive
22. A business will borrow to fund a project if the: a. rate of return on the project is less than the interest rate on the loan. b. project will produce a good or service that is in high demand. *c. rate of return on the project is at least as high as the interest rate on the loan. d. minimum efficient scale will be attained.
23. What is measured on the vertical axis of a graph depicting the loanable funds
market? a. the quantity of loanable funds b. the present value of a dollar received in the future c. the number of potential investment projects *d. the nominal interest rate
24. What is measured on the horizontal axis of a graph depicting the loanable funds
market? *a. the quantity of loanable funds b. the present value of a dollar received in the future c. the number of years until the investment project generates a profit d. the nominal interest rate
25. The downward slope of the demand for loanable funds reflects the fact that a: a. lower interest rate means lower income for savers. b. lower interest rate lowers the value of dollars to be received in the future. *c. higher interest rate means that fewer potential investment projects will be profitable. d. higher interest rate means that more potential investment projects will be profitable.
26. The present value of a sum of money to be received in the future is: *a. determined by the relevant interest rate. b. more than the sum to be received today. c. determined by the slope of the demand for loanable funds. d. determined by the slope of the supply of loanable funds.
27. The downward slope of the demand for loanable funds shows that: a. savers supply more funds when interest rates are higher. b. savers supply more funds when interest rates are lower. c. more potential investment projects appear profitable when interest rates are higher. *d. more potential investment projects appear profitable when interest rates are lower.
28. The supply of loanable funds is _____ sloping because _____ respond to lower
interest rates by _____ their quantity supplied of loanable funds. a. upward; savers; increasing b. upward; investors; decreasing *c. upward; savers; decreasing d. downward; investors; increasing
29. Figure: Supply of Loanable Funds
Reference: Ref 21-3
(Figure: Supply of Loanable Funds) According to the Figure: Supply of Loanable Funds, when the interest rate rises from 6 percent to 8 percent, the: a. supply of loanable funds rises by $20 billion. *b. quantity supplied of loanable funds rises by $20 billion. c. supply of loanable funds falls by $10 billion. d. quantity supplied of loanable funds falls by $20 billion.
30. Savers who supply loanable funds: *a. incur an opportunity cost when they lend to businesses. b. are unaffected by interest rates. c. will supply a greater quantity of funds when interest rates are lower, other things equal. d. behave in a way that is consistent with a downward-sloping supply of loanable funds.
31. The upward slope of the supply of loanable funds shows that: *a. savers will supply a greater quantity of funds when interest rates are higher. b. savers will supply a greater quantity of funds when interest rates are lower. c. more potential investment projects appear profitable when interest rates are higher. d. more potential investment projects appear profitable when interest rates are lower.
32. The interest rate is 5 percent in the market for loanable funds. Investors wish to
borrow $100 million and savers wish to save $125 million at this interest rate. We would expect the interest rate to: a. fall, as there is a shortage of loanable funds. b. rise, as there is a surplus of loanable funds. c. rise, as there is a shortage of loanable funds. *d. fall, as there is a surplus of loanable funds.
33.
Reference: Ref
21-4
(Table: Loanable Funds) In the Table: Loanable Funds, at what interest rate will the market for loanable funds be in equilibrium? a. 7 percent b. 6 percent *c. 5 percent d. 4 percent
34. Figure: Market for Loanable Funds I
Reference: Ref 21-5
(Figure: Market for Loanable Funds I) According to the Figure: Market for Loanable Funds I, the equilibrium interest rate in the loanable funds market is: a. 2 percent. b. 4 percent. *c. 6 percent. d. 8 percent.
35. Consider a loanable funds market in which the equilibrium interest rate is 6
percent. What would happen if the nominal interest rate were set above equilibrium at 8 percent? a. The supply of loanable funds would increase. b. The demand for loanable funds would decrease. c. The quantity of loanable funds demanded would exceed the quantity supplied. *d. The quantity of loanable funds demanded would be less than the quantity supplied.
36. Consider a loanable funds market in which the equilibrium interest rate is 6
percent. What would happen if the nominal interest rate were set below equilibrium at 5 percent? a. The supply of loanable funds would increase. b. The demand for loanable funds would decrease. *c. The quantity of loanable funds demanded would exceed the quantity supplied. d. The quantity of loanable funds demanded would be less than the quantity supplied.
37. A surplus of loanable funds will result if the: a. demand for loanable funds increases. b. supply of loanable funds decreases. *c. nominal interest rate is held above the equilibrium level. d. nominal interest rate is held below the equilibrium level.
38. A shortage of loanable funds will result if the: a. demand for loanable funds increases. b. supply of loanable funds decreases. c. nominal interest rate is held above the equilibrium level. *d. nominal interest rate is held below the equilibrium level.
39. If there is an increase in the government budget deficit, the: *a. demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase. b. demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. c. supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. d. supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.
40. If private savings increase, the: a. demand for loanable funds will increase, interest rates will increase, and the amount of borrowing will increase. b. demand for loanable funds will decrease, interest rates will decrease, and the amount of borrowing will decrease. *c. supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase. d. supply of loanable funds will decrease, interest rates will increase, and the amount of borrowing will decrease.
41. Figure: Loanable Funds
Reference: Ref 21-6
(Figure: Loanable Funds) The Figure: Loanable Funds shows the market for loanable funds in equilibrium. Which might produce a new equilibrium interest rate of 8 percent and a new equilibrium quantity of loanable funds of $150 billion? a. Consumers increase consumption as a fraction of disposable income. *b. Businesses become more optimistic about the return on investment spending. c. The federal government has a budget surplus rather than a budget deficit. d. There is an increase in capital inflows from other nations.
42. Figure: Loanable Funds
Reference: Ref 21-6
(Figure: Loanable Funds) The Figure: Loanable Funds shows the market for loanable funds in equilibrium. Which might produce a new equilibrium interest rate of 5 percent and a new equilibrium quantity of loanable funds of $150 billion? a. Consumers increase consumption as a fraction of disposable income. b. Businesses have become more optimistic about the return on investment spending. c. The federal government has a budget surplus rather than a budget deficit. *d. There is an increase in capital inflows from other nations.
43. Figure: Loanable Funds
Reference: Ref 21-6
(Figure: Loanable Funds) The Figure: Loanable Funds shows the market for loanable funds in equilibrium. Which might produce a new equilibrium interest rate of 8 percent and a new equilibrium quantity of loanable funds of $75 billion? *a. Capital inflows from foreign citizens decline. b. The federal government runs a budget deficit rather than a surplus.
c. Profit expectations are less optimistic for business investments. d. The government eliminates taxes on income from interest earned.
44. Figure: Loanable Funds
Reference: Ref 21-6
(Figure: Loanable Funds) The Figure: Loanable Funds shows the market for loanable funds in equilibrium. Which might produce a new equilibrium interest rate of 4 percent and a new equilibrium quantity of loanable funds of $75 billion? *a. Profit expectations are less optimistic for business investments. b. Capital inflows from foreign citizens decline. c. The federal government runs a budget deficit rather than a surplus. d. The government eliminates taxes on income from interest earned.
45. All scenarios are associated with government budget deficits EXCEPT: a. The government becomes a borrower in the market for loanable funds. b. The interest rate rises. *c. The total amount of borrowing decreases. d. Private investment spending is crowded out.
46. Figure: Loanable Funds Market
Reference: Ref 21-7
(Figure: Loanable Funds Market) According to the Figure: Loanable Funds Market, if the interest rate is 8 percent in the loanable funds market, businesses will want to borrow approximately: a. $3 trillion. *b. $2 trillion. c. $4 trillion. d. $1 trillion.
47. Figure: Loanable Funds Market
Reference: Ref 21-7
(Figure: Loanable Funds Market) According to the Figure: Loanable Funds Market, if the interest rate is 8 percent in the loanable funds market, people will want to save approximately: a. $3 trillion. b. $2 trillion. *c. $4 trillion. d. $1 trillion.
48. Figure: Loanable Funds Market
Reference: Ref 21-7
(Figure: Loanable Funds Market) According to the Figure: Loanable Funds Market, the equilibrium interest rate and total quantity of lending in this loanable funds market are: a. 8 percent and $2 trillion. b. 2 percent and $5 trillion. c. 10 percent and $1 trillion. *d. 6 percent and $3 trillion.
49. If in an open economy, a country imports more than it exports and the
government budget deficit increases: a. interest rates will increase and the amount of borrowing will increase. b. interest rates will decrease and the amount of borrowing will increase. c. interest rates will increase, but the change in borrowing is ambiguous. *d. the change in interest rates is ambiguous, but the amount of borrowing will increase.
50. If the interest rate in the market for loanable funds is above the equilibrium
interest rate, we know that: a. there is a shortage of loanable funds. *b. savings exceed investment spending. c. the quantity demanded of loanable funds exceeds the quantity supplied of loanable funds. d. consumption is smaller than savings.
51. Figure: The Market for Loanable Funds with Government Borrowing
Reference: Ref 21-8
(Figure: The Market for Loanable Funds with Government Borrowing) According to the Figure: The Market for Loanable Funds with Government Borrowing, after an increase in government borrowing, the new equilibrium interest rate will rise from ______ and the amount of private savings will _______. a. 6 percent to 10 percent; stay the same *b. 6 percent to 8 percent; rise c. 6 percent to 8 percent; fall d. 6 percent to 10 percent; be indeterminate
52. A shift away from taxing asset income and toward taxing consumption would
lead to a: a. larger demand for loanable funds, a higher interest rate, and slower economic growth. *b. larger supply of loanable funds, a lower interest rate, and faster economic growth. c. larger government budget deficit and slower economic growth. d. smaller supply of loanable funds, a higher interest rate, and faster economic growth.
53. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, if the interest rate is higher than ______ in this loanable funds market, the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded. *a. 8 percent; be greater than b. 8 percent; be less than c. 8 percent; equal d. 10 percent; be less than
54. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, if the interest rate is lower than 8 percent, the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded. a. be greater than *b. be less than c. equal d. The quantity supplied of loanable funds cannot be determined from the information provided.
55. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, an increase in government borrowing will shift the demand for loanable funds to the: a. left and increase the interest rate. b. left and decrease the interest rate. *c. right and increase the interest rate. d. right and decrease the interest rate.
56. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, a decrease in government borrowing will shift the demand for loanable funds to the:
a. left and increase the interest rate. b. right and decrease the interest rate. c. right and increase the interest rate. *d. left and decrease the interest rate.
57. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, a decrease in savings by the private sector will shift the supply of loanable funds to the: *a. left and increase the interest rate. b. right and decrease the interest rate. c. right and increase the interest rate. d. left and decrease the interest rate.
58. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, an increase in savings by the private sector will shift the supply of loanable funds to the: a. left and increase the interest rate. *b. right and decrease the interest rate. c. right and increase the interest rate. d. left and decrease the interest rate.
59. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, other things being equal, if there is an increase in the interest rate above 8 percent, ________ loanable funds will be demanded. a. the same b. more *c. less d. either more or less
60. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, other things being equal, if there is a decrease in the interest rate below 8 percent, ________ loanable funds will be demanded. a. the same *b. more c. less d. either more or less
61. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, other things being equal, an increase in taxes on savings and investment income will shift: a. demand to the right and increase the interest rate. b. demand to the left and decrease the interest rate. c. supply to the right and decrease the interest rate. *d. supply to the left and increase the interest rate.
62. Figure: The Market for Loanable Funds II
Reference: Ref 21-9
(Figure: The Market for Loanable Funds II) According to the Figure: The Market for Loanable Funds II, other things being equal, a decrease in taxes on savings and investment income will shift: a. demand to the right and increase the interest rate. b. demand to the left and decrease the interest rate. *c. supply to the right and decrease the interest rate. d. supply to the left and increase the interest rate.
63. Which is FALSE? When there is an increase in: *a. the government budget deficit, the total amount of borrowing falls. b. private savings, the interest rate decreases. c. government budget deficit, the private investment is crowded out.
d. private savings, the total amount of borrowing increases.
64. Figure: Crowding Out
Reference: Ref 21-10
(Figure: Crowding Out) According to the Figure: Crowding Out, the demand for loanable funds curve DLF1 will shift to DLF2 when there is a(n): a. decrease in the government budget deficit. *b. increase in the government budget deficit. c. increase in private savings. d. decrease in private savings.
65. Figure: Crowding Out
Reference: Ref 21-10
(Figure: Crowding Out) According to the Figure: Crowding Out, if the demand for loanable funds curve shifts to the right, then it will result in a(n): *a. increase in the interest rate and the total amount of borrowing in the funds market. b. increase in the interest rate and a decrease in the total amount of borrowing in the funds market. c. decrease in the interest rate and the total amount of borrowing in the funds market. d. decrease in the interest rate and an increase in the total amount of borrowing in the funds market.
66. Figure: Crowding Out
Reference: Ref 21-10
(Figure: Crowding Out) According to the Figure: Crowding Out, the supply of loanable funds curve SLF1 shifts to SLF2. This shift implies that: *a. private savings have increased. b. national investment has decreased. c. private savings have decreased. d. national savings have decreased.
67. Figure: Crowding Out
Reference: Ref 21-10
(Figure: Crowding Out) According to the Figure: Crowding Out, if the supply of loanable funds curve shifts to the right, then it will result in a(n): a. increase in the total amount of borrowing and the interest rate. b. decrease in the total amount of borrowing and the interest rate. *c. increase in the total amount of borrowing and a fall in the interest rate. d. decrease in the total amount of borrowing and an increase in the interest rate.
68. The government's budget deficit increases, and at the same time the trade
deficit grows in an open economy. This will lead to a(n) _________ in the demand and a(n) ________ in the supply of loanable funds in domestic markets. a. increase; decrease b. decrease; decrease *c. increase; increase d. decrease; increase
69. Figure: The Market for Loanable Funds III
Reference: Ref 21-11
(Figure: The Market for Loanable Funds III) According to the Figure: The Market for Loanable Funds III, if the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the equilibrium interest rate will: a. fall to 12 percent. b. rise to 16.5 percent. *c. rise to 18 percent. d. rise to 21 percent.
70. Figure: The Market for Loanable Funds III
Reference: Ref 21-11
(Figure: The Market for Loanable Funds III) According to the Figure: The Market for Loanable Funds III, if the government in a closed economy is running a budget balance of zero when it decides to increase defense spending by $200 billion and then finances the spending by selling bonds, the government will crowd out _____ in private investment spending. a. $200 billion *b. $100 billion c. $50 billion d. $0 billion
71. Figure: The Market for Loanable Funds III
Reference: Ref 21-11
(Figure: The Market for Loanable Funds III) According to the Figure: The Market for Loanable Funds III, if the government in a closed economy finances deficits by selling bonds and it decides to decrease defense spending by $200 billion, the equilibrium interest rate will: a. rise to 18 percent. b. not change. c. fall to 13.5 percent. *d. fall to 12 percent.
72. Figure: The Market for Loanable Funds III
Reference: Ref 21-11
(Figure: The Market for Loanable Funds III) According to the Figure: The Market for Loanable Funds III, if the government in a closed economy finances deficits by
selling bonds and it decides to decrease defense spending by $200 billion, the decrease in government spending will encourage _____ in additional private investment spending. a. $400 billion b. $200 billion *c. $100 billion d. $0 billion
73. To help increase investment spending, the government can: a. lower taxes on consumption, so that disposable income rises. *b. lower taxes on the returns from savings, so that total savings increase and the interest rate falls. c. raise taxes on the returns from bonds while lowering taxes on stock dividends. d. lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant.
74. If the government increases its borrowing, then at every interest rate there is
a(n): a. additional supply of funds. *b. additional demand for funds. c. decrease in the supply of funds. d. increase in the supply of funds.
75. Which is the most accurate statement concerning the relationship between
government budget deficits and economic growth? a. Deficits increase economic growth. b. Deficits decrease economic growth. c. Deficits have no impact on economic growth. *d. We cannot unambiguously say whether government spending that increases deficits lowers or increases economic growth.
76. Crowding out negatively affects the economy by: a. decreasing government borrowing. b. decreasing consumption. c. increasing private borrowing. *d. reducing private investment spending on physical capital.
77. An expectation that perceived business opportunities will increase will generally
cause: a. a shift to the left in the loanable funds demand curve.
b. a movement along the loanable funds demand curve. *c. the demand for loanable funds to increase. d. the demand for loanable funds to decrease.
78. An increase in the level of business opportunity will generally: a. not change the loanable funds demand curve. b. shift the loanable funds demand curve to the left. c. cause a movement either up or down the loanable funds demand curve. *d. shift the loanable funds demand curve to the right.
79. A decrease in the level of business opportunity will generally: a. not change the loanable funds demand curve. *b. shift the loanable funds demand curve to the left. c. cause a movement either up or down the loanable funds demand curve. d. shift the loanable funds demand curve to the right.
80. A decrease in the demand for loanable funds would most likely be caused by
a(n): a. decrease in the market interest rate. b. decrease in corporate income tax rates. c. increase in the amount of expected business opportunities. *d. decrease in the amount of expected business opportunities.
81. An increase in the demand for loanable funds would most likely be caused by
a(n): a. increase in the market interest rate. b. increase in business tax rates. *c. increase in the amount of expected business opportunities. d. decrease in the amount of expected business opportunities.
82. A decrease in the demand for loanable funds would most likely be caused by
a(n): a. increase in the inflation rate. b. decrease in the budget deficit. *c. decrease in the amount of expected business opportunities. d. increase in the amount of expected business opportunities.
83. All other things unchanged, a general increase in the amount of government
borrowing will typically:
a. shift the loanable funds demand curve to the left and decrease interest rates. *b. shift the loanable funds demand curve to the right and increase interest rates. c. have no effect on the loanable funds demand curve. d. have no effect on the demand for loanable funds.
84. All other things unchanged, a general decrease in the amount of government
borrowing will typically: a. have no effect on the demand for loanable funds. b. increase interest rates. *c. shift the loanable funds demand curve to the left. d. raise the level of demand for loanable funds.
85. All other things unchanged, an increase in loanable funds demand would most
likely be caused by a(n): a. decrease in the amount of expected business opportunities. b. increase in the market interest rate. c. increase in corporate income tax rates. *d. increase in the amount of government borrowing.
86. All other things unchanged, an increase in loanable funds demand would most
likely be caused by an: *a. important economic forecast predicting solid economic growth. b. important economic forecast predicting a looming recession. c. increase in the market interest rate. d. increase in the cost of new capital goods.
87. Crowding out is a phenomenon: a. in which an increase in the government's budget surplus decreases overall investment spending. b. where overproduction in the goods market leads to a sharp drop in the aggregate price level. *c. where an increase in the government's budget deficit causes overall investment spending to fall. d. where an increase in imports causes the overall domestic production to fall.
88. Crowding out means: a. private savings decreases when the government borrows money.
*b. private investment decreases when the government borrows money. c. there are too many players in the financial markets. d. some bondholders will be squeezed out of the market.
89. When there is a widely held belief that there is an increase of promising
business opportunities, the: a. supply of loanable funds will increase. b. demand for loanable funds will decrease. *c. demand for loanable funds will increase. d. supply of loanable funds will decrease.
90. When there is an overall mood of pessimism about the prospects for business
profitability, the: a. supply of loanable funds will increase. *b. demand for loanable funds will decrease. c. demand for loanable funds will increase. d. supply of loanable funds will decrease.
91. The existence of a federal budget deficit causes the: a. supply of loanable funds to increase. b. demand for loanable funds to decrease. *c. demand for loanable funds to increase. d. supply of loanable funds to decrease.
92. The Fisher effect states that the: a. nominal rate of interest is unaffected by the change in expected inflation. b. nominal rate of interest is unaffected by the change in unexpected inflation. *c. expected real rate of interest is unaffected by the change in expected inflation. d. expected real rate of interest increases by one percentage point for each percentage change in expected inflation.
93. Suppose a lender expects a real interest rate of 6 percent and the inflation rate
is expected to be 3 percent. In this case, the nominal interest rate is equal to: a. 3 percent. *b. 9 percent. c. 12 percent. d. 6 percent.
94. Samantha asks her employer for a 5 percent raise for the coming year. If the
inflation rate during the next year is 5.5 percent, then her real wage will: a. increase by 5 percent. *b. decrease by 0.5 percent. c. decrease by 5 percent. d. increase by 0.5 percent.
95. The loanable funds market examines the market outcome of the demand for funds from savers and the supply of funds from borrowers. a. True *b. False
96. Firms want to undertake projects whose rate of return is greater than the interest rate. *a. True b. False
97. An increase in the interest rate causes a decrease in investment by shifting the loanable funds demand curve to the left. a. True *b. False
98. Higher interest rates will lead to increased investment spending. a. True *b. False
99. Lower interest rates will lead to less investment spending. a. True *b. False
100. There is a negative relationship between the quantity of investment spending and the interest rate. *a. True b. False
101. Higher interest rates encourage investment spending. a. True *b. False
102. If interest rates are high, people are willing to forgo consumption and save more, all else equal. *a. True b. False
103. Expectations of an improving economy will generally cause an increase in investment by shifting the loanable funds demand curve to the right. *a. True b. False
104. An increase in the level of business opportunities will not cause a change in investment spending. a. True *b. False
105. The crowding-out effect is the negative effect of government budget deficits on private investment spending. *a. True b. False
106. Explain what the Fisher effect implies. What does this effect tell us about the relationship between inflation expectations and the market for loanable funds? Correct Answer:
In general, the Fisher effect says that the expected real interest rate is unaffected by the change in expected inflation. Because the nominal interest rate is equal to the real interest rate plus expected inflation, any change in expected inflation will affect only the nominal rate, not the real rate. Because both savers and borrowers are basing their decisions solely on the real rate, the equilibrium quantity of loanable funds is unaffected, but the nominal rate can rise or fall with inflation expectations. 107. You have agreed to borrow $2000 from the bank for one year. The nominal rate of interest is 8.5 percent and the real interest rate is 6 percent. At the end of the year, inflation was 1 percent. How does this affect the borrower (you) and the lender (the bank)? Who is better off? Correct Answer:
The terms of the loan included an inflation expectation of 2.5 percent (8.5 percent – 6 percent). Since actual inflation was 1 percent, less than expected, the bank is better off and you are worse off. The real rate of interest, with actual inflation of 1
percent, was 8.5 percent – 1 percent, or 7.5 percent, which is higher than the original terms of the loan. Because of the unexpectedly low rate of inflation, in real terms you are actually overcompensating the bank for lending you the money. 108. You have agreed to borrow $2000 from the bank for one year. The nominal rate of interest is 8.5 percent and the real interest rate is 6 percent. At the end of the year, inflation was 3.5 percent. How does this affect the borrower (you) and the lender (the bank)? Who is better off? Correct Answer:
The terms of the loan included an inflation expectation of 2.5 percent (8.5 percent % – 6 percent). Since actual inflation was 3.5 percent, more than expected, the bank is worse off and you are better off. The real rate of interest, with actual inflation of 3.5 percent, was 8.5 percent – 3.5 percent, or 5 percent, which is lower than the original terms of the loan. Because of the unexpectedly high rate of inflation, in real terms you are actually undercompensating the bank for lending you the money. 109. The market for loanable funds is in equilibrium. All else equal, the federal government deficit is growing. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds. Correct Answer:
A larger budget deficit means the government must borrow to pay the bills. This shifts the demand for loanable funds to the right. The equilibrium interest rate and the equilibrium quantity of loanable funds both increase. 110. The market for loanable funds is in equilibrium. All else equal, the federal government has eliminated all taxes on interest that is earned from savings. Describe how this will affect the market for loanable funds, the equilibrium interest rate, and the equilibrium quantity of loanable funds. Correct Answer:
If households are no longer taxed on income earned from interest on savings, savings will increase and the supply of loanable funds will shift to the right. The equilibrium interest rate decreases and the equilibrium quantity of loanable funds increases.
111. In the loanable funds market, borrowers are: a. best represented by the supply of loanable funds. b. not affected by changes in the inflation rate. *c. best represented by the demand for loanable funds. d. negatively impacted by unexpected increases in the inflation rate.
112. Investment spending projects are undertaken when the rate of return is: a. positive. *b. greater than the equilibrium interest rate. c. equal to the equilibrium interest rate. d. less than the equilibrium interest rate.
113. Businesses will undertake projects if the rate of return is: a. positive. *b. greater than or equal to the interest rate levied on the loan. c. greater than 1. d. less than the cost of borrowing for the project.
114. In the loanable funds market, savers: a. demand funds. *b. supply funds. c. represent borrowers of funds. d. pay the equilibrium interest rate.
115. Crowding out results in a(n): *a. decrease in private investment spending resulting from government deficit spending. b. increase in physical capital accumulation, which leads to higher economic growth. c. increase in private investment spending resulting from government deficit spending. d. increase in consumption spending as a result of higher investment spending.
116. Alison lends $100 to Vanessa for one year. Alison expects that inflation will be
10 percent. If Alison wishes to maintain the real value of her $100, she should expect payment from Vanessa in the amount of: a. $100. *b. $110. c. $120. d. $101.
117. In lending to Vanessa, Alison expects the inflation rate to be 8 percent over the
next year. Vanessa agrees to pay Alison a 10 percent interest rate on the loan, but Vanessa expects inflation to be 9 percent. If the inflation rate is 9 percent, then:
*a. Alison's real rate of interest is 1 percent. b. Alison's real rate of interest is 9 percent. c. Vanessa ends up paying a lower real interest rate than she had expected. d. Alison ends up receiving a higher real interest rate than she had expected.
118. Holding everything else constant, when the government uses an expansionary
policy in the presence of a deficit, it will result in a(n): *a. increase in the equilibrium interest rate in the loanable funds market. b. increase in the level of private investment spending. c. increase in government savings. d. fall in the equilibrium interest rate in the loanable funds market.
1. Which statement is FALSE? a. The dollar amount of a future payment is more than its present value. *b. The present value of a future payment is approximately the same as its future dollar amount. c. The present value of a future payment is less than its future dollar amount. d. The bigger the future payment, the higher its present value, all other things held constant.
2. Suppose Maria wins a $7 million lottery and is trying to decide whether to take $2
million all at once or $7 million over 20 years. To decide which option is better, one bit of information Maria would need to know is what the prevailing _____ will be over the next 20 years. a. unemployment rate *b. interest rate c. deflation rate d. standard of living
3. Someone who has to make a choice involving whether to receive $100 now or
$100 one year from now will probably choose _____, because there is a(n) _____ in waiting to receive money. a. one year from now; benefit *b. now; opportunity cost c. one year from now; opportunity cost d. now; benefit
4. Assuming a non-zero interest rate, the dollar amount of a future payment is
_____ its present value. a. always exactly the same as b. usually exactly the same as c. less than *d. more than
5. Assuming a non-zero interest rate, the present value of a future payment is
_____ its future dollar amount. a. always exactly the same as b. usually exactly the same as *c. less than d. more than
6. An amount that would equal a particular future value if deposited today at the
prevailing interest rate is the: *a. present value. b. inflation rate. c. discount premium. d. market index.
7. The present value of future payments depends on: a. whether the payment is interest or dividends. b. the marginal propensity to save. *c. the interest rate. d. sunk costs.
8. Which statement is true? a. Assuming a non-zero interest rate, the dollar amount of a future payment is always exactly the same as its present value. b. The dollar amount of a future payment is usually exactly the same as its present value. c. The dollar amount of a future payment is less than its present value. *d. The dollar amount of a future payment is more than its present value.
9. An amount that would equal a particular future value if deposited today at a
specific interest rate is the: *a. present value. b. inflation rate. c. discount premium. d. market index.
10. Ross has won the lottery and has been given the choice of receiving $5 million
today or $10 million after 10 years. Assume that the interest rate remains fixed at 10% per year for the entire 10-year period. He should choose: a. $10 million after 10 years, because this is more than he would get if he invested $5 million for 10 years at an annual rate of interest of 10%. b. $10 million after 10 years, because that is a larger amount than the present value of $5 million paid after 10 years. *c. $5 million today, because it would be worth more than $10 million after 10 years if the $5 million earned interest at the rate of 10% per year. d. $10 million after 10 years, because it is the larger amount.
11. A semiconductor firm is considering opening a new plant. The plant will
generate profits of $100 million for each of three years after the first year of production and then zero profits after that. If the interest rate is 10%, what is the maximum cost (to the nearest million) the firm is willing to pay now for the plant? a. $300 million *b. $249 million c. $273 million d. $100 million
12. As the manager of a professional football team, Sam just offered the kicker a
two-year contract that pays $2 million per year. The kicker refuses the contract, stating he wants $3 million this year. If Sam offers $3 million this year, about how much will he have to offer next year to keep the present value of the contract the same as his original offer? Assume a 10% annual interest rate. a. $1 million *b. $900,000 c. $808,080 d. $743,800
13. Val wins a prize at her sorority, and she is given the following two payoff
options: Option 1 is to receive $100 one year from today and $100 two years from today. Option 2 is to receive $180 today. If the annual interest rate is 10%, the present value of option 1 is: *a. $173.56. b. $190.91. c. $182.65. d. $181.80.
14. Zoe wins a prize at her sorority and she is given the following two payoff
options: Option 1 is to receive $100 one year from today and $100 two years from today. Option 2 is to receive $180 today. If the annual interest rate is 5%, the present value of option 1 is: a. $176.56. *b. $185.94. c. $190.48. d. $195.24.
15. The present value of a future payment increases if the: a. period between the present and when the future payment occurs increases. b. future payment decreases.
*c. interest rate decreases. d. stock market falls.
16. The present value of a future payment decreases if the: *a. period between the present and when the future payment occurs increases. b. future payment increases. c. interest rate decreases. d. stock market rises.
17. The _____ the future payment, the _____ its present value, all other things held
constant. a. lower; the more uncertain is b. higher; lower *c. higher; higher d. lower; higher
18. The _____ the number of periods between the present and when the future
payment is expected, the present value of a given future payment is _____, all other things held constant. *a. larger; less b. shorter; less c. larger; larger d. shorter; more uncertain
19. The present value of a future payment will be smaller the: a. sooner the payment is due. b. lower the interest rate. c. higher the interest rate. *d. higher the interest rate and the later the payment is due.
20. Other things equal, the _____ the loan period, the _____ the present value. a. shorter; lower b. longer; higher *c. longer; lower d. shorter; more variable
21. The present value (PV) of a payment one year in the future (FV) given an
interest rate (r), is given by the equation: a. PV = 1/FV.
b. PV = FV/1. *c. PV = FV/(1 + r). d. PV = FV × (1 + r).
22. The present value (PV) of a payment n years in the future (FV) given an interest
rate (r), is given by the equation: a. PV = FVN. b. PV = 1 ÷ FVN. c. PV = FV/(1 + r). *d. PV = FV/(1 + r)N.
23. The present value of a future payment _____ if the _____. a. increases; period between the present and the future payment occurs increases b. decreases; future payment increases *c. increases; interest rate decreases d. decreases; stock market rises
24. Alfred's friend wants to borrow $2,000 and pay it back in one year. She is
someone who keeps her word. She agrees to repay him $2,080 in one year. The bank annual interest rate is 5%. Which statement is true? *a. Alfred will be financially worse off if he makes the loan rather than deposits $2,000 in the bank. b. Alfred will be financially better off if he makes the loan rather than deposits $2,000 in the bank. c. The present value of $2,080 payable in one year with an interest rate of 5% is $1,904.76, which is less than the value of the $2,000 he has been asked to lend. d. Alfred will be financially better off if he spends the money on himself.
25. Jerry receives an email from a firm proposing the following business deal. They
will send him $1,000 now, and in exchange he will send them $1,100 in one year. Jerry will just break even from this deal if the annual interest rate is: a. 12%. b. 4%. c. 6%. *d. 10%.
26. Eric's textbook costs $90, and he can resell it in one year's time for $45. If the
annual interest rate is 10%, then the present value of the textbook's resale value (to the nearest dollar) is:
a. $90. *b. $41. c. $45. d. $37.
27. The _____ money paid back after borrowing a given sum of money, the _____
the interest rate. a. more; higher *b. less; higher c. more; lower d. less; lower
28. If Sally is paid $10,500 in one year on a $10,000 loan made today, then her
annual interest rate is: a. 0%. *b. 5%. c. $500. d. $10,000.
29. If Mega Corp. borrows $9,000 and agrees to pay the lender $10,000 in one
year, the annual interest rate on the loan is approximately: a. 9.0%. b. 10.0%. *c. 11.1%. d. 8.0%.
30. Given an annual interest rate of 3%, the present value of a future payment of
$2,080 to be paid in one year is: a. $1,904.76. b. $2,000.00. *c. $2,019.42. d. $2,080.00.
31. The present value of $1 realized one year from now is equal to: *a. $1/(1 + r). b. $1 × (1 + r). c. 1 + r. d. 1/r.
32. Una has purchased a new mattress for $2,000, but the store has given her a “12
months, same as cash” deal. This means that she does not actually have to pay for the mattress for another year. One year from now Una will need to give the store the full price of $2,000. If the current annual interest rate is 10%, how much money does she need to have today to ensure that she will have $2,000 one year from today? a. $1,980 *b. $1,818 c. $2,200 d. $20,000
33. David is given the choice of receiving $100 today or $115 one year from today.
What annual interest rate will make him indifferent between these two choices? a. 5% b. 10% *c. 15% d. 20%
34. If Bridget is paid $5,500 in one year on a $5,000 loan made today, then her
annual interest rate is: a. 0%. *b. 10%. c. $500. d. $1,000.
35. The present value of a future payment _____ if the _____. *a. decreases; interest rate increases b. increases; future payment decreases c. decreases; interest rate decreases d. increases; stock market falls
36. If Mega Corp. borrows $8,000 and agrees to pay the lender $9,000 in one year,
the annual interest rate on the loan is approximately: a. 9.0%. b. 10.5%. *c. 12.5%. d. 18%.
37. If Mega Corp. borrows $9,000 and agrees to pay the lender $10,500 in one
year, the annual interest rate on this loan is approximately: a. 8.6%.
b. 14.3%. *c. 16.7%. d. 7.3%.
38. The present value of a $110 payment one year in the future, given an annual
10% interest rate, is: a. $10. b. $11. *c. $100. d. $110.
39. Given an annual interest rate of 2%, the present value of a future payment of
$1,500 to be paid in one year is: a. $1,250.55. *b. $1,470.59. c. $1,530. d. $1,500.
40. The net present value of a project is the difference between: a. current benefits and the present value of future costs. b. the present value of current benefits and the current value of future costs. c. the present value of future benefits and the present value of future costs. *d. the present value of current and future benefits and the present value of current and future costs.
41. The net present value (NPV) of an activity or project is equal to the _____
values of all the revenues minus the _____ values of all the costs associated with it. a. future; present *b. present; present c. present; future d. future; future
42. If a firm considering the purchase of an asset determines that the asset's NPV >
0, then _____ the asset will _____ profits. a. refusing to buy; increase *b. purchasing; increase c. purchasing; decrease d. selling; increase
43. Janelle has heard about a new light bulb that is costly to purchase but uses less
electricity and thus allows her to save money on her utility bill. Suppose the new light bulb costs $10 today, but next year Janelle's electricity bill will be $50 lower. If the interest rate is 10%, what is the net present value of buying this new light bulb and using it for one year? a. $40 b. –$45.45 c. $55 *d. $35.45
44.
Reference: Ref 25A-1
(Table: Present Value of Projects A, B, C, and D) Examine the table Present Value of Projects A, B, C, and D. Given the information, if the annual interest rate were 2%, which project should be chosen? *a. A b. B c. C d. D
45.
Reference: Ref 25A-1
(Table: Present Value of Projects A, B, C, and D) Examine the table Present Value of Projects A, B, C, and D. Given the information, if the annual interest rate were 10%, which project should be chosen? a. A *b. B c. C d. D
46. Mike is the CEO of a company. He has an opportunity to undertake the
following project: pay $1,000 today and receive $1,200 a year from now. If the annual interest rate is 20%, the difference between the present value of the benefits and the cost of the project is: a. $440. b. $200. c. $166.
*d. $0.
47. Which statement is true? a. People generally prefer to receive money later rather than sooner. b. Interest is a payment made by lenders to borrowers. *c. The present value of a future payment will be lower the smaller the payment, the later it is due, and the higher the interest rate. d. The future value of a payment will be more if the interest rate is lower.
48. Laura's grandmother has promised her $1,000 when she graduates in one year. At a 6% annual interest rate, she can borrow $943.40 and pay it back with her grandmother's gift at graduation. *a. True b. False
49. The present value of a painting that Jen expects to sell for $500 in three years is $405.22 if the annual interest rate is 5%. a. True *b. False
50. The present value of $1 to be paid 10 years in the future will increase with the interest rate. a. True *b. False
51. A soft-drink bottling firm is thinking of opening a new distribution center. The center will cost $2.5 million to build today, and it will generate profits of $1 million one year from now, two years from now, and three years from now. The firm should build the distribution center if the interest rate is 9% or lower. *a. True b. False
52. Suppose the university offered the following payment plan: Either Veronica can pay $80,000 when first enrolling as a freshman or she can pay $25,000 at the beginning of her freshman year and $25,000 at the beginning of every year for the next 3 years. If the annual interest rate is 5%, then Veronica should take option 1 and pay $80,000 at the beginning of her first year.
*a. True b. False
53. You have recently graduated from high school and are debating whether you should attend college or immediately enter the workforce. Assume that you can spend $50,000 today for tuition and receive your college degree in only one year. When you graduate you will receive a job that pays you $100,000 immediately and $100,000 the following year. If you begin working immediately, you can earn $35,000 today and each of the next two years. If the annual interest rate is 10%, should you go to college? Correct Answer:
For each of these two options, compute the net present value. If you start working today, you will receive a total sum of $35,000 + $35,000/(1.10) + $35,000(1.21) = $95,743.80. If you go to college, you receive a total sum of: –$50,000 + $100,000/(1.1) + $100,000/(1.21) = $123,553.72. You should go to college. 54. You have recently graduated from high school and are debating whether you should attend college or immediately enter the workforce. Assume that you can spend $X today for tuition and receive your college degree in only one year. When you graduate you will receive a job that pays you $100,000 immediately and $100,000 the following year. If you begin working immediately, you can earn $35,000 today and each of the next two years. If the interest rate is 10%, solve for the $X of tuition that would make you indifferent between going to college and working immediately. Correct Answer:
For each of these two options, compute the net present value. If you start working today, you will receive a total sum of $35,000 + $35,000/(1.10) + $35,000(1.21) = $95,743.80. If you go to college, you receive a total sum of: –$X + $100,000/(1.1) + $100,000/(1.21) = $173,553.72 – $X. Setting the two options equal and solving for $X gives you $95,743.80 = $173,553.72 – $X and $X = $77,809.92. If tuition is less than this amount, you will go to college. If it is greater than this amount, you will work immediately. 55. Your business has $100,000 of excess cash and is considering the purchase of some real estate. The land will cost your firm $100,000 today, but in a year you hope its value will increase because of a new shopping mall being built nearby, and your business plans to sell it for a profit. Your banker tells you that the current annual rate of interest being offered to savers is 12%. What price must you receive for the land next year in order for this investment to be profitable? Correct Answer:
This investment will be profitable if the net present value is greater than zero. The net present value is: –$100,000 + $X/(1.12) > 0. Solve for $X and you find that you must sell the developed property for more than $112,000; otherwise, you are better off putting the $100,000 in the bank so that it can earn $12,000 in interest.
56. In order to finance Karina's education, she borrows $10,000 from a relative at
an annual interest rate of 5%. If another relative offers to lend her the same amount but suggests a lower interest rate, this would mean that Karina: a. would end up paying more than she did to the initial relative. *b. would pay less than she did to the initial relative. c. would pay the same amount as she did to the initial relative. d. is paying more now but less later.
57. In order to finance Brenda's education, she borrows $10,000 from a relative at
an annual interest rate of 5%. Brenda promises to pay her back in eight years. Which formula is correct for calculating the value of Brenda's payment in eight years? a. $10,000(1 + 0.05) b. $10,000(1 + 5) *c. $10,000(1 + 0.05)8 d. $10,000(1 + 0.5)8
58. All else equal, the present value of a future payment: *a. decreases when the interest rate rises. b. decreases when the interest rate falls. c. decreases when the interest rate stays the same. d. never changes regardless of the interest rates.
59. A firm is considering a new capital expenditure that would cost $2 million. This
expenditure is expected to yield $1 million in annual profits for each of the next two years. Given this information, the firm should: a. not undertake the project, because the costs are not offset by the profits. b. undertake the project, because the profits will be greater than the costs. *c. undertake the project only if the interest rate is zero. d. undertake the project regardless of the interest rate.
60. If a firm finds that the net present value of a project is _____ for a given interest
rate, it will _____ the project. *a. positive; undertake b. positive; not undertake c. negative; undertake d. positive or negative; undertake
61. If a friend offers to pay Molly $1 five years from now when the prevailing annual
interest rate is 5%, what is the present value of that $1 today? a. $0.95 b. $1.05 *c. $0.78 d. $1.50
62. If the friend offers to pay Molly $1 five years from today, the present value will: a. be higher than $1. *b. depend upon the prevailing interest rate. c. be equal to zero, because Molly does not have the dollar. d. not be important in understanding the time value of money.
1. From the standpoint of economic growth, banks are important to: a. fight inflation. b. keep interest rates low. *c. channel savings into investment. d. channel investment into savings.
2. Which qualifies as an asset from the viewpoint of a household? *a. a house b. mortgage c. credit card debt d. car loan
3. The value of all accumulated savings of a household is called: *a. wealth. b. income. c. debt. d. wages.
4. The main role of financial systems is to: a. make the capitalist class richer. b. provide credit cards to as many people as possible. c. channel goods and services to the people willing to pay for them. *d. channel funds from savers into investments.
5. A household's wealth is: a. what a household earns each period. b. what a household saves each period. *c. the value of a household's accumulated savings. d. the value of a household's financial assets.
6. A financial asset is: a. a physical asset like a car. *b. a claim that entitles the owner to future income from the seller. c. the value of accumulated savings. d. another term for capital.
7. A physical asset is:
*a. a claim on a tangible asset that gives the owner the right to dispose of it as he or she wishes. b. a claim that entitles the owner to future income from the seller. c. the value of accumulated savings. d. human capital.
8. A liability is: a. having wronged someone and being held responsible in court. *b. a requirement to pay in the future. c. inability to perform an agreed task. d. a claim that entitles the owner to future income from the seller.
9. In financial markets: a. households sell liabilities. b. wealth is transformed into savings. *c. households purchase financial assets. d. physical assets exchange hands.
10. When you take out a loan from a bank, it is a(n): a. asset to you and a liability to the bank. b. asset to you and an asset to the bank. c. liability to you and a liability to the bank. *d. liability to you and an asset to the bank.
11. Which is NOT one of the three tasks of a financial system? a. reduction of transaction costs b. risk management c. provision of liquidity *d. determining fiscal policy
12. Transaction costs are the: a. return to an entrepreneur. b. return to moving a product to market. c. expenses of producing a product. *d. expenses of negotiating and executing a deal.
13. Financial markets make the process of borrowing large amounts of money
easier because they simplify negotiation between borrowers and lenders. This is an example of:
*a. reducing transaction costs. b. reducing risk. c. providing liquidity. d. acting as a lender of last resort.
14. A risk-averse person: a. considers any risk unacceptable. b. would never buy a financial asset. *c. has an asymmetric view of the value of losses and gains. d. would never buy insurance.
15. Financial markets spread the potential gains and losses of borrowing and
lending operations among many individuals, therefore decreasing the overall uncertainty. This is an example of: a. reducing transaction costs. *b. reducing risk. c. providing liquidity. d. guaranteeing rates of return.
16. Which portfolio is the most diversified in terms of risk? a. $100,000 worth of stock in ten companies in the same industry b. $100,000 worth of stock in ten companies in two industries *c. $100,000 worth of stock in ten companies in five industries d. $100,000 worth of stock in one company that sells ten products
17. Financial markets: a. increase transaction costs. b. reduce diversification. *c. provide liquidity. d. determine tax rates.
18. A common strategy to reduce the potential of a large financial loss is to: a. buy and sell assets through a mutual fund, since mutual funds cannot lose money. *b. diversify financial assets so that their risks of failure are unrelated. c. buy financial assets from developing countries, because the rates of return are very high and safe and their national currencies are much more stable than the U.S. dollar. d. buy real instead of financial assets.
19. One way to reduce financial risk is to: a. buy stock only in a major company. b. buy bonds only in a major company. *c. diversify in a variety of assets, both financial and physical. d. diversify in a number of banks.
20. The term liquidity means that the: a. asset is used in a barter exchange. b. asset is used as the medium of exchange. *c. asset is readily convertible to cash without much loss of value. d. market interest rate is too low.
21. The financial system performs certain tasks in order to make the financial
market more efficient. Which one is NOT one of these tasks? a. reducing risk *b. reducing menu costs c. reducing transaction costs d. providing liquidity
22. Diversification in investment is achieved when: a. the government invests in several projects of different lengths in order to increase total output. b. a business produces multiple unrelated products so that the firm can maximize profit. c. an economy trades with multiple trading partners for maximum benefit. *d. an individual invests in several assets with independent or unrelated risks so that total risk from loss is reduced.
23. Which asset would be considered to be the least liquid? a. cash b. checking account balance c. corporate bond *d. ownership of one fourth of a privately held company
24. Which asset would be considered to be the most liquid? *a. currency b. checking account balance
c. stock in a publicly traded company d. a townhouse
25. An illiquid asset: a. cannot be sold. b. provides the owner no return or income. c. is a tangible asset. *d. cannot quickly be converted into cash with little loss of value.
26. A loan is a: a. liability for the lender and an asset for the borrower. b. physical asset that is traded in financial markets. c. claim on a bank that obliges the bank to provide funds to a lender. *d. liability for the borrower and an asset for the lender.
27. An important advantage of bonds as a financial asset is that they: *a. are standardized and therefore are easier to sell than loans. b. offer higher rates of return than stocks. c. allow the owner to receive a share of the company's profits in the form of dividends. d. are guaranteed to be risk free.
28. A bond is: a. share of ownership in company. b. a promise to pay interest each year and to repay the principle on a specified date. c. a liquid asset, since it is a standardized product with a market in which the owner can sell it. *d. both a promise, to pay interest each year and to repay the principle on a specified date, and a liquid asset, since it is a standardized product with a market in which the owner can sell it.
29. Financial assets that carry more risk: a. usually have a lower rate of return. *b. usually have a higher rate of return. c. are purchased by risk-averse buyers. d. are a hedge against the future.
30. Shares of stock represent:
*a. shares of ownership in the issuing company. b. a tax liability for the issuing company. c. a tax deduction for the investor. d. a debt of the issuing company to the investors who purchase the stock.
31. Which would NOT be considered to be one of the four main types of financial
assets? *a. robots on an assembly line b. bonds c. bank deposits d. loans
32. As an investor, you may choose to purchase a bond or a share of stock. If you
choose to purchase the bond, you are likely to receive a _____ return in exchange for a _____ level of risk. a. higher; higher *b. lower; lower c. lower; higher d. higher; lower
33. All are examples of financial assets and/or liabilities EXCEPT: a. loans. b. stocks and bonds. *c. real estate. d. bank deposits.
34. All are financial assets EXCEPT: a. bonds. b. stocks. c. bank deposits. *d. gold coins.
35. When a corporation borrows money from a bank to expand its factory plant, the
corporation is: *a. taking out a loan. b. issuing bonds. c. issuing stocks. d. liquidating a bank deposit.
36. When a corporation borrows money from lenders in exchange for a fixed rate of
return and a given maturity, the corporation is: a. taking out a loan. *b. issuing bonds. c. issuing stocks. d. liquidating a bank deposit.
37. When a corporation borrows money from lenders in exchange for a fixed share
of the firm's assets and potential profits, the corporation is: a. taking out a loan. b. issuing bonds. *c. issuing stocks. d. liquidating a bank deposit.
38. Financial assets with the highest risk are: *a. stocks. b. loans. c. bonds. d. bank deposits.
39. Which financial asset is likely to be the most liquid? a. stocks b. bonds c. mutual funds shares *d. bank demand deposits
40. One reason financial institutions become very large is to: *a. decrease transaction costs. b. enjoy the power of having a large corporation. c. increase transaction costs. d. offset the power of other large corporations.
41. A financial intermediary that creates a diversified portfolio of stocks and then
resells that portfolio to individual investors is known as a: a. life insurance company. *b. mutual fund. c. brokerage company. d. credit card company.
42. Financial intermediaries that manage a stock portfolio and sell shares of the
stock portfolio itself to individual investors are: *a. mutual funds. b. pension funds. c. life insurance companies. d. banks.
43. A mutual fund: a. always includes a base year. *b. owns a diversified portfolio. c. always earns a profit. d. involves a lower rate of return for any given level of risk.
44. Banks are financial intermediaries that: a. have customer deposits as the primary asset and loans to borrowers as the primary liability. *b. provide liquid assets to lenders and long-term financing to borrowers. c. are types of mutual funds. d. have customer deposits as the primary asset and that provide liquid assets to lenders.
45. All are financial intermediaries EXCEPT: a. mutual funds. b. pension funds. c. insurance companies. *d. the New York Stock Exchange.
46. Which is NOT a financial intermediary? a. pension funds b. mutual funds c. life insurance companies *d. credit card companies
47. The financial slump that began in the United States in 2008 was a result of: a. falling energy prices. b. massive tax increases necessary to balance the government budget. c. a crisis in the foreign exchange market. *d. a sharp fall in housing prices.
48. Between 2000 and 2006, there was a housing bubble in the United States. A
bubble is: a. a fluctuation in asset prices that leads to inherent instability. *b. an increase in asset prices driven by unrealistic expectations about future prices. c. individuals reselling assets rapidly to make quick profit. d. speculation by unscrupulous investors.
49. If you borrow money from a bank to buy a house, the mortgage (loan) is a financial asset for you and a liability for the bank. a. True *b. False
50. Financial markets eliminate transactions costs. a. True *b. False
51. When corporations need to borrow large amounts of money, they can minimize their transaction costs by getting many small loans from many different people. a. True *b. False
52. An illiquid asset can be quickly converted into cash with little or no loss of value. a. True *b. False
53. Stocks are usually riskier than bonds but also typically earn a higher rate of return than bonds. *a. True b. False
54. A financial intermediary transforms funds gathered from many individuals into financial assets. *a. True b. False
55. A bubble is a large decrease in asset prices caused by unrealistic expectations about future prices. a. True *b. False
56. Consider each of these forms of investment. Identify whether it is an example of investment spending, an investment in physical assets, or a financial investment. a. You purchase a classic 1965 Ford Mustang. b. You buy 50 shares of stock in the Ford Motor Company. c. Ford Motor Company builds a new plant in Tennessee. Correct Answer:
a. This is an investment in a physical asset. Like any asset, you hope that it appreciates in value so that you can sell it later at a profit, but it does not add to the nation's stock of physical capital. b. This is a financial investment. These shares of stock give you a very small ownership stake in the company and a very small claim on future profits. It is not investment spending because it is not increasing the stock of physical capital. c. This is investment spending. The new plant actually increases the stock of physical capital.
57. Providing a linkage between savers and investors is an important aspect of: *a. a well-functioning financial system. b. government. c. the public sector. d. consumers.
58. Financial assets: *a. are paper claims that provide the buyer of the claim future income from the seller of the claim. b. in the form of loans by an individual are an asset to the individual receiving the loan. c. are accompanied by high transaction costs. d. have no financial risk.
59. A liquid asset: a. can be easily converted into a loan. *b. can be easily converted into cash with little or no loss of value. c. are the only assets with which financial markets work. d. carries no financial risk.
60. Someone who is risk-averse is: a. willing to expend whatever resources necessary to gain an uncertain amount of money. *b. willing to spend more resources to avoid losing a fixed sum of money than he or she is willing to expend on gaining the same sum of money. c. irrational in the need to hold all assets in liquid form. d. one who does not believe in financial risk.
61. A checking account with $500 is: *a. more liquid than a person's new car. b. less liquid than a checking account with $1000. c. equally liquid as a stock share with a $500 value. d. less liquid than a home with a market value of $250,000.
62. Four types of financial intermediaries are: a. mutual funds, pension funds, government, and the central bank. *b. mutual funds, pension funds, life insurance companies, and banks. c. banks, stock markets, pension funds, and the central bank. d. the central bank, government, the stock market, and the Dow Jones Industrial Average.
63. Borrowers who cannot be served by the stock and bond markets can use: *a. banks for their financing needs. b. the government for their financing needs. c. no other source and are therefore crowded out of the market. d. must hold all of their assets in liquid form.
1. The changes in the economy of Ft. Myers, Florida, between 2003 and 2008
provide an example of: a. the risk associated with an agricultural economy. *b. positive and negative multiplier effects. c. how public assistance programs can stimulate the economy. d. the benefits of government budget surpluses.
2. The real estate market in Ft. Myers, Florida, collapsed by 2008 because: *a. houses were overpriced. b. most Floridians prefer to rent apartments rather than buy houses. c. hurricanes damaged so much property. d. climate change has made much of the retiree population leave Florida.
3. The main reason that speculators bought houses in Ft. Myers in the early 2000s
was to: *a. profit by reselling them at much higher prices. b. live in them. c. demolish them and build a shopping mall. d. rent them to students.
4. The expansion and collapse of the housing market in Ft. Myers between 2003
and 2010 is primarily an example of how: a. too much government regulation is harmful to the economy. *b. changes in investment spending can have an effect on consumer spending and an impact on the entire economy. c. immigration affects local economies. d. high tax rates can decrease economic activity in an area.
5. The marginal propensity to consume is: a. increasing if the marginal propensity to save is increasing. b. the proportion of total disposable income that the average family consumes. *c. the change in consumer spending divided by the change in aggregate disposable income. d. the change in consumer spending minus the change in aggregate disposable income.
6. The marginal propensity to consume is equal to the:
a. proportion of consumer spending as a function of aggregate disposable income. b. change in saving divided by the change in aggregate disposable income. *c. ratio of the change in consumer spending to the change in aggregate disposable income. d. change in saving divided by the change in consumer spending.
7. The MPS plus the MPC must equal: a. zero. *b. one. c. income. d. saving.
8. If the MPS = 0.1, then the value of the multiplier equals: a. 1. b. 5. c. 9. *d. 10.
9. If the multiplier equals 4, then the marginal propensity to save must be equal to: *a. 1/4. b. 1/2. c. 3/4. d. the marginal propensity to consume.
10. Suppose that the marginal propensity to consume is 0.8, and investment
spending increases by $100 billion. The increase in aggregate demand is: a. $100 billion, the same amount as investment spending. b. $125 billion, composed of $100 billion in investment spending and $25 billion in consumption. c. $80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion. *d. $500 billion, composed of $100 billion in investment spending and $400 billion in consumption.
11. If the marginal propensity to save is 0.3, the size of the multiplier is: *a. 3.3. b. 2.3. c. 1.3. d. 0.7.
12. The marginal propensity to save is: a. savings divided by aggregate income. *b. the fraction of an additional dollar of disposable income that is saved. c. 1 + MPC. d. savings divided by aggregate income or 1 + MPC.
13. The multiplier is: *a. 1 / (1 – MPC). b. MPS / MPC. c. 1 / (MPC). d. 1(1 + MPC).
14. If the MPC is 0.8, then the multiplier is: a. 4. *b. 5. c. 8. d. 10.
15. The marginal propensity to consume (MPC) is equal to the change in: *a. consumer spending divided by the change in disposable income. b. consumer spending divided by the change in investment spending. c. consumer spending divided by the change in gross domestic product. d. disposable income divided by the change in consumer spending.
16. If disposable income increases by $5 billion and consumer spending increases
by $4 billion, the marginal propensity to consume is equal to: a. 20. *b. 0.8. c. 1.25. d. 9.
17. Suppose the marginal propensity to consume is equal to 0.9 and investment
spending increases by $50 billion. Assuming no taxes and no trade, by how much will real GDP change? a. $450 billion increase b. $90 billion increase *c. $500 billion increase d. $500 billion decrease
18. The spending multiplier is equal to: a. MPC / MPS. b. 1 / (1 – MPS). c. MPC + MPS. *d. 1 / (1 – MPC).
19. Suppose that a financial crisis decreases investment spending by $100 billion
and the marginal propensity to consume is 0.8. Assuming no taxes and no trade, by how much will real GDP change? *a. $500 billion decrease b. $200 billion decrease c. $800 billion decrease d. $400 billion increase
20. The MPC is the change in: a. saving divided by the change in disposable income. b. disposable income divided by the change in consumption. c. disposable income divided by the change in saving. *d. consumption divided by the change in disposable income.
21. If your disposable income increases from $10,000 to $15,000 and your
consumption increases from $9000 to $12,000, your MPC is: a. 0.2. b. 0.4. *c. 0.6. d. 0.8.
22. If your disposable personal income increases from $10,000 to $15,000 and your
consumption increases from $9000 to $13,000, your MPC is: a. 0.2. b. 0.4. c. 0.6. *d. 0.8.
23. The MPC plus the MPS must: a. equal each other. *b. equal 1. c. be less than 1. d. be greater than 1.
24. The value of MPC is: a. equal to 1. b. greater than 1. *c. greater than 0 and less than 1. d. less than 0 and greater than –1.
25. An increase in the MPC: *a. increases the multiplier. b. shifts the autonomous investment line upward. c. decreases the multiplier. d. shifts the autonomous investment line downward.
26. Which most accurately depicts the formula for the expenditure multiplier?
a. b. *c. d.
27. If MPC = 0.9, the multiplier is: *a. 10. b. 90. c. 9. d. 1.
28. The _______ the _______, the _______ the multiplier. a. smaller; level of wealth; bigger b. bigger; MPS; bigger c. bigger; MPC; smaller *d. bigger; MPC; bigger
29. Suppose investment spending increases by $50 billion and as a result the
equilibrium income increases by $200 billion. The investment multiplier is: a. 8. b. 10.
*c. 4. d. 0.25.
30. Suppose investment spending increases by $50 billion and as a result the
equilibrium income increases by $200 billion. The value of the MPC is: a. 0.8. b. 0.4. *c. 0.75. d. 4.
31. If the multiplier is 4 and investment spending falls by $100 billion, the change in
equilibrium income will be: *a. –$400 billion. b. $400 billion. c. $25 billion. d. –$25 billion.
32. Suppose the government increases spending by $100 billion as a stimulus
package. If the MPC is 0.6, then equilibrium income will: a. decrease by $250 billion. *b. increase by $250 billion. c. increase by $600 billion. d. decrease by $400 billion.
33. According to the National Bureau of Economic Research, the U.S. economy is
going through a severe recession. Most households are trying to save more of their income than before. This increase in private spending will lead to: a. an increase in aggregate income, as more saving means more funds for business investment. *b. a fall in aggregate income, as more saving means people will spend less. c. no change in aggregate income, because there is no saving multiplier. d. an increase in aggregate income, as an increase in saving will make people wealthier.
34. If MPS is small, it will: a. make the multiplier smaller. *b. make the multiplier larger. c. not affect the value of the multiplier. d. increase the interest rate.
35. The marginal propensity to consume is the increase in consumer spending
when _____ increase(s) by $1. a. investment spending b. taxes *c. disposable income d. savings
36. The marginal propensity to save is the increase in household savings when
________ increase(s) by $1. a. investment spending b. taxes c. consumption *d. disposable income
37. In a simple economy with no taxes, government spending, exports, or imports, if
disposable income increases by $100 and $70 is spent on the consumption of good and services, ________ is saved. *a. $30 b. $70 c. $100 d. $170
38. In a simple economy with no taxes, government spending, exports, or imports, if
disposable income increases by $100 and $30 is saved, ________ is spent on the consumption of goods and services. a. $30 *b. $70 c. $100 d. $170
39. A $50 million increase in investment spending will cause real GDP to: a. decrease by $50 million. b. increase by $50 million. *c. increase by more than $50 million. d. increase by less than $50 million.
40. A $70 million decrease in investment spending will cause real GDP to: a. decrease by $70 million. b. increase by $70 million. c. decrease by less than $70 million.
*d. decrease by more than $70 million.
41. An initial change in the desired level of spending by firms, households, or
government at a given level of real GDP is a(n): *a. autonomous change in aggregate spending. b. multiplier induced change in spending. c. endogenous spending. d. budget surplus.
42. In an economy with no taxes or imports, if the marginal propensity to save is
0.2, the marginal propensity to consume must be: a. 0.2 *b. 0.8 c. 1.2 d. 0.16
43. In an economy with no taxes or imports, if the marginal propensity to consume
is 0.7, the marginal propensity to save must be: a. 1.7 b. 0.7 *c. 0.3 d. 0.21
44. In an economy with no taxes or imports, if the marginal propensity to consume
increases, the marginal propensity to save will: a. increase. *b. decrease. c. remain constant. d. fluctuate randomly.
45. In an economy with no taxes or imports, if the marginal propensity to save
decreases, the marginal propensity to consume will: *a. increase. b. decrease. c. remain constant. d. fluctuate randomly.
46. In an economy with no taxes or imports, if disposable income increases by
$1000 and consumption increases by $600, the marginal propensity to consume is:
a. $600 b. $400 c. 1.67 *d. 0.6
47. In an economy with no taxes or imports, if disposable income increases by
$1000 and consumption increases by $600, the marginal propensity to save is: a. $600 b. $400 c. 2.5 *d. 0.4
48. In an economy with no taxes or imports, if disposable income increases by
$1000 and consumption increases by $600, the multiplier is: a. $600 b. 0.6 *c. 2.5 d. 0.4
49. In an economy with no taxes and no imports, when disposable income
increases from $2000 to $3000, consumption increases from $1500 to $2100. Given this information, the marginal propensity to consume is: a. $600 b. 0.71 *c. 0.6 d. 0.5
50. In an economy with no taxes and no imports, when disposable income
increases from $2000 to $3000, consumption increases from $1500 to $2100. Given this information, the marginal propensity to save is: a. $600 b. $400 c. 0.8 *d. 0.4
51. In an economy with no taxes and no imports, when disposable income
increases from $2000 to $3000, consumption increases from $1500 to $2100. Given this information, the multiplier is: a. 6 *b. 2.5 c. 0.6 d. 0.4
52. In an economy with no taxes and no imports, when disposable income
decreases from $6000 to $4000, consumption decreases from $4500 to $3000. Given this information, the marginal propensity to consume is: a. -0.75 b. –0.2 *c. 0.75 d. 1
53. In an economy with no taxes and no imports, when disposable income
decreases from $6000 to $4000, consumption decreases from $4500 to $3000. Given this information, the marginal propensity to save is: *a. 0.25 b. –0.25 c. 1.125 d. 0.75
54. In an economy with no taxes and no imports, when disposable income
decreases from $6000 to $4000, consumption decreases from $4500 to $3000. Given this information, the multiplier is: a. 0.25 *b. 4 c. 1.125 d. –4
55. If the marginal propensity to consume increases, the multiplier will: *a. increase. b. decrease. c. remain constant. d. fluctuate randomly.
56. If the marginal propensity to save increases, the multiplier will: a. increase. *b. decrease. c. remain constant. d. fluctuate randomly.
57. If the marginal propensity to consume is 0.8, the multiplier is: a. 0.8
b. 0.2 c. 1.25 *d. 5
58. If the marginal propensity to consume is 0.5, the multiplier is: a. 5 *b. 2 c. 1 d. 0.5
59. If the marginal propensity to save is 0.2, the multiplier is: a. 0.8 b. 0.2 c. 1.25 *d. 5
60. If the marginal propensity to save is 0.5, the multiplier is: a. 5 *b. 2 c. 1 d. 0.5
61. If the multiplier is 4, the marginal propensity to consume is: a. 3 b. 0.8 *c. 0.75 d. 0.25
62. If the multiplier is 4, the marginal propensity to save is: a. 3 b. 0.8 c. 0.75 *d. 0.25
63. If the multiplier is 4 and there are no taxes, and government spending increases
by $100 billion, real GDP will: *a. increase by $400 billion. b. decrease by $400 billion. c. increase by $100 billion. d. increase by $25 billion.
64. If the multiplier is 4 and there are no taxes, and government spending
decreases by $100 billion, real GDP will: a. increase by $400 billion. *b. decrease by $400 billion. c. increase by $100 billion. d. increase by $25 billion.
65. The marginal propensity to consume is the: a. number of times during the year that consumers change their planned expenditures. b. portion of income that is saved. c. portion of income that is consumed. *d. increase in consumer spending when disposable income increases by $1.
66. The marginal propensity to save is the: a. portion of income that is saved. *b. increase in household savings when disposable income increases by $1. c. portion of income that is consumed. d. proportion of the population with savings accounts.
67. What is the marginal propensity to save when the marginal propensity to
consume is 0.8? a. 0.1 *b. 0.2 c. 0.3 d. 0.4
68. What is the marginal propensity to save when the marginal propensity to
consume is 0.9? *a. 0.1 b. 0.2 c. 0.3 d. 0.4
69. An initial rise or fall in aggregate spending that causes ripple effects on the level
of total income is known as a(n): *a. autonomous change in aggregate spending.
b. economic fluctuation. c. economic disruption. d. normalized change.
70. The value of the multiplier is calculated as: a. MPC x MPS b. MPC + MPS c. 1/MPC *d. 1/(1 – MPC)
71. The concept of the multiplier was first developed by economists trying to explain
the: a. impact of the American Civil War. b. value of British colonies in North America. *c. Great Depression in the 1930s. d. boom and bust caused by the Ft. Myers housing market.
72. During the Great Depression, consumer spending ________, and investment
spending ______. a. increased; increased b. increased; decreased c. decreased; increased *d. decreased; decreased
73. During the Great Depression, real GDP: *a. decreased. b. remained constant. c. increased. d. decreased for a year, and then increased for the next ten years.
74. Compared to the multiplier during the Great Depression, the multiplier today is: a. larger. *b. smaller. c. approximately the same size. d. sometimes larger and sometimes smaller, depending on what the Office of Management and Budget feels is appropriate.
75. The current multiplier is _________ than the multiplier during the Great
Depression, primarily because of _________ today.
a. larger; automatic stabilizers b. larger; partisan politics in Washington *c. smaller; automatic stabilizers d. smaller; the destabilizing policies of the Federal Reserve
76. Between 2003 and 2010, the unemployment rate in Ft. Myers, Florida, decreased from 13 percent to 3 percent. a. True *b. False
77. Much of the housing boom in Ft. Myers was due to speculators who bought homes not to live in themselves, but to resell quickly at much higher prices. *a. True b. False
78. The changes in the economy of Ft. Myers between 2003 and 2010 illustrates that the multiplier has positive effects, but not negative effects on an economy. a. True *b. False
79. The housing market in Ft. Myers collapsed in the mid to late 2000s because of extensive damage to homes from hurricanes. a. True *b. False
80. The expansion and collapse of the housing market in Ft. Myers between 2003 and 2010 is primarily an example of how changes in investment spending can have an effect on consumer spending and an impact on the entire economy. *a. True b. False
81. The marginal propensity to consume is consumption divided by disposable income. a. True *b. False
82. The marginal propensity to consume is the increase in consumer spending when disposable income increases by $1.
*a. True b. False
83. The marginal propensity to save is the increase in household savings when investment spending increases by $1. a. True *b. False
84. In a simple economy with no taxes, government spending, exports, or imports, any disposable income that is not spent on consumption is saved. *a. True b. False
85. In a simple economy with no taxes, government spending, exports, or imports, if disposable income increases by $500 and $450 is spent on consumption, $950 is saved. a. True *b. False
86. In a simple economy with no taxes, government spending, exports, or imports, if disposable income increases by $500 and $450 is spent on consumption, $50 is saved. *a. True b. False
87. A $200 million increase in investment spending will cause real GDP to increase by exactly $200 million. a. True *b. False
88. A $200 million increase in investment spending will cause real GDP to increase by more than $200 million. *a. True b. False
89. A $300 million decrease in investment spending will cause real GDP to increase by more than $300 million. a. True
*b. False
90. A $600 million decrease in investment spending will cause real GDP to decrease by more than $600 million. *a. True b. False
91. Autonomous spending is the spending that occurs in the second round of spending increases caused by the multiplier. a. True *b. False
92. Autonomous spending is an initial change in the desired level of spending by firms, households, or government at a given level of real GDP. *a. True b. False
93. If the marginal propensity to save is 0.25 in an economy with no taxes and no imports, the marginal propensity to consume is 1.25. a. True *b. False
94. If the marginal propensity to save is 0.25 in an economy with no taxes and no imports, the marginal propensity to consume is 0.75. *a. True b. False
95. In an economy with no taxes or imports, if the marginal propensity to consume increases, the marginal propensity to save will also increase. a. True *b. False
96. In an economy with no taxes or imports, if the marginal propensity to consume increases, the marginal propensity to save will decrease. *a. True b. False
97. In an economy with no taxes or imports, if disposable income increases by $2000 and consumption increases by $1400, the marginal propensity to save is 0.21. a. True *b. False
98. In an economy with no taxes or imports, if disposable income decreases by $2000 and consumption decreases by $1400, the marginal propensity to save is 0.3. *a. True b. False
99. In an economy with no taxes or imports, if disposable income decreases by $2000 and consumption decreases by $1400, the multiplier is 7. a. True *b. False
100. In an economy with no taxes or imports, if disposable income decreases by $2000 and consumption decreases by $1500, the marginal propensity to consume is –0.25. a. True *b. False
101. In an economy with no taxes or imports, if disposable income decreases by $2000 and consumption decreases by $1500, the multiplier is –4. a. True *b. False
102. In an economy with no taxes and no imports, when disposable income increases from $1000 to $2000, consumption increases from $800 to $1500. Given this information, the marginal propensity to consume is 0.7. *a. True b. False
103. In an economy with no taxes and no imports, when disposable income increases from $1000 to $2000, consumption increases from $800 to $1500. Given this information, the marginal propensity to save is 0.25. a. True *b. False
104. In an economy with no taxes and no imports, when disposable income increases from $1000 to $2000, consumption increases from $800 to $1500. Given this information, the marginal propensity to save is 0.3. *a. True b. False
105. In an economy with no taxes and no imports, when disposable income increases from $1000 to $2000, consumption increases from $800 to $1500. Given this information, the multiplier is 3.33. *a. True b. False
106. If the marginal propensity to consume decreases, the multiplier will increase. a. True *b. False
107. If the marginal propensity to save decreases, the multiplier will increase. *a. True b. False
108. Suppose we are in an economy with no taxes or imports. If the marginal propensity to consume is 0.9, the multiplier will be 0.1. a. True *b. False
109. Suppose we are in an economy with no taxes or imports. If the marginal propensity to save is 0.2, the multiplier will be 5. *a. True b. False
110. Suppose we are in an economy with no taxes or imports. If the marginal propensity to consume is 0.9 and investment spending increases by $50 billion, the change in real GDP will be $5 billion. a. True *b. False
111. Suppose we are in an economy with no taxes or imports. If the marginal propensity to save is 0.25 and investment spending increases by $50 billion, the change in real GDP will be $200 billion. *a. True b. False
112. The concept of the multiplier was first developed by economists trying to explain the economic impact of the Whiskey Rebellion. a. True *b. False
113. During the Great Depression, consumer spending increased even though investment spending decreased. a. True *b. False
114. During the Great Depression between 1929 and 1933, the decrease in consumer spending was larger than the decrease in investment spending. *a. True b. False
115. During the Great Depression between 1929 and 1933, the decrease in consumer spending was smaller than the decrease in investment spending because of the multiplier effect. a. True *b. False
116. During the Great Depression, real GDP decreased. *a. True b. False
117. Compared to the multiplier during the Great Depression, the multiplier today is larger because of reductions in the size of government at the state, local, and federal levels. a. True *b. False
118. The current multiplier is smaller than the multiplier during the Great Depression, primarily because of automatic stabilizers used today.
*a. True b. False
119. Explain how the boom and bust in the Ft. Myers housing market between 2003 and 2010 illustrates the positive and negative effects of the multiplier. Correct Answer:
When the boom began, construction and related companies increased hiring. The spending by those employed in the construction and construction-related industries led to higher income and spending by other workers in the local economy and, eventually, to the creation of more jobs in the area. As employment,incomes, and spending increased, the Ft. Myers economy grew. Fairly quickly, houses became overpriced and the market collapsed. Construction and construction-related companies were forced to lay off workers, which decreased incomes and spending for those workers. This decrease in spending meant lower incomes for other workers in the area and led to increased unemployment and a serious slowdown in the Ft. Myers economy. 120. How and why has the size of the multiplier changed since the Great Depression in the 1930s? Correct Answer:
The multiplier is thought to have been around 3 in the Great Depression, but is estimated to be lower now. The main reason for the difference is the increase in the size of government since then. In the 1930s, taxes were lower and there were no government programs such as food stamps, Medicaid, Medicare and Social Security. Many taxes and government spending programs are automatic stabilizers designed to lessen the fluctuations in the business cycle, which reduces the size of the multiplier. 121. How does a nation's saving rate, as measured by the marginal propensity to save, affect the size of the spending multiplier? Explain with both intuition and the formula for the multiplier. Correct Answer:
The multiplier process relies upon spending at every step. If disposable income rises, consumers increase spending at every stage of the process, by an amount equal to the marginal propensity to consume multiplied by the increase in disposable income. If the MPC is large, the MPS is small, and more total spending is multiplied throughout the economy. However, if consumers decide to increase savings at each stage of the process, the MPS increases, and disposable income leaks out of the spending multiplier. The multiplier M = 1 / (1 – MPC). If the MPS increases, the MPC decreases, so (1 – MPC) increases. If (1 – MPC) increases, 1 / (1 – MPC) decreases and the multiplier, M, falls.
122. Suppose that the marginal propensity to consume is 0.80, and the government spends $10 million to repair a bridge. Assuming no taxes and no international trade, explain how the $10 million of government spending causes GDP to increase by $50 million. Correct Answer:
The initial $10 million in spending used to pay for the bridge repairs is income for the construction workers and the suppliers of the building materials. With a marginal propensity to consume of 0.8, the workers and suppliers will spend $8 million, which becomes income for store owners and workers who produced the goods and services purchased by the construction workers. Of the $8 million in new disposable income, 80 percent of it will be spent on consumer goods, causing another increase in output and incomes. The process continues through many rounds until the total increase in GDP is the multiplier (of 5) times the initial autonomous spending of $10 million, which is a total of $50 million in GDP generated.
123. The multiplier process: a. explains how spending continues indefinitely with continuous rounds of spending. b. ends after one round of spending and with total spending limited to the initial change in spending. c. occurs only when economies are in an expansion phase. *d. is limited, with the total change in real GDP dependent upon the size of the marginal propensity to consume.
124. The value of the multiplier will be smaller: *a. the larger is the value of the MPS. b. the larger is the value of the MPC. c. if the MPC equals the MPS. d. if the MPC + MPS equals 1.
125. The marginal propensity to save: a. is the change in consumer saving divided by the change in consumption. *b. is the change in saving divided by the change in disposable income. c. equals MPC + 1. d. changes when the MPC is constant.
126. Alice's disposable income increases by $1000, and she spends $600 of it.
Alice's: *a. MPS is 0.4 and she saves $400. b. MPC is 0.4 and she saves $400.
c. MPS is 0.4 and she saves $600. d. MPC is 0.6 and she consumes $400.
127. During the Great Depression: a. investment fell, but consumption increased. b. investment increased, but consumption decreased. *c. both consumption and investment decreased. d. overall GDP rose.
1. Figure: Consumption and Real GDP
Reference: Ref 25-1
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, the slope of the consumption function is called the: a. marginal propensity to save. b. average propensity to consume. *c. marginal propensity to consume. d. marginal consumption increment.
2. Figure: Consumption and Real GDP
Reference: Ref 25-1
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, the marginal propensity to consume in this example is: a. 0. *b. 0.5. c. 1.0. d. 2.0.
3. Figure: Consumption and Real GDP
Reference: Ref 25-1
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, if real GDP is $4 trillion, consumption is _______ trillion. a. $0.75 b. $1 *c. $3 d. $4
4. Figure: Consumption and Real GDP
Reference: Ref 25-1
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, if real GDP is $12 trillion, consumption is _______ trillion. a. $5 *b. $7 c. $9 d. $11
5. Figure: Consumption and Real GDP
Reference: Ref 25-1
(Figure: Consumption and Real GDP) According to the Figure: Consumption and Real GDP, if real GDP is $8 trillion, consumption is _______ trillion and saving is _______ trillion. a. $4; $4 *b. $5; $3 c. $6; $2 d. $7; $1
6. You and a coworker have been trying to develop a linear equation that describes
the local household consumption function. Your coworker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + 0.75(YD). Your job is to explain this result to your supervisor. According to this consumption function, what is the marginal propensity to consume? a. 100 *b. 0.75 c. 4 d. 0.25
7. You and a coworker have been trying to develop a linear equation that describes
the local household consumption function. Your coworker has sent you a very short email that simply says he has finished the project and the consumption function is: C = 100 + 0.75(YD). Your job is to explain this result to your supervisor. According to this consumption function, how much consumption spending would occur if a household had disposable income of $1000? a. $750 b. $4000 *c. $850 d. $350
8. Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will
this affect the consumption function? *a. The slope will get steeper. b. Autonomous consumption will increase. c. The function will shift upward. d. The slope will get steeper and autonomous consumption will increase.
9.
Reference: Ref 25-2
(Table: Individual and Aggregate Consumption Functions) According to the Table: Individual and Aggregate Consumption Functions, which represents Andy's individual consumption function? *a. C = 0.15YD b. C = 150 + 0.5YD c. C = 150 + 0.8YD d. C = 0.95YD
10.
Reference: Ref 25-2
(Table: Individual and Aggregate Consumption Functions) According to the Table: Individual and Aggregate Consumption Functions, which represents Fred's individual consumption function? *a. C = 100 + 0.7YD. b. C = 100 + 0.5YD. c. C = 150 + 0.8YD. d. C = 0.80YD.
11.
Reference: Ref 25-2
(Table: Individual and Aggregate Consumption Functions) According to the Table: Individual and Aggregate Consumption Functions, which represents Mark's individual consumption function? a. C = 200 + 1.1YD. b. C = 450 + 0.5YD. c. C = 0.8YD. *d. C = 200 + 0.9YD.
12.
Reference: Ref 25-2
(Table: Individual and Aggregate Consumption Functions) According to the Table:
Individual and Aggregate Consumption Functions, autonomous consumption in the aggregate consumption function is: *a. $450. b. $200. c. $150. d. $100.
13.
Reference: Ref 25-2
(Table: Individual and Aggregate Consumption Functions) According to the Table: Individual and Aggregate Consumption Functions, the marginal propensity to consume in the aggregate consumption function is: a. 0.5. b. 0.7. *c. 0.8. d. 0.9.
14.
Reference: Ref 25-2
(Table: Individual and Aggregate Consumption Functions) According to the Table: Individual and Aggregate Consumption Functions, which represents the aggregate consumption function? a. C = 450 + 0.7YD. b. C = 150 + 0.9YD. c. C = 250 + 0.8YD. *d. C = 450 + 0.8YD.
15. Figure: Consumption and Disposable Personal Income
Reference: Ref 25-3
(Figure: Consumption and Disposable Personal Income) According to the Figure: Consumption and Disposable Personal Income, when disposable personal income is $1200 billion, consumption is _______ billion. a. $600 *b. $800 c. $1200 d. $2000
16. Figure: Consumption and Disposable Personal Income
Reference: Ref 25-3
(Figure: Consumption and Disposable Personal Income) According to the Figure: Consumption and Disposable Personal Income, when disposable personal income is $2000 billion, consumption is _______ billion. a. $400 b. $1000 *c. $1200 d. $1600
17. Figure: Consumption and Disposable Personal Income
Reference: Ref 25-3
(Figure: Consumption and Disposable Personal Income) According to the Figure: Consumption and Disposable Personal Income, the slope of the consumption function is: a. 0.25. *b. 0.50. c. 0.60. d. 0.67.
18.
Reference: Ref 25-4
(Table: Income and Consumption) According to the Table: Income and Consumption, when disposable personal income is $200, the MPC is: a. 0.00. b. 0.20. *c. 0.80. d. 1.40.
19.
Reference: Ref 25-4
(Table: Income and Consumption) According to the Table: Income and Consumption, when disposable personal income is $300, the MPC is: *a. 0.80. b. 0.92. c. 0.95. d. 1.00.
20.
Reference: Ref 25-4
(Table: Income and Consumption) According to the Table: Income and Consumption, when disposable personal income is $400, the level of personal saving is: a. –$40. b. –$20.
c. $0. *d. $20.
21. The most important determinant of consumer spending is: a. the government budget deficit or surplus. b. the price of gasoline. c. the trade deficit. *d. disposable income.
22. Scenario: Consumption Spending
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. Reference: Ref 25-5
(Scenario: Consumption Spending) According to the Scenario: Consumption Spending, autonomous consumption is: *a. $500. b. 0. c. 0.8 of disposable income. d. $1300 if disposable income is $1000.
23. Scenario: Consumption Spending
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. Reference: Ref 25-5
(Scenario: Consumption Spending) According to the Scenario: Consumption Spending, the marginal propensity to consume is: a. $500. b. 0. *c. 0.8. d. 0.2.
24. Scenario: Consumption Spending
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. Reference: Ref 25-5
(Scenario: Consumption Spending) According to the Scenario: Consumption Spending, the marginal propensity to save is: a. $500. b. 0. c. 0.8. *d. 0.2.
25. Scenario: Consumption Spending
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. Reference: Ref 25-5
(Scenario: Consumption Spending) According to the Scenario: Consumption Spending, if income increases by $2000, consumption will increase by: a. $500. b. $2000. *c. $1600. d. $400.
26. Scenario: Consumption Spending
Suppose that the consumption function is: C = $500 + 0.8 × YD, where YD is disposable income. Reference: Ref 25-5
(Scenario: Consumption Spending) According to the Scenario: Consumption Spending, if disposable income is $1000, saving is: a. –$500. b. $1300. *c. –$300. d. $300.
27. When David has no income, he spends $500. If his income increases to $2000,
he spends $1900. Which represents his consumption function? a. C = 1.2 × YD. b. C = 0.95 × YD. *c. C = $500 + 0.7 × YD. d. C = $500 + 1000 × YD.
28. Consumer spending in the United States normally accounts for approximately
______ of the economy. a. one-third. b. one-half. *c. two-thirds. d. three-fourths.
29. An algebraic representation of the consumption function is C = A + MPC × YD.
Which represents the slope of the function? a. C
b. A *c. MPC d. YD
30. Table: Individual Consumption Function for Bob
Reference: Ref 25-6
According to the Table: Individual Consumption Function for Bob, the MPC and autonomous consumption are ________ and ________, respectively, for Bob. a. 0.6; $10,000 b. 0.4; $13,000 c. 0.6; $9000 *d. 0.4; $9000
31. The most important factor affecting a household's consumer spending is: a. its expected future disposable income. *b. its current disposable income. c. its wealth. d. the current interest rate.
32. In the consumption function, an individual household's consumer spending is: *a. positively related to its current disposable income. b. negatively related to its autonomous consumption and its marginal propensity to consume. c. positively related to the interest rate. d. determined by the accelerator principle.
33. If the marginal propensity to consume is 0.5, individual autonomous
consumption is $10,000, and disposable income is $40,000, then individual consumption spending is: a. $20,000. b. $25,000. *c. $30,000. d. $45,000.
34. Assuming the A represents autonomous consumption and YD represents
disposable income, for the economy as a whole it holds true that:
a. C = MPC + (A × YD). *b. C = A + (MPC × YD). c. C = (A + MPC) × YD. d. C = (A – MPS) + (MPC × YD).
35. The marginal propensity to consume is: *a. the slope of the consumption function. b. the intercept of the consumption function. c. the inverse of the consumption function. d. autonomous.
36. If the aggregate consumption equals $100 million + 0.75 × YD, then the
marginal propensity to consume is: *a. 0.75. b. 0.25. c. $75 million. d. $100 million.
37. If the aggregate consumption equals $100 million + 0.75 × YD, then the
marginal propensity to save is: a. 0.75. *b. 0.25. c. –$75 million. d. –$100 million.
38. If the aggregate consumption equals $100 million + 0.75 × YD, then
autonomous consumption is: a. 0.75. b. 0.25. c. $75 million. *d. $100 million.
39. The aggregate consumption function: a. relates household consumption to interest rates. b. describes what people would like to buy. c. describes the relationship of spending to family wealth. *d. relates disposable income to total consumer spending.
40. An algebraic representation of the consumption function is C = A + MPC × YD.
Which represents autonomous consumption?
a. C *b. A c. MPC d. YD
41. David receives a tax refund of $800. He spends $600 and saves $200. David's
marginal propensity to consume is: a. 0.6. *b. 0.75. c. 0.25. d. 0.20.
42. If the MPC is greater than zero but less than one, then we can be sure that
when disposable income rises by $1 consumption will: a. not be affected. b. rise by more than $1. *c. rise by less than $1. d. rise by exactly $1.
43. If the consumption function is plotted on the vertical axis of a graph with
disposable income on the horizontal axis, the: a. slope of the line will be negative and determined by the marginal propensity to save. b. horizontal axis intercept will be determined by the level of autonomous consumption. *c. slope of the line will be positive and determined by the marginal propensity to consume. d. vertical axis intercept will be determined by the marginal propensity to save.
44. The marginal propensity to consume is equal to: a. consumption divided by disposable income. *b. a change in consumption divided by a change in disposable income. c. income divided by consumption. d. a change in income divided by a change in consumption.
45. If the marginal propensity to save decreases from 0.6 to 0.5, the: *a. slope of the consumption function increases from 0.4 to 0.5. b. vertical axis intercept changes from 0.6 to 0.5. c. slope of the consumption function decreases from 0.6 to 0.5.
d. horizontal axis intercept changes from 0.4 to 0.5.
46. Consider the simple economy of Behr, whose government does not tax its
citizens. The consumption function of Behr is given by: C = 500 + 0.80Y, where Y is income. The autonomous consumer spending in this economy is: a. 1000. b. 800. *c. 500. d. 600.
47. Consider the simple economy of Behr, whose government does not tax its
citizens. The consumption function of Behr is given by: C = 500 + 0.80Y, where Y is income. The marginal propensity to consume in Behr is: a. 0.75. b. 500. *c. 0.80. d. 1.
48. If disposable income increases, then: a. the consumption function will shift upward. *b. there will be a rightward movement along the consumption function. c. there will be a leftward movement along the consumption function. d. the consumption function will shift downward.
49. If disposable income increases by $1000 and consumer spending increases by
$800, then the marginal propensity to consume is: *a. 0.8. b. 1. c. 1.25. d. 0.75.
50. If MPC = 0.75, then the MPS is: a. 1.75. *b. 0.25. c. –0.25. d. 1.25.
51.
Reference: Ref 25-7
(Table: Disposable Income and Consumption) Refer to the Table: Disposable Income and Consumption. Autonomous consumer spending is: a. 200. *b. 100. c. 120. d. 0.
52.
Reference: Ref 25-7
(Table: Disposable Income and Consumption) Refer to the Table: Disposable Income and Consumption. The MPC is equal to: a. 0.8. b. 2. c. 1.2. *d. 0.6.
53. The slope of the consumption function is equal to the slope of the: a. 45-degree line. *b. aggregate expenditure line. c. aggregate demand curve. d. short-run aggregate supply curve.
54. Consider a simple economy: MPC = 0.75, income = $400 billion, and aggregate
consumption spending = $400 billion. Autonomous consumption is: a. 0. *b. $100 billion. c. $300 billion. d. $200 billion.
55. The consumption function will shift up if: *a. households expect an increase in the minimum wage in the future. b. households expect a decrease in the minimum wage in the future.
c. the marginal propensity to consume decreases. d. the marginal propensity to save increases.
56. If other things are equal, expectations of lower disposable income in the future
would ________ and shift the consumption function _________. a. increase autonomous consumption; up b. decrease the marginal propensity to consume; down *c. decrease autonomous consumption; down d. increase the marginal propensity to consume; up
57. The marginal propensity to consume is 0.5, aggregate autonomous
consumption is $10,000, and aggregate disposable income is $40,000. If disposable income is expected to increase in the future, the aggregate consumption function might take the form of: a. C = 10,000 + (40,000 × 0.5). *b. C = 12,000 + (40,000 × 0.5). c. C = 10,000 + (40,000 × 0.7). d. C = 10,000 + (42,000 × 0.5).
58. When future disposable income rises, current consumption: a. falls. *b. rises. c. is unaffected. d. is autonomous.
59. Which will shift the aggregate consumption function upward? a. Disposable income rises. b. Consumer expectations turn more pessimistic about the future. *c. The stock market is strong and wealth is rising. d. Disposable income falls.
60. Figure: Consumption Functions
Reference: Ref 25-8
(Figure: Consumption Functions) According to the Figure: Consumption Functions, an economy's consumption function would shift from curve C to curve Cʹʹ when there is a(n):
*a. decrease in wealth. b. increase in the price level. c. increase in expected future disposable income. d. increase in wealth.
61. Figure: Consumption Functions
Reference: Ref 25-8
(Figure: Consumption Functions) According to the Figure: Consumption Functions, an economy's consumption function would shift from curve C to curve Cʹ when there is a(n): *a. increase in expected future disposable income. b. increase in expected future GDP growth estimates. c. drop in wealth. d. increase in the unemployment rate.
62. An increase in the wealth of households, all other things unchanged, will result
in _______ the aggregate consumption function. a. no effect on *b. an upward shift in c. a downward shift of d. a movement to the right along
63. An upward shift in the aggregate consumption function can be caused by: *a. expectations of higher future incomes. b. expectations of less income in the future. c. a stock market crash. d. a reduction in the wealth of households.
64. A downward shift in the consumption function can be caused by: a. expectations of higher future incomes. b. an increase in the MPC. *c. a decline in consumer wealth. d. an increase in the wealth of households.
65. An upward shift in the consumption function can be caused by: *a. an increase in consumer wealth. b. a drop in consumer wealth. c. pessimistic expectations about the future.
d. an increase in disposable personal income.
66. A downward shift in the consumption function can be caused by: a. a decrease in disposable income. b. an increase in disposable income. c. expectations of higher permanent income. *d. a decrease in wealth.
67. If the stock market crashes: a. the aggregate consumption function will shift up. *b. the aggregate consumption function will shift down. c. unplanned inventory investment will be negative. d. GDP will increase.
68. Which is NOT a determinate of consumer spending? a. current disposable income b. expected future disposable income c. wealth *d. investment spending
69. If other things are equal, an increase in aggregate wealth would ________ and
shift the consumption function _________. *a. increase autonomous consumption; up b. decrease the marginal propensity to consume; down c. decrease autonomous consumption; down d. increase the marginal propensity to consume; up
70. The aggregate consumption function depends on: a. disposable income. b. expected future disposable income. c. wealth. *d. disposable income, expected future disposable income, and wealth.
71. According to the life-cycle hypothesis, wealth affects consumer spending
because: a. wealthier people have higher incomes. b. wealthier people have better connections to buy in-demand goods.
*c. people try to smooth their consumption over the course of their lives. d. people try to consume as early in their lives as they can.
72. An increase in aggregate wealth: a. increases the consumption of each individual. *b. increases the aggregate consumption function. c. decreases the consumption of each individual. d. decreases the aggregate consumption function.
73. The life-cycle hypothesis of consumer spending says that consumers plan their
spending: a. based only on current disposable income. b. based on interest rates. *c. over their lifetime. d. according to fluctuations in the stock market.
74. The consumption function shifts when: a. disposable income changes. *b. expected future disposable income changes. c. people receive a pay raise. d. disposable income goes down.
75. The life-cycle hypothesis suggests that consumers: a. spend in response to current income. *b. plan spending over their lifetime. c. spend more when income rises. d. save more when incomes rise.
76. People are likely to save the most during what part of the life cycle, according to
the life-cycle hypothesis? a. as they get closer to retirement. *b. in their peak earnings years. c. the older they get. d. in their old age.
77. Which will increase the aggregate consumption function? *a. an increase in aggregate wealth. b. an increase in aggregate disposable income. c. a decrease in aggregate wealth.
d. a decrease in expected future disposable income.
78. Planned investment spending depends on all EXCEPT the: a. rate of interest. b. expected future level of real GDP. c. current productive capacity in the economy. *d. current level of real GDP.
79. Which is NOT one of the three principle factors upon which investment
spending depends? a. interest rate b. expected future level of real GDP c. current level of production capacity *d. current level of aggregate wealth
80. All factors determine investment spending EXCEPT: a. expected future real GDP. *b. expectations about future disposable income. c. the market interest rate. d. production capacity.
81. Planned investment spending is: a. actual investment in a period. b. investment spending minus depreciation in a period. *c. investment spending that businesses plan to undertake during a period. d. always equal to savings.
82. Planned investment spending depends on: *a. the market interest rate. b. wealth. c. expected future disposable income. d. the life-cycle hypothesis.
83. Most recessions originate from a(n): a. increase in investment spending. *b. decrease in investment spending. c. increase in aggregate supply. d. decrease in aggregate supply.
84. Investment spending: *a. fluctuates more than consumption. b. fluctuates less than consumption. c. fluctuates by the same amount as consumption. d. is less volatile than consumption.
85. An important factor determining investment spending is: a. company profits. b. the prices of final products. c. expected future spending. *d. expected future real GDP.
86. If the Federal Reserve increases interest rates to reduce inflation: a. planned investment spending is most likely to increase. *b. planned investment spending is most likely to decrease. c. planned investment spending is most likely to remain the same. d. unplanned investment in inventories is likely to be negative.
87. The supply of loanable funds increases when people decide to be thriftier.
Which is most likely to occur? a. Interest rates increase, and investment spending increases. b. Interest rates increase, and investment spending decreases. *c. Interest rates decrease, and investment spending increases. d. Interest rates decrease, and investment spending decreases.
88. Which is true regarding the tradeoff a firm makes when it spends money on an
investment project? a. Borrowing money will always be more expensive than using retained earnings. b. The cost of retained earnings is unrelated to the cost of borrowing money. *c. The tradeoff a firm faces when using retained earnings or borrowed funds is the same. d. Using retained earnings has a higher opportunity cost than does using borrowed money because retained earnings come from past profits.
89. A fall in the market interest rate makes any investment project: a. less profitable if the funds were borrowed and more profitable if it came from retained earnings.
b. less profitable whether the funds were borrowed or came from retained earnings. *c. more profitable whether the funds were borrowed or came from retained earnings. d. more profitable only if the funds were borrowed.
90. Planned investment spending: a. is positively related to the interest rate. *b. is negatively related to the interest rate. c. is independent of the interest rate. d. moves in the same direction as does the market interest rate.
91. Planned investment spending is _______ to the interest rate because ______. a. positively related; a fall in the market interest rate decreases the supply of loanable funds *b. negatively related; a rise in the market interest rate makes any given investment project less profitable c. positively related; a fall in the market interest rate decreases the opportunity cost of investing d. negatively related; a rise in the market interest rate causes consumption to crowd out investment
92. If households increase savings in their bank accounts, the _______ and the
interest rate _______, therefore increasing investment spending. a. supply of loanable funds shifts right; rises b. demand of loanable funds shifts right; rises *c. supply of loanable funds shifts right; falls d. demand of loanable funds shifts left; falls
93. Retained earnings are past: a. earnings that firms keep to pay taxes. b. earnings firms retain to pay dividends. *c. earnings firms retain to finance investments. d. off-the-book earnings that firms do not pay taxes on.
94. If the interest rate rises, then: a. planned investment spending rises. b. more investment projects have a rate of return greater than the interest rate. *c. the opportunity cost of investment is greater. d. excess capacity will increase.
95. If a firm pays for investment spending out of retained earnings: a. the interest rate is irrelevant. b. past profits are adjusted downward. c. current profits are adjusted downward. *d. the firm forgoes interest it could have received.
96. Planned investment spending will decrease if: *a. the interest rate rises. b. firms expect the growth of real GDP to increase. c. firms are producing near full capacity. d. consumer expectations about future wealth grow more optimistic.
97. The accelerator principle states that investment spending by firms is: *a. positively related to the expected future growth of real GDP. b. negatively related to the expected future growth of real GDP. c. negatively related to the current level of real GDP. d. positively related to the current level of real GDP.
98. The current level of productive capacity _____ investment spending. a. has no impact on b. is positively related to *c. is negatively related to d. varies directly with
99. Other things being equal, investment spending ________ when ________. *a. decreases; firms expect sales to fall b. increases; firms have excessive production capacity c. increases; the rate of growth of real GDP is low d. decreases; the obsolete or worn out physical capital increases
100. Other things being equal, investment spending ________ as long as
________. a. decreases; technological innovation develops faster than technological obsolescence *b. increases; sales exceed the existing production capacity c. increases; the rate of growth of real GDP is lower than the marginal propensity to save d. decreases; the rate of growth of physical capital is positive
101. The higher the current production capacity of the economy, the: a. higher is investment spending. *b. lower is investment spending. c. higher is actual production. d. lower is current production.
102. According to the accelerator principle: *a. a higher growth rate of real GDP leads to higher planned investment spending. b. a higher growth rate of real GDP causes immigration to increase. c. higher budget deficits lead to even larger deficits. d. the more money people make, the faster they spend it.
103. According to the accelerator principle, a _______ rate of growth in real GDP
leads to _______. a. lower; lower unplanned inventory investment b. higher; higher inventory investment *c. higher; higher planned investment spending d. lower; higher inventory investment
104. According to the _____, there is a positive relationship between planned
investment spending and the expected future growth rate of real GDP. a. paradox of thrift b. life-cycle hypothesis c. multiplier effect *d. accelerator principle
105. According to the accelerator principle, there is a: *a. positive relationship between expected future growth and planned investment spending. b. negative relationship between expected future growth and planned investment spending. c. positive relationship between unplanned inventory investment and planned investment spending. d. positive relationship between the interest rate and planned investment spending.
106. Which accurately describes actual investment spending? *a. Actual investment = planned investment + unplanned investment.
b. Actual investment = planned investment – unplanned investment. c. Actual investment = planned investment + unplanned investment + inventory investment. d. Actual investment = planned investment × unplanned investment – inventory investment.
107. Inventory investment is: a. a part of planned investment spending and is always positive. *b. a part of unplanned investment spending and may either be positive or negative. c. not a part of investment spending by firms, as it can't be properly planned ahead of time. d. a part of the consumption spending, as these are unsold goods.
108. If a CD store has 10,000 CDs at the start of the period and 15,000 CDs at the
end of the period, then its inventory investment during the period was: a. –5000. b. 0.67. c. 1.5. *d. 5000.
109. Positive unplanned inventory investment occurs when actual: a. depreciation is less than expected depreciation. *b. sales are less than expected sales. c. depreciation is more than expected depreciation. d. sales are higher than expected sales.
110. If planned investment spending is $2 trillion and inventories decrease by $0.5
trillion, actual investment spending is: a. $2.5 trillion. *b. $1.5 trillion. c. $2 trillion. d. $3 trillion.
111. Inventory investment can be: a. negative. b. zero. c. positive. *d. negative, zero, or positive.
112. Actual investment spending equals:
*a. planned investment plus unplanned investment. b. planned investment minus unplanned investment. c. unplanned investment, even if there is a positive amount of planned investment. d. unplanned investment minus planned investment.
113. Rising inventories typically indicate _______ unplanned inventory investment
and a _________ economy. *a. positive; slowing b. negative; slowing c. positive; expanding d. negative; expanding
114. In 2005, Airbus Co. purchased raw materials worth $400 million in order to
manufacture airplanes for a total value of $900 million. In that year, Airbus Co. sold airplanes for a total value of $800 million. During 2005, Airbus Co. registered inventory investment of: a. $900 million. b. $500 million. c. $400 million. *d. $100 million.
115. Actual investment spending is equal to the: a. difference between unplanned investment spending and planned investment spending. b. difference between planned investment spending and unplanned investment spending. *c. sum of planned investment spending and unplanned investment spending. d. ratio of planned investment spending to unplanned investment spending.
116. If overall inventories rise in a month because of unplanned inventory
investment, one can conclude that: *a. the economy is slowing down. b. sales were more than had been forecast. c. inventory investment is negative. d. the accelerator principle was contradicted.
117. When planned investment is less than actual investment, there must be
unplanned:
*a. inventory investment. b. inventory disinvestments. c. depreciation. d. technological progress.
118. Which will cause a decrease in unplanned inventory investment? a. increase in interest rates *b. unexpected increase in consumer spending c. increase in the growth rate of real GDP d. sudden decrease in consumer wealth
119. Actual investment equals: *a. planned investment plus unplanned investment. b. planned investment minus unplanned investment. c. unplanned investment minus planned investment. d. planned investment in a free market economy.
120. Negative inventory investment occurs when companies: a. add to their inventories because sales fall. b. add to their inventories by increasing production. c. reduce their inventories by decreasing production. *d. reduce their inventories because sales increase.
121. Rising inventories usually indicate a(n): a. economy that grows unexpectedly. *b. economy that slows unexpectedly. c. unexpected spurt in sales. d. inflationary cycle.
122. Falling inventories indicate ______ unplanned inventory investment and a
______ economy. a. positive; growing b. positive; slowing c. negative; slowing *d. negative; growing
123. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if disposable income is $500, autonomous consumption is: a. $0. *b. $200. c. $400. d. $600.
124. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if disposable income is $500, aggregate consumption is: a. $0. b. $200. c. $400. *d. $600.
125. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if disposable income increases from $500 to $800, autonomous consumption is: a. $0. *b. $200. c. $240. d. $440.
126. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if disposable income increases from $500 to $800, aggregate consumption is:
*a. $840. b. $440. c. $240. d. $200.
127. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if disposable income increases from $500 to $800, aggregate consumption will increase by: a. $0. b. $200. *c. $240. d. $440.
128. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if all employers announce in September that they guarantee to give all employees a large Christmas bonus in December, which equation could represent the new aggregate consumption function? a. C = 100 + 0.8YD. b. C = 250 + 0.8YD. *c. C = 200 + 0.9YD. d. C = 200 + 0.7YD.
129. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if the stock market crashes suddenly, which equation could represent the new aggregate consumption function? *a. C = 100 + 0.8YD. b. C = 250 + 0.8YD.
c. C = 200 + 0.9YD. d. C = 200 + 0.7YD.
130. Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation: C = 200 + 0.8YD, where C represents consumption and YD represents disposable income. Reference: Ref 25-9 -- Scenario: Aggregate Consumption Equation
(Scenario: Aggregate Consumption Equation) According to the Scenario: Aggregate Consumption Equation, if housing prices throughout the United States decrease rapidly due to an increase in mortgage foreclosures, which equation could represent the new aggregate consumption function? *a. C = 100 + 0.8YD. b. C = 250 + 0.8YD. c. C = 200 + 0.9YD. d. C = 200 + 0.7YD.
131. Planned investment spending is: a. positively related to existing productive capacity and the interest rate. *b. negatively related to existing productive capacity and the interest rate. c. positively related to the interest rate and expected future GDP. d. negatively related to the interest rate and expected future GDP.
132. An unexpected decrease in consumer spending will change: a. planned investment spending. *b. unplanned investment spending. c. both planned and unplanned investment spending. d. neither planned nor unplanned investment spending.
133. An unexpected decrease in consumer spending will: a. decrease planned investment spending. b. decrease unplanned investment spending. c. increase planned investment spending. *d. increase unplanned investment spending.
134. An increase in interest rates on business loans will change: *a. planned investment spending.
b. unplanned investment spending. c. both planned and unplanned investment spending. d. neither planned nor unplanned investment spending.
135. An increase in interest rates on business loans will: *a. decrease planned investment spending. b. decrease unplanned investment spending. c. increase planned investment spending. d. increase unplanned investment spending.
136. A sudden decrease in the growth rate of GDP will cause a change in: *a. planned investment spending. b. unplanned investment spending. c. both planned and unplanned investment spending. d. neither planned nor unplanned investment spending.
137. A sudden decrease in the growth rate of GDP will: a. decrease planned investment spending. b. decrease unplanned investment spending. c. increase planned investment spending. *d. increase unplanned investment spending.
138. If the consumption function is C = $100 million + 0.8 × YD, then the MPC is $100 million. a. True *b. False
139. If you expect to get a substantial raise six months from now, it will not affect your current consumption because you haven't received the money yet. a. True *b. False
140. The aggregate consumption function can shift because of changes in expected future disposable income and changes in aggregate wealth. *a. True b. False
141. According to the life-cycle hypothesis, consumers plan their spending based on their current disposable income when they are very young. a. True *b. False
142. People use wealth to smooth consumption over their life cycle. *a. True b. False
143. The demand for loanable funds is inversely related to the interest rate, because fewer projects are profitable at higher interest rates. *a. True b. False
144. If expected future GDP increases, then planned current investment will increase. *a. True b. False
145. The higher current production capacity is, the higher current planned investment will be. a. True *b. False
146. Planned investment spending and actual investment spending are NOT always equal. *a. True b. False
147. If planned investment is $50 billion and unplanned inventory investment is $10 billion, then actual investment is $40 billion. a. True *b. False
148. Inventories are investment because inventories are a source of future sales. *a. True b. False
149. How can autonomous consumption be greater than zero when disposable income is equal to zero? Correct Answer:
When YD = 0, consumption can still be positive if the consumer spends savings, liquidates some other asset (like selling stock or property), or borrows. 150. Suppose you have estimated the consumption function as: C = 250 + 0.90 × YD. Knowing this, what is the equation for the corresponding savings function? Correct Answer:
If disposable income is zero, autonomous consumption will be 250. Since C + S = YD, autonomous savings must be –250. Looking at the consumption function, it is clear that the MPC = 0.90, which is the slope of the function. Because MPC + MPS = 1, the MPS = 0.10, the slope of the savings function. So the equation of the savings function is: S = –250 + 0.10 × YD. 151.
Reference: Ref 25-10 (Table: Consumption for Four Consumers) The Table: Consumption for Four Consumers shows the consumption spending of four consumers, Brandy, Mandy, Sandy, and Candi, at several levels of disposable income. Use these data to construct the aggregate consumption function. Correct Answer:
Autonomous consumption when disposable income is zero is $3500. When each person has disposable income of $1000, total income is $4000 and total consumption spending is $6300. When each person has $2000 of disposable income, total income rises to $8000 and total consumption spending rises to $9100. So collectively the MPC = (9100 – 6300) / (8000 – 4000) = 2800 / 4000 = 0.7. So the aggregate consumption function is: C = 3500 + 0.7 × YD.
152. All affect consumer spending EXCEPT: a. current disposable income. b. wealth. *c. past disposable income.
d. expected future disposable income.
153. Two-thirds of total spending is usually attributed to: *a. consumption. b. investment. c. government spending. d. net exports.
154. When Julie Ann's disposable income is $10,000, she spends $10,000, and
when her disposable income is $15,000, her spending is $12,500. Julie Ann's autonomous consumption is ________ and her ___________. *a. $5000; MPC = 0.5 b. $10,000; MPS = 0.5 c. $0; MPC = 0.5 d. $0; MPS = 0.5
155. The slope of the consumption function equals: *a. 1 – MPS. b. 1 / (1 – MPS). c. 1 – MPC. d. MPC / MPS.
156. If housing prices rise nationwide, there will be a(n): *a. increase in consumer spending at any given level of disposable income. b. decrease in wealth as consumers spend more income on mortgage payments. c. decrease in overall aggregate expenditures. d. drop in investment spending.
157. If the economy experiences a decrease in consumer spending it was most
likely caused by an: *a. expected increase in personal income taxes in the future. b. expected decrease in personal income taxes in the future. c. increase in the multiplier. d. increase in investment spending.
158. When consumers receive more disposable income, their spending: *a. will increase. b. will decrease.
c. will stay the same, but their saving will decrease. d. and their saving will both decrease.
159. The permanent income hypothesis suggests that consumer: *a. spending depends on income people expect over the long term rather than on current income. b. spending is smoothed each month in response to changes in their current disposable income. c. spending is made up of an autonomous amount and an amount dependent upon disposable income. d. saving depends on one's lifetime income.
160. Vanessa tells people she is consuming more now and probably will continue to
do so for some time, but she believes her consumption will smooth out over her lifetime. Vanessa's consumption pattern mirrors: a. the multiplier hypothesis. *b. life-cycle income hypothesis. c. relative income hypothesis. d. accelerator principle.
161. Interest rates and planned investment spending: a. have a positive relationship. *b. exhibit a negative relationship. c. have no relationship, since planned investment is fixed. d. have no relationship if the firm has retained earnings.
162. A firm has enough retained earnings to finance an investment project. For this
firm, the market interest rate: a. is not relevant to the investment decision. *b. represents the opportunity cost of using retained earnings. c. will help to calculate the rate of return for the project. d. has no impact on the profitability of the investment project.
163. The belief that a higher rate of growth in real GDP will lead to higher planned
investment spending is known as: *a. the accelerator principle. b. the multiplier effect. c. fiscal policy with an emphasis on government spending. d. unplanned investment spending.
164. Planned investment spending is:
*a. what investment firms plan to make during a given period. b. inventory investment changes. c. not considered part of GDP. d. dependent only on interest rates.
165. Scenario: Aggregate Consumption Function
Use the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following equation: C = 1000 + 0.75YD, where C stands for consumption and YD stands for disposable income. Reference: Ref 25-11
(Scenario: Aggregate Consumption Function) According to the Scenario: Aggregate Consumption Function, if disposable income increases by $100, aggregate consumption will increase by _________ and autonomous consumption _______________. *a. $75; remains at $1,000 b. $1000; remains at $75 c. $100; increases by $100 d. $175; increases by $100
166. Scenario: Aggregate Consumption Function
Use the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following equation: C = 1000 + 0.75YD, where C stands for consumption and YD stands for disposable income. Reference: Ref 25-11
(Scenario: Aggregate Consumption Function) According to the Scenario: Aggregate Consumption Function, if aggregate disposable income equals $1000, then aggregate consumption equals: a. $1000. *b. $1750. c. $2000. d. $1075.
1. In an economy with no international trade, no government expenditure, no
transfers, and no taxes, planned aggregate spending is equal to: a. GDP minus disposable income plus planned investment spending. *b. consumption plus planned investment spending. c. disposable income plus planned investment spending. d. GDP minus consumption plus unplanned investment spending.
2. In an economy with no international trade, no government expenditure, no
transfers, and no taxes, disposable income is equal to GDP. Therefore, it follows that: a. as GDP increases, planned aggregate spending decreases. b. consumption is equal to investment spending. *c. as GDP decreases, planned aggregate spending decreases. d. investment spending is equal to disposable income.
3. Planned aggregate expenditures are represented by a line that is: *a. upward sloping. b. not sloped. c. vertical. d. horizontal.
4. The slope of the planned aggregate spending line is determined by the: *a. marginal propensity to consume. b. level of unplanned investment spending. c. level of planned investment spending. d. level of autonomous consumption.
5. If investment spending increases, the planned aggregate spending line: a. becomes flatter. b. shifts down. c. becomes steeper. *d. shifts up.
6. An increase in the expected future disposable income of households: a. shifts down the planned aggregate spending line. b. increases the slope of the aggregate spending line. c. decreases the slope of the aggregate spending line. *d. shifts up the planned aggregate spending line.
7. Aggregate spending increases when there is a(n):
a. increase in prices. b. fall in prices. c. increase in unplanned investment spending. *d. increase in planned investment spending.
8. In an economy without government purchases, government transfers, or taxes,
aggregate autonomous consumer spending is $250 billion, planned investment spending is $100 billion, and the marginal propensity to consume is 0.6. What is the expression for planned aggregate spending? a. AEPlanned = $100 + 0.6 × YD. b. AEPlanned = $250 + 0.4 × YD. *c. AEPlanned = $350 + 0.6 × YD. d. AEPlanned = $150 + 0.4 × YD.
9. In an economy without government purchases, government transfers, or taxes,
aggregate autonomous consumer spending is $750 billion, planned investment spending is $300 billion, and the marginal propensity to consume is 0.75. What is the expression for planned aggregate spending? *a. AEPlanned = $1050 + 0.75 × YD. b. AEPlanned = $300 + 0.25 × YD. c. AEPlanned = $750 + 0.75 × YD. d. AEPlanned = $500 + 0.25 × YD.
10. The aggregate expenditure line has a slope: a. greater than 1. *b. less than 1. c. equal to 1. d. less than 0.
11. Assuming that there is no government sector in the economy, which two values
will be equal in our representation of the multiplier process? a. investment and consumption b. unplanned investment and planned investment *c. disposable income and real GDP d. disposable income and actual investment spending
12. Whenever GDP exceeds planned aggregate expenditure, unplanned investment
is _______; whenever GDP falls short of planned aggregate expenditure, unplanned investment is _________.
*a. positive; negative b. negative; positive c. zero; positive d. zero; negative
13. Whenever planned aggregate spending exceeds GDP: *a. unplanned inventory investment is negative. b. unplanned inventory investment is zero. c. unplanned inventory investment is positive. d. planned investment spending exceeds consumption.
14. Whenever GDP exceeds planned aggregate spending: *a. firms reduce production, thereby reducing GDP. b. households increase consumption, thereby increasing disposable income. c. firms increase production, thereby increasing GDP. d. households decrease consumption, thereby decreasing disposable income.
15. Income–expenditure equilibrium GDP is the level of GDP at which: a. the unemployment rate is zero. *b. GDP equals planned aggregate spending. c. there is no saving. d. autonomous consumption equals planned inventory investment.
16. Income–expenditure equilibrium occurs when: *a. GDP is equal to planned aggregate spending. b. GDP is equal to actual aggregate spending. c. GDP is equal to unplanned aggregate expenditure. d. consumption and investment are equal.
17. If GDP is smaller than planned aggregate spending, then: a. unplanned inventory investment is positive. b. GDP will fall. c. the economy is in equilibrium. *d. unplanned inventory investment is negative.
18. If GDP is greater than planned aggregate spending, then: a. unplanned inventory investment is negative. *b. GDP will fall.
c. the economy is in equilibrium. d. GDP will rise.
19. At the income–expenditure equilibrium: a. investment net of depreciation is zero. b. planned investment is zero. *c. unplanned inventory investment is zero. d. inventory investment is zero.
20. Unplanned inventory investment leads to: a. prices increasing. b. production increasing. c. firms hiring more workers. *d. production decreasing.
21. An unplanned fall in inventories leads to: a. prices falling. b. production falling. *c. production increasing. d. interest rates increasing.
22. The Keynesian cross was developed by: a. John Maynard Keynes. *b. Paul Samuelson. c. Adam Smith. d. Robert Heilbroner.
23. An income–expenditure equilibrium can be defined as a situation in which: a. there are no inventories. *b. there is no unplanned inventory investment. c. inventory investment is equal to consumption. d. there are no savings.
24. Figure: Aggregate Expenditures and Real GDP
Reference: Ref 26-1
(Figure: Aggregate Expenditures and Real GDP) According to the Figure: Aggregate Expenditures and Real GDP, at a real GDP of $9000 billion: *a. planned investment is less than investment. b. planned investment equals investment. c. planned investment is greater than investment. d. there will be no unplanned investment.
25. Figure: Aggregate Expenditures and Real GDP
Reference: Ref 26-1
(Figure: Aggregate Expenditures and Real GDP) According to the Figure: Aggregate Expenditures and Real GDP, if the level of real GDP equals $9000 billion and there are no changes in the consumption function or in planned investment, then real GDP will ________ in the next period. a. rise b. remain unchanged *c. fall d. fall, but only if there is an offsetting change in autonomous consumption
26. In the aggregate expenditures model, if aggregate expenditures are higher than
real GDP: *a. there are unplanned decreases in inventories. b. employment decreases. c. aggregate output decreases. d. actual real output is greater than equilibrium real output.
27. In the aggregate expenditures model, if aggregate expenditures are lower than
real GDP: *a. there will be unplanned increases in inventories. b. employment increases. c. aggregate output increases. d. actual real output is less than equilibrium real output.
28. In the aggregate expenditures model, if aggregate expenditures equal $800
billion and real GDP equals $600 billion: a. unplanned inventory accumulation equals $200 billion. *b. unplanned inventory accumulation equals –$200 billion. c. consumption plus investment equals $200 billion. d. investment equals –$200 billion.
29. In the aggregate expenditures model, if real GDP equals $700 billion and
aggregate expenditures equal $400 billion: a. consumption plus investment equals $300 billion. b. investment equals –$300 billion. c. investment plus saving equals $300 billion. *d. unplanned inventory accumulation equals $300 billion.
30. In the aggregate expenditures model, if real GDP exceeds aggregate
expenditures, the economy will: *a. contract, causing employment to decrease. b. expand, causing inflation. c. expand, causing employment to increase. d. neither contract nor expand, causing employment to remain constant.
31. In the aggregate expenditures model, if aggregate expenditures exceed real
GDP, the economy will: *a. expand, causing an increase in employment. b. expand, causing a decrease in prices. c. contract, causing a decrease in employment. d. neither expand nor contract, causing employment to remain the same.
32. Figure: Aggregate Expenditures I
Reference: Ref 26-2
(Figure: Aggregate Expenditures I) Refer to the Figure: Aggregate Expenditures I. The equilibrium real GDP is: *a. $500 billion. b. $300 billion. c. $700 billion. d. $625 billion.
33. Figure: Aggregate Expenditures I
Reference: Ref 26-2
(Figure: Aggregate Expenditures I) Refer to the Figure: Aggregate Expenditures I. When real GDP is $700 billion, there will be a: *a. $125 million increase in unplanned inventory investment. b. $125 million decline in unplanned inventory investment. c. $200 million decline in unplanned inventory investment. d. $200 million increase in unplanned inventory investment.
34. If real GDP is less than aggregate expenditure, then inventories will: a. increase, and firms will cut back on future production. b. fall, and firms will increase the prices of their products. c. increase, and firms will lower their product prices. *d. fall, and firms will increase their future production.
35. If real GDP is $1000 billion and the aggregate expenditure is $850 billion, then
the change in inventories will be: a. –$150 million. b. $1850 million. *c. $150 million. d. –$1850 million.
36. When the economy is in income–expenditure equilibrium: a. exports equal imports. b. saving is less than investment spending. c. taxes equal transfer payments. *d. real GDP equals planned aggregate spending.
37. At the income-expenditure equilibrium, a. unplanned investment is positive. b. unplanned investment is negative. *c. unplanned investment is zero. d. planned investment is zero.
38. At levels of GDP higher than the income-expenditure equilibrium, *a. unplanned investment is positive. b. unplanned investment is negative. c. unplanned investment is zero.
d. planned investment is zero.
39. At levels of GDP below the income-expenditure equilibrium, a. unplanned investment is positive. *b. unplanned investment is negative. c. unplanned investment is zero. d. planned investment is zero.
40. The Federal Reserve, the central bank of the United States, has been cutting
the interest rate in order to stimulate the recessionary economy. Interest cuts by the Federal Reserve are supposed to: a. lower the savings rate in the economy and stop leakages. b. increase government spending on the economic infrastructure and thus increase GDP through the multiplier process. c. increase cash holding by the general public thus lowering their dependence on credit. *d. increase investment spending and thus increase GDP via the multiplier.
41. If the slope of the aggregate expenditures curve = 0.8, the multiplier is equal to: a. 1. b. 4. *c. 5. d. infinity.
42. If the slope of the aggregate expenditures curve = 0.9, the multiplier is equal to: a. 1. b. 4. c. 5. *d. 10.
43. If the slope of the aggregate expenditures curve = 0.75, the multiplier is equal
to: a. 1. *b. 4. c. 5. d. infinity.
44. The magnitude of the multiplier process that links planned aggregate spending
to GDP is determined by the:
*a. marginal propensity to save. b. interest rate. c. level of autonomous consumption. d. level of planned investment spending.
45. If the planned aggregate spending rises by $10 billion and the MPC is 0.75,
then equilibrium GDP changes by: a. $2.5 billion. b. $7.5 billion. c. $10 billion. *d. $40 billion.
46. If the planned aggregate spending rises by $25 billion and the MPC is 0.8, then
equilibrium GDP changes by: a. $25 billion. *b. $125 billion. c. $200 billion. d. $250 billion.
47. An autonomous increase in aggregate spending: a. reduces GDP by that amount. b. increases GDP by that amount. c. reduces GDP by more than that amount. *d. increases GDP by more than that amount.
48. In response to an increase in autonomous aggregate spending, the equilibrium
level of real GDP will: a. rise by the amount of the increase in autonomous spending. *b. rise by an amount equal to the multiplier times the amount of the increase in autonomous spending. c. fall by the amount of the increase in autonomous spending. d. fall by an amount equal to the multiplier times the amount of the increase in autonomous spending.
49. If the marginal propensity to consume is 0.8, then an increase in autonomous
aggregate spending of $5 billion will increase the equilibrium level of real GDP by __________. a. $4 billion b. $5 billion c. $10 billion *d. $25 billion
50. According to the paradox of thrift, *a. choices that households make to prepare for tough times can worsen overall economic conditions. b. higher savings rates arise from higher levels of income. c. households that save more typically also borrow more. d. the wealth that comes from higher savings rates causes people to spend more.
51. The primary cause of the recession that ended in late 2001 was: *a. a slump in business investment spending. b. too much investment spending by households, crowding out business investment spending. c. an increase in income tax rates. d. a decrease in government spending.
52. The recession began to end in late 2001 mainly because of an increase in: a. tax rates on capital gains. *b. consumer spending on durable goods, especially automobiles. c. consumer spending on nondurables, especially gasoline and clothing. d. consumer saving.
53. In the last quarter of 2001 when the recession was ending due to increased
consumer spending, GDP growth was slow at first because: a. consumer saving also decreased. b. tax rates increased. *c. inventories which had built up during the recession decreased. d. inventories of consumer goods increased.
54. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, what is the consumption function? a. C = 8000 + 0.8 × YD b. C = 8700 + 0.2 × YD *c. C = 500 + 0.8 × YD d. C = 1700 + 0.2 × YD
55. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, how much is consumption? a. $500 b. $8000 c. $700 *d. $6900
56. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, how much is planned aggregate spending? *a. $7100 b. $6400 c. $8000 d. $700
57. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, how much is unplanned inventory investment? a. $1100 b. –$900 *c. $900 d. 0
58. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, given this income–expenditure equilibrium, firms will tend to:
a. raise prices. b. hire more people. c. increase output. *d. decrease output.
59. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, if GDP is $3000, planned aggregate spending is: a. $2400. b. $2900. *c. $3100. d. $3000.
60. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, if GDP is $3000, how much is unplanned inventory investment? a. 0 b. $600 c. $100 *d. –$100
61. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, income–expenditure equilibrium is achieved when GDP is: a. $8000. b. $7000. *c. $3500. d. $700.
62. Scenario: Income–Expenditure Equilibrium
GDP is $8000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is 0.8. Reference: Ref 26-3
(Scenario: Income–Expenditure Equilibrium) According to the Scenario: Income– Expenditure Equilibrium, the multiplier is: a. 0.8. b. 0.2. *c. 5. d. 1.25.
63. Table: The Economy of Albernia
Reference: Ref 26-4
(Table: The Economy of Albernia) According to the Table: The Economy of Albernia, what is the consumption function for Albernia? a. C = 600 + 0.3 × YD. b. C = 600 + 0.75 × YD. *c. C = 400 + 0.6 × YD. d. C = 400 + 0.75 × YD.
64. Table: The Economy of Albernia Reference: Ref 26-4
(Table: The Economy of Albernia) According to the Table: The Economy of Albernia, what is the income–expenditure equilibrium GDP? a. $1000 billion b. $1500 billion c. $2000 billion *d. $2500 billion
65. Table: The Economy of Albernia Reference: Ref 26-4
(Table: The Economy of Albernia) According to the Table: The Economy of Albernia, if GDP is $1500 billion, then the level of unplanned inventories will be equal to: a. $400 billion. *b. –$400 billion. c. $600 billion. d. –$600 billion.
66. Table: The Economy of Albernia Reference: Ref 26-4
(Table: The Economy of Albernia) According to the Table: The Economy of Albernia, if real GDP is $3000 billion, then unplanned investment will be: a. zero. b. $100 billion. *c. $200 billion. d. $300 billion.
67. Figure: Income–Expenditure Equilibrium
Reference: Ref 26-5
(Figure: Income–Expenditure Equilibrium) According to the Figure: Income– Expenditure Equilibrium, if investment spending increases in this economy, then the: *a. AE will shift up, increasing the income–expenditure equilibrium. b. AE will shift down, decreasing the income–expenditure equilibrium. c. economy will move upward along the AE, increasing the income– expenditure equilibrium. d. economy will move downward along the AE, decreasing the income–expenditure equilibrium.
68. Figure: Income–Expenditure Equilibrium
Reference: Ref 26-5
(Figure: Income–Expenditure Equilibrium) According to the Figure: Income– Expenditure Equilibrium, if investment spending decreases in this economy, then the: a. AE will shift up, increasing the income–expenditure equilibrium. *b. AE will shift down, decreasing the income–expenditure equilibrium. c. economy will move upward along the AE, increasing the income– expenditure equilibrium. d. economy will move downward along the AE, decreasing the income–expenditure equilibrium.
69. Figure: Income–Expenditure Equilibrium
Reference: Ref 26-5
(Figure: Income–Expenditure Equilibrium) According to the Figure: Income– Expenditure Equilibrium, if planned investment spending increases autonomously by $100, GDP will: *a. increase by $250. b. increase by $100. c. increase by $125. d. not change.
70. Figure: Income Expenditure Equilibrium
Reference: Ref 26-5
(Figure: Income Expenditure Equilibrium) According to the Figure: Income Expenditure Equilibrium, if planned investment spending increases by $100, income expenditure equilibrium occurs at GDP of: a. $8100. b. $3600. *c. $2250. d. $4000.
71.
Reference: Ref 26-6
(Table: Aggregate Spending) According to the Table: Aggregate Spending, suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the table show consumption spending (C) and planned investment (IPlanned). At what level of real GDP will the economy find its Income–Expenditure Equilibrium? a. $2000 b. $2500 *c. $3500 d. $4500
72.
Reference: Ref 26-6
(Table: Aggregate Spending) According to the Table: Aggregate Spending, suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the table show consumption spending (C) and planned investment (IPlanned). If real GDP is $2500, what is the level of unplanned inventory investment? a. $200 b. $0 c. $2700 *d. –$200
73.
Reference: Ref 26-6
(Table: Aggregate Spending) According to the Table: Aggregate Spending, suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the table show consumption spending (C) and planned investment (IPlanned). The income–expenditure equilibrium real GDP is found at _____. If planned investment fell to $300, the new income–expenditure equilibrium real GDP would fall to _____. a. $3500; $2500 *b. $3500; $2000 c. $3000; $1500 d. $4000; $2500
74. Figure: Aggregate Expenditures Curve I
Reference: Ref 26-7
(Figure: Aggregate Expenditures Curve I) According to the Figure: Aggregate Expenditures Curve I, the equilibrium level of real GDP in the aggregate expenditures model shown in this figure is: a. $800. b. $1000. *c. $1600. d. $3200.
75. Figure: Aggregate Expenditures Curve I
Reference: Ref 26-7
(Figure: Aggregate Expenditures Curve I) According to the Figure: Aggregate Expenditures Curve I, the slope of the aggregate expenditures curve in this figure is: a. 0.25. *b. 0.5. c. 1.0. d. 45 degrees.
76. Figure: Aggregate Expenditures Curve I
Reference: Ref 26-7
(Figure: Aggregate Expenditures Curve I) According to the Figure: Aggregate Expenditures Curve I, the multiplier in the aggregate expenditures model shown in this figure is: a. 1. *b. 2. c. 3. d. 5.
77. Figure: Aggregate Expenditures Curve I
Reference: Ref 26-7
(Figure: Aggregate Expenditures Curve I) According to the Figure: Aggregate Expenditures Curve I, suppose that the consumption function in this economy rises by $100. The result would be a shift in the aggregate expenditures curve: *a. upward by $100. b. upward by $200. c. upward by $100 times the multiplier. d. downward by $200.
78. Figure: Aggregate Expenditures Curve I
Reference: Ref 26-7
(Figure: Aggregate Expenditures Curve I) According to the Figure: Aggregate Expenditures Curve I, suppose that the consumption function in this economy rises by $100. The result would be a ________ increase in the equilibrium level of real GDP. a. $100. *b. $200. c. $800. d. $1600.
79. Figure: Aggregate Expenditures Curve I
Reference: Ref 26-7
(Figure: Aggregate Expenditures Curve I) According to the Figure: Aggregate Expenditures Curve I, suppose that the government's purchases of goods and services in this economy rise by $100. Real GDP would: a. decrease by $100. *b. increase by $200. c. increase by $800. d. decrease by $200.
80. Figure: Aggregate Expenditures Curve II
Reference: Ref 26-8
(Figure: Aggregate Expenditures Curve II) According to the Figure: Aggregate Expenditures Curve II, the equilibrium level of real GDP in the aggregate expenditures model shown in this figure is: a. $800. b. $1000. *c. $2000. d. $4000.
81. Figure: Aggregate Expenditures Curve II
Reference: Ref 26-8
(Figure: Aggregate Expenditures Curve II) According to the Figure: Aggregate Expenditures Curve II, the slope of the aggregate expenditures curve in the aggregate expenditures model shown in this figure is: a. 0.25. b. 0.5. *c. 0.6. d. 45 degrees.
82. Figure: Aggregate Expenditures Curve II
Reference: Ref 26-8
(Figure: Aggregate Expenditures Curve II) According to the Figure: Aggregate Expenditures Curve II, the multiplier in the aggregate expenditures model shown in this figure is: a. 1.0. b. 2.0. *c. 2.5. d. 5.0.
83. Figure: Aggregate Expenditures Curve II
Reference: Ref 26-8
(Figure: Aggregate Expenditures Curve II) According to the Figure: Aggregate Expenditures Curve II, suppose that the consumption function in this figure rises by $100. The result would be a shift in the aggregate expenditures curve upward by: *a. $100. b. $250. c. $100 times the multiplier. d. $150.
84. Figure: Aggregate Expenditures Curve II
Reference: Ref 26-8
(Figure: Aggregate Expenditures Curve II) According to the Figure: Aggregate Expenditures Curve II, suppose that the consumption function in this figure rises by $100. The result would be an increase in the equilibrium level of real GDP of: a. $100. b. $200. *c. $250. d. $50.
85. Figure: Aggregate Expenditures Curve II
Reference: Ref 26-8
(Figure: Aggregate Expenditures Curve II) According to the Figure: Aggregate Expenditures Curve II, suppose that the consumption function in this economy rises by $200. The result would be an increase in equilibrium real GDP of: a. $100. b. $200. c. $250. *d. $500.
86. Figure: Aggregate Expenditures Curve III
Reference: Ref 26-9
(Figure: Aggregate Expenditures Curve III) According to the Figure: Aggregate Expenditures Curve III, suppose that the consumption function in this figure rises by $100. The result would be a shift in the aggregate expenditures curve upward by:
*a. $100. b. $400. c. $100 times the multiplier. d. $200 times the multiplier.
87. Figure: Aggregate Expenditures Curve III
Reference: Ref 26-9
(Figure: Aggregate Expenditures Curve III) According to the Figure: Aggregate Expenditures Curve III, suppose that the consumption function shifts upward by $100. The result would be an increase in the equilibrium level of real GDP of: a. $100. *b. $400. c. $800. d. $3200.
88. Figure: The Aggregate Consumption Function and Planned Aggregate
Spending
Reference: Ref 26-10
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) According to the Figure: The Aggregate Consumption Function and Planned Aggregate Spending, if current disposable income increases in this economy, then the: a. AE will shift up. b. AE will shift down. *c. economy will move upward along the AE. d. economy will move downward along the AE.
89. Figure: The Aggregate Consumption Function and Planned Aggregate
Spending
Reference: Ref 26-10
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) According to the Figure: The Aggregate Consumption Function and Planned
Aggregate Spending, if current disposable income decreases in this economy, then the: a. AE will shift up. b. AE will shift down. c. economy will move upward along the AE. *d. economy will move downward along the AE.
90. Figure: The Aggregate Consumption Function and Planned Aggregate
Spending
Reference: Ref 26-10
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) According to the Figure: The Aggregate Consumption Function and Planned Aggregate Spending, if expected future disposable income increases in this economy, then the: *a. AE will shift up. b. AE will shift down. c. economy will move upward along the AE. d. economy will move downward along the AE.
91. Figure: The Aggregate Consumption Function and Planned Aggregate
Spending
Reference: Ref 26-10
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) According to the Figure: The Aggregate Consumption Function and Planned Aggregate Spending, if expected future disposable income decreases in this economy, then the: a. AE will shift up. *b. AE will shift down. c. economy will move upward along the AE. d. economy will move downward along the AE.
92. Figure: The Aggregate Consumption Function and Planned Aggregate
Spending
Reference: Ref 26-10
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) According to the Figure: The Aggregate Consumption Function and Planned Aggregate Spending, if aggregate wealth increases in this economy, then:
*a. AE will shift up. b. AE will shift down. c. economy will move upward along the AE. d. economy will move downward along the AE.
93. Figure: The Aggregate Consumption Function and Planned Aggregate
Spending
Reference: Ref 26-10
(Figure: The Aggregate Consumption Function and Planned Aggregate Spending) According to the Figure: The Aggregate Consumption Function and Planned Aggregate Spending, if aggregate wealth decreases in this economy, then the: a. AE will shift up. *b. AE will shift down. c. economy will move upward along the AE. d. economy will move downward along the AE.
94.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. Some blank spaces remain for you to fill in before answering all questions. The marginal propensity to consume is 0.8 in this economy. What is the amount of autonomous consumption? *a. $16 billion b. $32 billion
c. $4 billion d. $20 billion
95.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. What is the amount of consumption spending when real GDP is $60 billion? a. $24 billion b. $52 billion c. $48 billion *d. $64 billion
96.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. What is the amount of consumption spending when real GDP is $80 billion? a. $84 billion *b. $80 billion c. $96 billion d. $100 billion
97.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. What is the amount of consumption spending when real GDP is $100 billion? *a. $100 billion b. $104 billion c. $96 billion d. $84 billion
98.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. What is the amount of consumption spending when real GDP is $140 billion? a. $132 billion b. $130 billion *c. $128 billion d. $140 billion
99.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. What is the amount of planned aggregate expenditure when real GDP is $80 billion? *a. $84 billion b. $80 billion c. $54 billion d. $100 billion
100.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. What is the amount of planned aggregate expenditure when real GDP is $100 billion? a. $84 billion b. $80 billion c. $54 billion *d. $100 billion
101.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure
Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. What is the equilibrium level of real GDP? a. $84 billion b. $80 billion *c. $100 billion d. $120 billion
102.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. At which income level would there be positive unplanned investment? *a. $140 billion b. $100 billion c. $80 billion d. $60 billion
103.
Table: Income-Expenditure Equilibrium
Reference: Ref 26-11
(Table: Income-Expenditure Equilibrium) The Table: The Income–Expenditure Equilibrium shows the values of GDP, disposable income, consumption, planned investment, and planned aggregate expenditure for a hypothetical economy. Numbers are given in billions of dollars. The marginal propensity to consume is 0.8 in this economy. Some blank spaces remain for you to fill in before answering all questions. At which income level would there be negative unplanned investment? a. $140 billion
b. $120 billion c. $100 billion *d. $80 billion
104. If GDP is greater than planned expenditure, unplanned inventory investment is negative. a. True *b. False
105. Changes in unplanned inventory investment cause the economy to move toward the income–expenditure equilibrium. *a. True b. False
106. Decreases in investment spending are usually offset by increases in consumption through the multiplier process. a. True *b. False
107. If planned aggregate spending rises by $10 billion and the MPC is 0.8, then the income–expenditure equilibrium increases by $50 billion. *a. True b. False
108. If planned aggregate spending rises by $20 billion and the MPC is 0.9, then the income–expenditure equilibrium increases by $18 billion. a. True *b. False
109. The main cause of the recession that ended in late 2001 was a decrease in consumer saving. a. True *b. False
110. An increase in consumer spending on durable goods was the main factor that ended the recession in 2001. *a. True b. False
111. Negative inventory investment caused the growth of GDP to be fairly low when the recovery from the recession began in the fourth quarter of 2001. *a. True b. False
112. Suppose the economy is in income–expenditure equilibrium. How will each of the following situations affect planned investment and unplanned inventory investment? a. The Federal Reserve decreases interest rates. b. Major economic indicators decrease business optimism about future growth in real GDP. Correct Answer:
a. A lower interest rate will increase planned investment and aggregate spending. This will increase planned aggregate spending above real GDP, and inventories will fall. Thus unplanned inventory investment will be negative. b. Pessimism about the growth rate of the economy will decrease planned investment. This will decrease planned aggregate spending so that it is less than real GDP, and inventories will accumulate. Thus unplanned inventory investment will be positive. 113. In a simple economy with no government and no foreign sector, autonomous consumer spending is $100 and planned investment spending is $300. The marginal propensity to consume is 0.75. a. Solve for the equilibrium level of real GDP. b. If real GDP is $2000, what is unplanned inventory investment? Correct Answer:
a. Given this information, AEPlanned = 400 + 0.75 × YD. In equilibrium, AEpPanned = GDP = YD. So we can rewrite YD = 400 + 0.75 × YD, or 0.25 × YD = 400, and equilibrium YD = GDP = $1600. b. If GDP = $2000, AEPlanned = 400 + 0.75 × (2000) = $1900, so output exceeds spending and unplanned inventory investment is $100. 114. In a simple economy with no government and no foreign sector, autonomous consumer spending is $250 and planned investment spending is $500. The marginal propensity to consume is 0.80. a. Solve for the equilibrium level of real GDP. b. Suppose that interest rates fall and planned investment increases by $100. What is the new level of equilibrium real GDP? Correct Answer:
a. Given this information, AEPlanned = 750 + 0.80 × YD. In equilibrium, AEPlanned = GDP = YD. So we can rewrite YD = 750 + 0.80 × YD, or 0.20 × YD = 750, and equilibrium YD = GDP = $3750. b. With the MPC = 0.80, the multiplier M = 5. So an increase of $100 of new planned
investment will increase real GDP by $500. So the new equilibrium real GDP is $4250. 115. Table: Disposable Income and Spending
Reference: Ref 26-12 (Table: Disposable Income and Spending) Using the Table: Disposable Income and Spending, calculate the marginal propensity to consume (MPC). Use this MPC to compute the spending multiplier. Correct Answer:
The MPC = (change in consumer spending) / (change in disposable income) = $40 / $50 = 0.80. The multiplier = 1 / (1 – MPC) = 1 / 0.2 = 5. 116. Table: Disposable Income and Spending Reference: Ref 26-12 (Table: Disposable Income and Spending) Use the data in the Table: Disposable Income and Spending to develop a linear equation of the consumption function. Use this consumption function to forecast the amount of consumption spending that would occur if disposable income were equal to $500. Correct Answer:
The general equation of the consumption function is: C = A + MPC × (YD). The letter A stands for autonomous consumption, the level of consumption that occurs when disposable income YD is zero. From the table, A = $10. The MPC is the slope of the line, MPC = $40 / $50 = 0.80. So C = 10 + 0.80 × (YD). If YD = $500, C = $410.
117. Reference: Ref 26-13 (Table: Aggregate Spending) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the Table: Aggregate Spending show consumption spending (C) and planned investment (IPlanned). a. What is the MPC in this economy? b. At what level of real GDP will the economy find its income– expenditure equilibrium? Correct Answer:
a. As YD increases by $1000, C increases by $900, so the MPC = 900 / 1000 = 0.90. b. If you create a new column for AEPlanned = C + IPlanned, you will see that real GDP = AEPlanned at $7000.
118. The multiplier process assumes that: a. aggregate prices are perfectly flexible. b. the economy is open and there is free trade. *c. the economy is operating with sticky aggregate price levels. d. interest rates are constantly changing.
119. Suppose the level of planned aggregate expenditure in an economy is $1000
and the real GDP is $800. According to the simple model developed in this chapter, where the aggregate price level is assumed to be constant, we can expect: a. inventories will stay the same, since this is part of planned investment. *b. inventories will decrease. c. inventories will increase. d. real GDP will fall further.
120. If unplanned inventory investment is positive, this most likely means: a. the economy is growing rapidly.
*b. aggregate expenditures on goods and services is less than forecast. c. the economy is doing the same, since inventory changes have no impact on the economy. d. the stock of inventories is declining.
121. In the income–expenditure model, inventories are: a. fixed and therefore provide little insight into the direction of the economy. b. a long-run event which aids forecasters in understanding where long-run real GDP is. *c. constantly changing and provide insight into the future state of the economy. d. often positive, suggesting that additions to inventory stocks are a long-run goal.
122. If the MPC equals 0.75, then based on the simple model presented in this
chapter, one would expect a $100 decrease in investment spending to lead to a total: a. increase in spending of $100. b. increase in spending of $400. c. decrease in spending of $100. *d. decrease in spending of $400.
123. Scenario: A Country's Consumption Function
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. Reference: Ref 26-14
(Scenario: A Country's Consumption Function) Given this consumption function in Scenario: A Country's Consumption Function, if this country experienced an increase in income of $10,000, consumption would increase by: a. $10,000. *b. $7500. c. $200. d. $7700.
124. Scenario: A Country's Consumption Function
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD,
where YD is disposable income and C is consumption. Assume that planned investment equals 75. Reference: Ref 26-14
(Scenario: A Country's Consumption Function) According to the Scenario: A Country's Consumption Function, when real GDP equals $900: a. planned investment equals $900. *b. unplanned inventory investment is negative. c. autonomous consumption equals $900. d. the economy is in income–expenditure equilibrium.
125. Scenario: A Country's Consumption Function
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. Reference: Ref 26-14
(Scenario: A Country's Consumption Function) According to the Scenario: A Country's Consumption Function, what is the income–expenditure equilibrium for this country? a. $900 *b. $1100 c. $275 d. $200
126. Scenario: A Country's Consumption Function
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. Reference: Ref 26-14
(Scenario: A Country's Consumption Function) According to the Scenario: A Country's Consumption Function, holding everything else constant, what will happen if aggregate wealth decreases by $100? *a. The AE curve will shift downward. b. The income–expenditure equilibrium real GDP will increase by more than $100. c. There will be no multiplier effect on real GDP since there is a drop in aggregate wealth. d. Planned investment will increase.
127. Scenario: A Country's Consumption Function
A country is closed. It has no government sector, and its aggregate price levels and interest rate levels are fixed. Furthermore, the marginal propensity to consume is constant and the country's consumption function is as follows: C = 200 + 0.75YD, where YD is disposable income and C is consumption. Assume that planned investment equals 75. Reference: Ref 26-14
(Scenario: A Country's Consumption Function) According to the Scenario: A Country's Consumption Function, if real GDP is $1100, then: *a. unplanned investment equals zero. b. planned investment equals zero. c. the AE curve shifts up. d. the MPC decreases.
1. Stagflation is a combination of: *a. increasing unemployment and increasing inflation. b. decreasing unemployment and decreasing inflation. c. increasing unemployment and decreasing inflation. d. decreasing unemployment and increasing inflation.
2. The 1979–1982 recession looked different from the slump at the beginning of the
Great Depression because it was: a. the result of a lack of confidence that led businesses and consumers to spend less. *b. largely caused by events in the Middle East that led to sudden cuts in world oil production and soaring prices for oil. c. the direct result of a contractionary monetary policy. d. the result solely of a negative demand shock.
3. In 2008, Ben Bernanke, the Federal Reserve Chairman, faced: *a. the threat of stagflation, and had a difficult time stabilizing the economy as stabilization policies are less effective in managing negative supply shocks. b. hyperinflation, and used strong disinflationary policies to bring the rise in prices under control. c. a healthy booming economy, and used fine-tuning methods to keep the growing economy on track. d. a deep recession with falling prices, and used stabilization policies to take the economy out of the slump.
4. The statement in the text, “Sometimes it's not easy being Ben” refers to Ben
Bernanke, the Federal Reserve Chairman. In 2008, Ben Bernanke was facing: a. an awfully high rate of inflation known as hyper-inflation, that could be reversed only with disinflationary policies. *b. a potentially dreadful combination of high inflation and high unemployment known as stagflation, that cannot be reversed easily. c. the deepest recession since the Great Depression combined with rapidly falling prices. d. a very severe deflation, rare in history, which was experienced only by Japan.
5. The Great Depression was caused by _______ shocks, and the recession of
1979–82 was caused by ______ shocks. a. demand; demand *b. demand; supply c. supply; demand d. supply; supply
6. Which represents the three consequences of the decline in demand during the
Great Depression? *a. falling prices, declining output, and a surge in unemployment b. falling prices, increasing output, and a surge in unemployment c. rising prices, increasing output, and a surge in unemployment d. rising prices, declining output, and a surge in unemployment
7. Figure: Aggregate Demand
Reference: Ref 27-1
(Figure: Aggregate Demand) Using the Figure: Aggregate Demand, the quantity of output demanded if the price level is 120 is: a. $9 trillion. *b. $10 trillion. c. $11 trillion. d. $12 trillion.
8. The negative relationship between the aggregate price level and aggregate
output demanded gives the aggregate demand curve a(n): a. upward slope. b. vertical slope. c. horizontal slope. *d. downward slope.
9. The aggregate demand curve shows the relationship between the aggregate
price level and: a. aggregate productivity. b. the aggregate unemployment rate. *c. the aggregate quantity of output demanded by households, businesses, the government, and the rest of the world. d. the aggregate quantity of output demanded by businesses only.
10. According to the aggregate demand curve, when the aggregate price level
_________, the quantity of _________.
a. rises; aggregate output supplied falls b. falls; aggregate output demanded falls *c. rises; aggregate output demanded falls d. rises; aggregate output demanded does not change
11. The relationship between the aggregate price level and the quantity of
aggregate output demanded by households, businesses, the government, and the rest of the world is called: a. market demand. b. surplus demand. *c. aggregate demand. d. simple demand.
12. A graphical representation of the relationship between the total quantity of
goods and services demanded and the price level is the: *a. aggregate demand curve. b. average price level. c. circular flow model. d. GDP curve.
13. The aggregate demand curve: *a. slopes downward. b. slopes upward. c. is horizontal at potential output. d. is vertical at potential output.
14. In general, a change in the price level, all other things unchanged, causes: *a. a movement along the aggregate demand curve. b. a shift of the aggregate demand curve. c. both a movement along the aggregate demand curve and a shift in the curve. d. no change in the purchasing power of assets.
15. The _____ curve shows the negative relationship between the aggregate price
level and the quantity of aggregate output demanded in the economy. *a. aggregate demand b. short-run aggregate supply c. long-run aggregate supply d. investment demand
16. The aggregate demand curve shows the relationship between
a. income and expenditure. b. income and investment. *c. the overall price level and the quantity of aggregate output demanded. d. the interest rate and the level of planned investment spending.
17. What is measured on the horizontal axis of a graph showing the aggregate
demand curve? a. investment spending b. employment c. the interest rate *d. real GDP
18. What is measured on the vertical axis of a graph showing the aggregate
demand curve? *a. the aggregate price level b. the interest rate c. employment d. nominal GDP
19. The downward slope of the aggregate demand curve illustrates the fact that,
other things equal, a higher _____ will result in a lower quantity of aggregate output demanded. a. employment rate b. income level *c. aggregate price level d. investment rate
20. When the aggregate price level increases, the purchasing power of many
assets falls, causing a decrease in consumer spending. This is known as the _____ effect and is a reason why the _____ curve slopes _____. a. interest rate; aggregate demand; downward *b. wealth; aggregate demand; downward c. interest rate; investment demand; downward d. wealth; short-run aggregate supply; upward
21. According to the wealth effect, when prices decrease, the purchasing power of
assets: a. decreases and consumer spending decreases. b. increases and consumer spending decreases.
c. decreases and consumer spending increases. *d. increases and consumer spending increases.
22. The components of aggregate demand are: a. C (consumption) and I (investment) expenditures. b. C (consumption), I (investment), and G (government) expenditures. c. C (consumption), I (investment) expenditures, and X – IM (net exports). *d. C (consumption), I (investment), G (government) expenditures, and X – IM (net exports).
23. The wealth effect suggests: a. a positive relationship between the price level and consumption spending. b. that price level changes do not affect real wealth. *c. a negative relationship between the price level and consumption spending. d. that when the price level increases, the real value of money increases also.
24. The aggregate demand curve is negatively sloped in part because of the impact
of: *a. the wealth effect on consumption. b. a changing exchange rate on potential output. c. the stickiness of nominal wages and salaries. d. the flexibility of nominal wages and salaries.
25. The aggregate demand curve is negatively sloped in part because of the impact
of interest rates on: a. potential output. b. net exports. *c. consumption and investment. d. government purchases.
26. The interest rate effect is the tendency for changes in the price level to affect: a. the quantity of investment demanded, and thus affect interest rates. b. export demand, and thus affect aggregate demand. *c. interest rates, and thus affect the quantity of investment and consumption demanded. d. real incomes, and lead to shifts in potential output.
27. The aggregate demand curve slopes: a. downward for the same reasons that an ordinary demand curve does. b. downward in part because when the price level falls the real wealth of the public falls, and this induces people to change their consumption. *c. downward in part because as the price level falls the ability of households and firms to borrow cheaply increases. d. upward unlike an ordinary demand curve.
28. The aggregate demand curve is downward sloping because of: a. the inverse relationship between price and quantity demanded. b. changes in expectation of future prices. c. unexpected change in commodity prices. *d. the wealth effect of a change in aggregate price level.
29. The wealth effect is reflected in: a. increases in interest rate to savers. b. the upward slope in aggregate supply. c. the upward slope in aggregate demand. *d. the downward slope in aggregate demand.
30. According to the interest rate effect, an increase in the price level causes people
to: *a. increase their money holdings, which increases interest rates and decreases investment spending. b. decrease their money holdings, which increases interest rates and decreases investment spending. c. increase their money holdings, which decreases interest rates and decreases investment spending. d. decrease their money holdings, which decreases interest rates and increases investment spending.
31. Which is one of the reasons that the aggregate demand curve slopes
downward? a. paradox of thrift *b. interest rate effect c. substitution effect d. income effect
32. Which is NOT true about the aggregate demand curve?
a. A rise in the price level lowers real wealth and results in a lower level of consumer spending. b. A rise in the price level increases the demand for money, raises the interest rate, and reduces investment spending. c. A fall in the price level will generally lead to a rise in the level of aggregate output demanded. *d. A fall in the price level will reduce the demand for money, raise the interest rate, and increase investment spending.
33. The aggregate demand curve is negatively sloped due to the: a. substitution effect of an aggregate price level change. *b. wealth effect of an aggregate price level change. c. elasticity effect of an aggregate price level change. d. fiscal policy effect.
34. The interest rate effect of an aggregate price level change causes the: a. long-run aggregate supply curve to be vertical. *b. aggregate demand curve to be negatively sloped. c. short-run aggregate supply curve to be positively sloped. d. aggregate demand curve to be positively sloped.
35. The interest rate effect of the price level is reflected in the: a. increase in interest rate to savers. b. upward slope in aggregate supply. c. upward slope in aggregate demand. *d. downward slope in aggregate demand.
36. The interest rate effect of a change in the aggregate price level occurs when: *a. a higher price level decreases the purchasing power of money, resulting in an increase in interest rate. b. the Fed uses contractionary monetary policy causing an increase in interest rate. c. government borrowing in the loanable funds market causes interest rate to increase. d. the price of a bond increases resulting in a fall in the interest rate.
37. The wealth effect and the interest rate effect explain: *a. the downward slope of aggregate demand. b. the position of the income-expenditure equilibrium. c. how the aggregate price level is determined. d. how real GDP differs from nominal GDP.
38. According to the interest rate effect, a decrease in the price level causes people
to _______ their money holdings, which ________ interest rates and _________ investment spending. a. increase; increases; decreases b. decrease; increases; decreases c. increase; decreases; decreases *d. decrease; decreases; increases
39. The interest rate effect leads to a downward sloping aggregate demand curve
because a higher price level causes consumption to _______ and investment to _______. *a. decrease; decrease b. decrease; increase c. increase; decrease d. increase; increase
40. If the price level rises by 10 percent, the purchasing power of $10,000 would: a. increase to $11,000. *b. decrease to $9000. c. decrease to $1000. d. remain constant.
41. If the price level falls by 10 percent, the purchasing power of $10,000 would *a. increase to $11,000. b. decrease to $9000. c. decrease to $1000. d. remain constant.
42. Figure: The Multiplier
Reference: Ref 27-2
(Figure: The Multiplier) According to the Figure: The Multiplier, if this economy is currently at Y1 and the price level decreases, then: a. AD1 will shift to the left, reflecting a multiplied decrease in the real GDP at every price level. b. AD1 will shift to the right, reflecting a multiplied increase in the real GDP at every price level. c. an upward movement along the AD1 will take place, reflecting an increase in the price level. *d. a downward movement along the AD1 will take place, reflecting a decrease in the price level.
43. Figure: The Multiplier
Reference: Ref 27-2
(Figure: The Multiplier) According to the Figure: The Multiplier, if this economy is currently at Y1 and investment spending increases, then: a. AD1 will shift to the left, reflecting a multiplied decrease in the real GDP at every price level. *b. AD1 will shift to the right, reflecting a multiplied increase in the real GDP at every price level. c. an upward movement along the AD1 will take place, reflecting an increase in the price level. d. a downward movement along the AD1 will take place, reflecting a decrease in the price level.
44. Figure: I-E and AD
Reference: Ref 27-3
(Figure: I-E and AD) The Figure: I-E and AD depicts an upward shift in the aggregate expenditure function that results from a decrease in the overall price level. Specifically when the price level declines, the aggregate expenditure function shifts from “AE planned 1” to “AE planned 2.” Which statement is true? a. The shift in the aggregate expenditure function shows an increase in the marginal propensity to consume. b. The shift in the aggregate expenditure function shows a decrease in the marginal propensity to consume. *c. The shift in the aggregate expenditure function shows an increase in the level of autonomous expenditure. d. The shift in the aggregate expenditure function shows a decrease in the level of autonomous expenditure.
45. Figure: I-E and AD
Reference: Ref 27-3
(Figure: I-E and AD) The Figure: I-E and AD depicts an upward shift in the aggregate expenditure function that results from a decrease in the overall price level. Specifically when the price level declines, the aggregate expenditure function shifts from “AE planned 1” to “AE planned 2.” What is the effect of the reduction in overall prices? a. The equilibrium level of real GDP remains unchanged. *b. The equilibrium level of real GDP increases from $8 billion to $10 billion. c. The level of autonomous expenditure decreases. d. The multiplier decreases.
46. Figure: I-E and AD
Reference: Ref 27-3
(Figure: I-E and AD) The Figure: I-E and AD depicts an upward shift in the aggregate expenditure function that results from a decrease in the overall price level. Specifically when the price level declines, the aggregate expenditure function shifts from “AE planned 1” to “AE planned 2.” Which statement accurately describes the situation in the graph? a. A decline in the overall price level has caused consumers to feel poorer, thereby resulting in lower aggregate spending. b. A decline in the overall price level has caused firms to reduce their investment expenditures, thereby resulting in lower aggregate spending. c. A decline in the overall price level has caused an increase in the multiplier.
*d. A decline in the overall price level has caused the equilibrium level of real GDP to rise by $2 billion.
47. Figure: I-E and AD
Reference: Ref 27-3
(Figure: I-E and AD) The Figure: I-E and AD depicts an upward shift in the aggregate expenditure function that results from a decrease in the overall price level. When the price level declines, the aggregate expenditure function shifts from “AE planned 1” to “AE planned 2.” This shift of the aggregate expenditure function causes an increase in a. the marginal propensity to consume. b. the marginal propensity to save. c. both the multiplier and the equilibrium level of income. *d. the equilibrium level of real GDP.
48. Figure: I-E and AD
Reference: Ref 27-3
(Figure: I-E and AD) The Figure: I-E and AD depicts an upward shift in the aggregate expenditure function that results from a decrease in the overall price level. Specifically when the price level declines, the aggregate expenditure function shifts from “AE planned 1” to “AE planned 2.” We could use the information on the graph to identify two points on: *a. a downward-sloping aggregate demand curve. b. an upward-sloping aggregate demand curve. c. the consumption function for an individual household. d. an aggregate supply curve.
49. Figure: I-E and AD
Reference: Ref 27-3
(Figure: I-E and AD) The Figure: I-E and AD depicts an upward shift in the aggregate expenditure function that results from a decrease in the overall price level. Specifically when the price level declines, the aggregate expenditure function shifts from AE planned 1 to AE planned 2. When the aggregate expenditure function is at AE planned 2, $10 billion is the level of real GDP at which: a. there will be negative unplanned inventory investment. b. there will be positive unplanned inventory investment.
*c. the level of planned aggregate spending will be equal to aggregate output. d. the level of planned aggregate spending will exceed aggregate output.
50. Suppose that the stock market crashes. Which is most likely to occur? a. aggregate demand curve shifts to the right *b. taggregate demand curve shifts to the left c. movement up the aggregate demand curve d. movement down the aggregate demand curve
51. Which factor cannot shift the aggregate demand curve? a. changes in expectations b. changes in wealth c. changes in stock market indices *d. changes in price level
52. The aggregate demand curve would shift to the left for all these reasons
EXCEPT: a. a fall in consumers' wealth. b. a decrease in the amount of money in circulation. c. more pessimistic consumer expectations. *d. lower labor productivity.
53. If prices are constant, but there is an increase in the value of financial assets,
aggregate: a. supply shifts to the left. b. supply shifts to the right. c. demand shifts to the left *d. demand shifts to the right.
54. As a result of a decrease in the value of the dollar in relation to other currencies,
U.S. imports decrease and exports increase. Consequently, there is a(n): a. increase in short-run aggregate supply. b. decrease in the quantity of aggregate output supplied in the short run. *c. increase in aggregate demand. d. decrease in the quantity of aggregate output demanded.
55. An increase in aggregate demand is seen as a(n):
*a. shift to the right in the aggregate demand curve. b. downward movement along the aggregate demand curve. c. upward movement along the aggregate demand curve. d. shift to the left in the aggregate demand curve.
56. A decrease in aggregate demand is seen as a(n): a. downward movement along the aggregate demand curve. b. upward movement along the aggregate demand curve. *c. shift to the left in the aggregate demand curve. d. shift to the right in the aggregate demand curve.
57. If the stock of physical capital becomes larger, all other things unchanged, the
aggregate demand curve will: a. shift to the right. *b. shift to the left. c. remain constant. d. become positively sloped.
58. Changes in aggregate demand can be caused by changes in: *a. the stock of physical capital. b. business costs. c. raw materials costs. d. the expenses of complying with government regulations.
59. Suppose that consumer expectations about the future improve. How will this
affect the aggregate demand curve? a. The aggregate demand curve shifts to the left. b. There will be a movement upward along the fixed aggregate demand curve. *c. The aggregate demand curve shifts to the right. d. There will be a movement downward along the fixed aggregate demand curve.
60. Suppose that consumer assets and wealth decrease in real value. How will this
affect the aggregate demand curve? *a. The aggregate demand curve shifts to the left. b. There will be a movement upward along the fixed aggregate demand curve. c. There will be a movement downward along the fixed aggregate demand curve. d. The aggregate demand curve shifts to the right.
61. Which would shift the aggregate demand curve to the left? *a. increase in the interest rate b. increase in the aggregate price level c. increase in consumer wealth d. stronger consumer optimism about future income
62. Suppose that a presidential candidate who promised large personal income tax
cuts is elected. Which is most likely to occur? a. decrease in short-run aggregate supply b. decrease in aggregate demand c. increase in short-run aggregate supply *d. increase in aggregate demand
63. An increase in government spending on health care is likely to shift the: a. short-run aggregate supply curve to the right. b. short-run aggregate supply curve to the left. *c. aggregate demand curve to the right. d. aggregate demand curve to the left.
64. A decrease in the money supply is likely to cause a(n): *a. increase in borrowing and interest rates and a decrease in aggregate demand. b. increase in borrowing and interest rates and an increase in aggregate demand. c. decrease in borrowing and interest rates and a decrease in aggregate demand. d. decrease in borrowing and interest rates and an increase in aggregate demand.
65. Raising taxes shifts the: *a. aggregate demand curve to the left. b. long-run aggregate supply curve to the left. c. aggregate demand curve to the right. d. short-run aggregate supply curve to the left.
66. Increasing the quantity of money in circulation shifts the: a. aggregate demand curve to the left. b. long-run aggregate supply curve to the right. *c. aggregate demand curve to the right. d. short-run aggregate supply curve to the right.
67. The only government policy that has a DIRECT effect on the aggregate demand
curve is: a. changing the quantity of money. b. raising or lowering the tax rate. *c. changing the level of government purchases of final goods and services. d. changing the level of government transfers.
68. A decrease in the supply of money shifts the aggregate: a. supply curve to the left. b. supply curve to the right. *c. demand curve to the left. d. demand curve to the right.
69. If government increases income tax rates, the aggregate demand curve is likely
to: a. shift to the right. *b. shift to the left. c. remain constant. d. become positively sloped.
70. An increase in government spending, all other things unchanged, will cause the
aggregate demand curve to: a. become positively sloped. b. remain constant. *c. shift to the right. d. shift to the left.
71. Changes in aggregate demand can be caused by changes in: a. wages. b. business costs. c. raw materials costs. *d. government spending.
72. Aggregate demand will shift to the right, if: a. the aggregate price level increases. *b. the government purchases increase. c. there is an increase in taxes. d. there is a decrease in money supply.
73. All are examples of fiscal policy, EXCEPT when the: a. government spends on building and repairing the nation's bridges and roads. *b. Fed lowers the interest rate by increasing the money supply. c. U.S. Congress approves an economic stimulus package. d. taxpayers receive a $1500 per family rebate.
74. If the government lowers taxes in response to a recession, the government is
engaging in what economists call _____ policy. a. monetary b. investment c. consumption *d. fiscal
75. The economy is in a recession. Which is a fiscal policy that the government
should adopt to strengthen the economy? a. a decrease in government transfer payments *b. an increase in government purchases of goods and services c. an increase in tax rates d. a decrease in interest rates.
76. Which changeshave the most direct effect on aggregate demand? a. taxes b. interest rates c. money supply *d. government spending
77. Government purchases of goods and services differ from changes in taxes and
transfer payments because government purchases of goods and services: a. are a type of fiscal policy, while changes in taxes and transfer payments are a type of monetary policy. b. are a type of monetary policy while changes in taxes and transfer payments are a type of fiscal policy. *c. influence aggregate demand directly, while changes in taxes and transfer payments influence aggregate demand indirectly. d. influence aggregate demand indirectly, while changes in taxes and transfer payments influence aggregate demand directly.
78. If the Fed increases the quantity of money in circulation, interest rates:
*a. decrease, investment increases, and the aggregate demand curve shifts to the right. b. increase, investment increases, and the aggregate demand curve shifts to the right. c. decrease, investment increases, and the aggregate demand curve shifts to the left. d. increase, investment decreases, and the aggregate demand curve shifts to the left.
79. If the Fed decreases the quantity of money in circulation, interest rates: a. decrease, investment increases, and the aggregate demand curve shifts to the right. b. decrease, investment decreases, and the aggregate demand curve shifts to the left. *c. increase, investment decreases, and the aggregate demand curve shifts to the left. d. increase, investment decreases, and the aggregate demand curve shifts to the right.
80. An increase in aggregate demand is represented by a: a. movement from one point to a higher point along the same aggregate demand curve. b. movement from one point to a lower point along the same aggregate demand curve. c. leftward shift of the entire curve. *d. rightward shift of the entire curve.
81. A decrease in aggregate demand is represented by a: a. movement from one point to a higher point along the same aggregate demand curve. b. movement from one point to a lower point along the same aggregate demand curve. *c. leftward shift of the entire curve. d. rightward shift of the entire curve.
82. In a graph showing the aggregate demand curve, an increase in the aggregate
price level will cause a: a. rightward shift of the curve. b. leftward shift of the curve. *c. movement to a lower level of real GDP along the same curve. d. movement to a higher level of real GDP along the same curve.
83. In a graph showing the aggregate demand curve, a decrease in the aggregate
price level will cause a:
a. rightward shift of the curve. b. leftward shift of the curve. c. movement to a lower level of real GDP along the same curve. *d. movement to a higher level of real GDP along the same curve.
84. When firms and individuals become more optimistic about their economic
prospects, aggregate demand: a. increases, thereby shifting to the left. *b. increases, thereby shifting to the right. c. decreases, thereby shifting to the left. d. decreases, thereby shifting to the right.
85. When the central bank increases the quantity of money circulating in the
economy, aggregate demand: a. increases, thereby shifting to the left. *b. increases, thereby shifting to the right. c. decreases, thereby shifting to the right. d. decreases, thereby shifting to the left.
86. During the 1979 oil crisis, the aggregate price level: a. increased slightly. *b. increased by a large amount. c. decreased slightly. d. remained constant.
87. During the 1979 oil crisis, interest rates ______, and consumer spending and
investment ______. a. increased; increased b. decreased; decreased *c. increased; decreased d. decreased; increased
88. During 1979 and 1980, due to the interest rate and wealth effects, the: a. aggregate demand curve shifted to the left. b. aggregate demand curve shifted to the right. c. economy moved down the aggregate demand curve from left to right. *d. economy moved up the aggregate demand curve from right to left.
89. Aggregate demand will increase in all of the following cases except if: a. household wealth rises, but prices are constant. b. government purchases of goods rise. c. the quantity of money increases. *d. interest rates increase.
90. Aggregate demand will decrease if: a. the aggregate price level falls. *b. the government raises the tax rate. c. productivity declines. d. the money supply increases.
91. Aggregate demand will increase if: *a. the public becomes more optimistic about future income. b. the aggregate price level falls. c. government spending is reduced. d. household wealth decreases.
92. Figure: Shift of the Aggregate Demand Curve
Reference: Ref 27-4
(Figure: Shift of the Aggregate Demand Curve) According to the Figure: Shift of the Aggregate Demand Curve, a movement from point A on AD1 to point C on AD2 could have resulted from a(n): a. lower price level. b. higher price level. *c. increase in the total quantity of consumer goods and services demanded at every price level. d. significant decrease in the income level of consumers.
93. Figure: Shift of the Aggregate Demand Curve
Reference: Ref 27-4
(Figure: Shift of the Aggregate Demand Curve) According to the Figure: Shift of the Aggregate Demand Curve, a movement from point B on AD1 to point E on AD2 could have been the result of:
*a. an increase in consumer optimism. b. an increase in consumer pessimism. c. an increase in personal income taxes. d. the central bank reducing the quantity of money.
94. Figure: Shift of the Aggregate Demand Curve
Reference: Ref 27-4
(Figure: Shift of the Aggregate Demand Curve) According to the Figure: Shift of the Aggregate Demand Curve, a movement from point C on AD2 to point A on AD1 may have been the result of: a. an increase in investment demand due to optimistic GDP forecasts. *b. a decrease in investment due to pessimistic GDP forecasts. c. decreases in the taxes paid by businesses. d. lower interest rates.
95. Figure: Shift of the Aggregate Demand Curve
Reference: Ref 27-4
(Figure: Shift of the Aggregate Demand Curve) According to the Figure: Shift of the Aggregate Demand Curve, an increase in aggregate demand is illustrated by a movement from: *a. AD1 to AD2. b. point C to point A. c. point B to point A. d. point C to point E.
96. Figure: Shift of the Aggregate Demand Curve
Reference: Ref 27-4
(Figure: Shift of the Aggregate Demand Curve) According to the Figure: Shift of the Aggregate Demand Curve, a movement from AD1 to AD2 may have been the result of: *a. an increase in government spending. b. a decrease in government spending. c. increases in personal income taxes. d. a decrease in value of consumer wealth.
97. When the real value of household assets decreases, aggregate demand: a. increases, thereby shifting to the left. b. increases, thereby shifting to the right. *c. decreases, thereby shifting to the left. d. decreases, thereby shifting to the right.
98. When the government increases taxes, aggregate demand: a. increases, thereby shifting to the left. b. increases, thereby shifting to the right. c. decreases, thereby shifting to the right. *d. decreases, thereby shifting to the left.
99. Deflation was a problem in both the Great Depression and the recession of 1979–1982. a. True *b. False
100. The aggregate demand curve shows a negative relationship between the aggregate price level and the quantity of aggregate output demanded. *a. True b. False
101. The aggregate demand curve shows that at higher aggregate price levels the quantity of aggregate output demanded will be less than at lower aggregate price levels. *a. True b. False
102. When the aggregate price level increases, people want to hold more money. *a. True b. False
103. When the aggregate price level increases and people want to hold more money, interest rates decrease. a. True *b. False
104. If the aggregate price level decreases by 20 percent, the purchasing power of $1000 will increase to $1200. *a. True b. False
105. If the aggregate price level increases by 20 percent, the purchasing power of $1000 will increase to $1200. a. True *b. False
106. Other things equal, in the income-expenditure model, a decrease in the aggregate price level will cause the planned aggregate expenditure curve to shift downward, resulting in a lower level of real GDP. a. True *b. False
107. If the aggregate price level increases, the wealth and interest rate effects will cause planned expenditures in the income-expenditure model to decrease. *a. True b. False
108. An increase in Social Security benefits will likely increase consumption and shift the aggregate demand curve to the right. *a. True b. False
109. The higher the existing physical capital stock, the higher is aggregate demand. a. True *b. False
110. Because of the multiplier effect, an increase in government spending of $200 billion will increase aggregate output by less than that amount. a. True *b. False
111. The purchasing power of money increased during the oil crisis of 1979, because the aggregate price level increased but the growth rate
of the money supply was faster than the increase in the aggregate price level. a. True *b. False
112. During 1979 and 1980, because of the interest rate and wealth effects, the economy was moving upward along the aggregate demand curve from right to left. *a. True b. False
113. What is meant by the “interest rate effect” and why does it help to explain the shape of the aggregate demand curve? Correct Answer:
If the aggregate price level rises, the purchasing power of the money that people hold begins to fall. Consumers respond to this falling purchasing power by borrowing money, or by selling assets like bonds. A decrease in the quantity of money available for lending to other borrowers tends to increase the interest rate. Higher interest rates decrease investment spending by firms and consumption spending by households. So through the interest rate effect, higher price levels decrease the quantity of aggregate output demanded. 114. Figure: I-E and AD
Reference: Ref 27-5 (Figure: I-E and AD) In the Figure: I-E and AD, explain how a change in the aggregate price level increases the equilibrium real GDP from $8 billion to $10 billion.
Correct Answer:
If the aggregate price level decreases, both the wealth effect and the interest rate effect will result in a higher level of planned expenditures. Per the wealth effect, the fall in the aggregate price level causes consumers' purchasing power to increase, which prompts consumers to increase consumer spending. A lower aggregate price level also reduces the amount of money people wish to hold. As a result, people are less willing to borrow and more willing to lend, and the interest rate falls. Lower interest rates prompt consumers and businesses to increase investment spending— this is the interest rate effect. Both of these effects cause the shift in planned expenditures from AE to AE . Then, through the multiplier effect, the increase in planned expenditures will cause an increase in real GDP from $8 billion to $10 billion. 115. How does rising consumer optimism affect the aggregate demand curve? Explain your response. Correct Answer:
When consumers are more optimistic about future income, they often increase spending now. As spending increases at all price levels, the aggregate demand curve shifts to the right. 116. Explain the difference between fiscal and monetary policy. Correct Answer:
Fiscal policy affects aggregate demand through changes in government purchases, transfer payments and tax rates. Monetary policy affects aggregate demand through changes in the money supply and interest rates.
117. When the aggregate price level rises, this will, other things equal: a. lead to a rightward shift in the AD curve. b. lead to a leftward shift in the AD curve. *c. result in a decrease in the quantity of aggregate output demanded. d. result in an increase in the quantity of aggregate output demanded.
118. A movement along the aggregate demand curve is caused by a(n): *a. change in the aggregate price level. b. increase in consumer spending. c. fall in commodity prices. d. reduction in government spending.
119. When the aggregate price level falls, the purchasing power of assets rises,
which leads to a(n):
*a. increase in the quantity of aggregate output demanded. b. decrease in the quantity of aggregate output demanded. c. shift in the AD curve to the right. d. shift in the AD curve to the left.
120. If the aggregate price level rises, holding everything constant, consumers will: *a. need more money to purchase the same basket of goods, which will lead to an increase in the demand for money, leading to interest rate increases, and a reduction in the quantity of aggregate output demanded via a drop in investment demand. b. find their purchasing power has increased and will purchase more goods and services, leading to an increase in the aggregate output demanded. c. demand less aggregate output at all price levels, resulting in a shift right of the AD curve. d. need less money to purchase the same basket of goods, which will lead to a decrease in the demand for money, leading to interest rate decreases, and an increase in the quantity of aggregate output demanded via an increase in investment demand.
121. The interest rate effect states that as the aggregate price level rises, holding
everything else constant, people demand: a. less money, which causes the interest rate to fall and investment to rise. *b. more money, which causes the interest rate to rise and investment to fall. c. less money, which causes interest rates to rise and investment to fall. d. more money, which causes interest rates to fall and investment to fall.
122. The wealth effect explains why the aggregate: *a. demand curve slopes downward, since changes in aggregate price levels change the purchasing power of peoples' assets. b. supply curve slopes upward, since an increase in wealth leads to more consumption. c. supply curve shifts, since changes in wealth affect production. d. demand curve slopes upward, since wealth allows consumers to purchase more regardless of the price level.
123. If the aggregate price level falls, this will cause, holding everything else
constant, the planned expenditure curve to: a. slope downwards.
*b. shift upwards. c. shift downwards. d. turn horizontal.
124. An increase in wealth or an increase in government spending will result in a: a. shift to the left of the aggregate supply curve. *b. shift right of the aggregate demand curve. c. shift right of the aggregate supply curve. d. movement along the aggregate demand curve.
125. The AD curve will shift to the left: a. because of the wealth and interest rate effects. *b. if there is a decrease in household wealth. c. if the aggregate price level falls. d. if the government decreases taxes paid by households.
126. Which will shift the AD curve to the right? *a. an increase in wealth b. pessimism about the future of the economy c. a supply shock d. a decrease in productivity
127. Which policy will shift the AD curve to the left? a. The government increases the level of spending in the economy. *b. The government increases tax rates in the economy. c. The Federal Reserve increases the money supply in the economy. d. The government decreases tax rates in the economy.
1. When demand declined in the Great Depression of 1929–1933 the GDP deflator: a. increased by 15 percent. b. increased by 26 percent. c. decreased by 15 percent. *d. decreased by 26 percent.
2. During the Great Depression, the United States moved to the: a. right along its aggregate demand curve. b. right along its short-run aggregate supply curve. c. left along its aggregate demand curve. *d. left along its short-run aggregate supply curve.
3. The aggregate supply curve shows the relationship between the: a. price of oil and the quantity of aggregate output supplied. *b. aggregate price level and the quantity of aggregate output supplied. c. price of money and the quantity of aggregate output supplied. d. level of employment and the quantity of aggregate output supplied.
4. The aggregate supply curve shows the relationship between the aggregate price
level and: *a. aggregate output supplied. b. the aggregate money supply. c. the aggregate unemployment rate. d. aggregate employment.
5. The aggregate supply curve shows the relationship of prices: a. to sales. b. and the output people want to buy. *c. and the output producers are willing to provide. d. to both the amount people want to buy and the amount producers want to provide.
6. As a result of a sharp decrease in aggregate demand between 1929 and 1933,
real GDP in 1933 was _________ its 1929 level. *a. 27 percent below b. 100 percent below c. 29 percent above d. 50 percent above
7. As a result of a sharp decrease in aggregate demand between 1929 and 1933,
the unemployment rate changed from _______ percent in 1929 to ________ percent in 1933. a. 0; 3 *b. 3: 25 c. 40; 5 d. 25; 0
8. The SRAS curve is upward sloping because a: a. higher aggregate price level leads to lower output as costs of production increase. *b. higher aggregate price level leads to higher output since most production costs are fixed in the short run. c. lower aggregate price level leads to higher output since production costs tend to fall in the short run. d. lower aggregate price level leads to higher profit and higher productivity.
9. The short-run aggregate supply curve is positively sloped because: a. wages and other costs of production respond immediately to changes in prices. b. profit is lower when prices increase, so output decreases. c. workers are willing to work for lower wages rather than be laid off. *d. higher prices lead to higher profit and higher output.
10. According to the short-run aggregate supply curve, when the _________ rises,
the quantity of _________ rises. a. profit per unit; aggregate output demanded *b. aggregate price level; aggregate output supplied c. aggregate price level; aggregate output demanded d. interest rate; aggregate output supplied
11. The positive relationship between the aggregate price level and aggregate
output supplied gives the short-run aggregate supply curve a(n): *a. upward slope. b. vertical slope. c. horizontal slope. d. downward slope.
12. The short-run aggregate supply curve is positively sloped because:
a. business people suffer from money illusion. *b. wages are sticky or don't readily adjust to changes in economic conditions in the short run. c. workers care about nominal wages, not real wages. d. of diminishing returns to labor.
13. Profit per unit equals: *a. price per unit minus cost per unit. b. price per unit divided by cost per unit. c. cost per unit minus price per unit. d. price per unit minus the nominal wage rate.
14. The short-run aggregate supply curve illustrates the: a. price level at which real output will be consumed. b. price level at which real output will be in equilibrium. *c. positive relationship between the aggregate price level and aggregate output supplied. d. negative relationship between the aggregate price level and aggregate output supplied.
15. In the short run, wages and some prices are considered to be: *a. sticky. b. unpredictable. c. extremely flexible. d. irrelevant.
16. The short run in macroeconomic analysis is a period: *a. in which many production costs can be taken as fixed. b. in which wages become fully flexible. c. of 2 months, and the long run is a period greater than 12 months. d. in which interest rates are fixed.
17. The short-run aggregate supply curve is: a. downward sloping. *b. upward sloping. c. horizontal at the natural level of employment. d. vertical at the natural level of employment.
18. The short-run aggregate supply curve slopes upward because of:
*a. wage and price stickiness. b. wage and price flexibility. c. increasing technology. d. a reduction in resource availability at higher price levels.
19. The _____ curve shows the positive relationship between the aggregate price
level and the quantity of aggregate output supplied in the economy. a. aggregate demand *b. short-run aggregate supply c. aggregate spending d. long-run aggregate supply
20. An increase in the aggregate price level will increase: a. short-run aggregate supply. *b. the quantity of aggregate output supplied in the short run. c. aggregate demand. d. the quantity of aggregate output demanded.
21. Nominal wages are “sticky” because: *a. wages are slow to rise in the short run when there are labor shortages and slow to fall even when there is significant level of unemployment. b. wages remain fixed in the long run thereby increasing the profitability of the firms. c. wages are slow to fall in the short run when there are labor shortages and slow to rise even when there is significant level of unemployment. d. in the long run all wages become adjusted for inflation.
22. The short-run aggregate supply curve is: *a. upward sloping. b. vertical. c. horizontal. d. downward sloping.
23. During the Great Depression, the United States experienced a ________ the
short-run aggregate supply curve. *a. movement down along b. movement up along c. a rightward shift d. a leftward shift
24. An upward-sloping short-run aggregate supply curve indicates that increases in: a. aggregate demand will increase aggregate supply. b. government spending will increase aggregate supply. *c. the overall price level will increase the amount of aggregate output supplied by firms. d. the overall price level will decrease the amount of aggregate output supplied by firms.
25. If Nike sells basketball shoes for $150 per pair and the cost of producing a pair
of basketball shoes is $15, Nike's profit per pair of basketball shoes is *a. $135. b. $160. c. $165. d. $10.
26. When the aggregate price level decreases, firms in perfectly competitive
markets will: a. decrease the amount of output that they produce and increase the price that they charge for their product. *b. decrease the quantity of output that they produce. c. increase the quantity of output that they produce and decrease the price that they charge for their product. d. increase the quantity of output that they produce.
27. When the aggregate price level increases, firms in perfectly competitive markets
will: a. decrease the amount of output that they produce and increase the price that they charge for their product. b. decrease the quantity of output that they produce. c. increase the quantity of output that they produce and decrease the price that they charge for their product. *d. increase the quantity of output that they produce.
28. When the aggregate price level decreases, firms in imperfectly competitive
markets will: a. decrease the amount of output that they produce and increase the price that they charge for their product. b. decrease the quantity of output that they produce. *c. decrease the quantity of output that they produce and decrease the price that they charge for their product. d. increase the quantity of output that they produce.
29. When the aggregate price level increases, firms in imperfectly competitive
markets will: a. decrease the amount of output that they produce and increase the price that they charge for their product. b. decrease the quantity of output that they produce and leave the price that they charge for their products unchanged. *c. increase the quantity of output that they produce and increase the price that they charge for their product. d. increase the quantity of output that they produce and leave their prices constant.
30. Which will shift the short-run aggregate supply curve to the right? *a. economy-wide decrease in commodity prices b. increase in nominal wages c. decrease in productivity d. decrease in government purchases of goods and services
31. The short-run aggregate supply curve may shift to the right if: *a. productivity increases. b. nominal wages increase. c. personal income taxes decrease. d. commodity prices rise.
32. Figure: Aggregate Supply Movements
Reference: Ref 27-1
(Figure: Aggregate Supply Movements) Refer to the Figure: Aggregate Supply Movements. In this figure, ________. a. an increase in the price level is responsible for pushing the SRAS curve to the right b. a decrease in the price level is responsible for pushing the SRAS curve to the right *c. that there has been an increase in the short-run aggregate supply d. that there has been a decrease in the short-run aggregate supply
33. Which would cause a shift in the short-run aggregate supply curve? a. the quantity of real output supplied b. the price level *c. a change in commodity prices d. changes in aggregate demand
34. Which would likely cause the short-run aggregate supply curve to shift to the
left? a. decrease in consumer spending b. decrease in the price of imported oil *c. increase in the price of imported oil d. increase in consumer spending
35. A decrease in energy prices will: *a. increase short-run aggregate supply. b. decrease the quantity of aggregate output supplied in the short run. c. decrease aggregate demand. d. increase the quantity of aggregate output demanded.
36. A rise in labor productivity will most likely result in a(n): a. increase in aggregate demand. b. decrease in aggregate demand. c. decrease in short-run aggregate supply. *d. increase in short-run aggregate supply.
37. Which will cause short-run aggregate supply to increase? a. law that requires employers to provide health insurance for all employees b. increase in the aggregate price level *c. large decrease in the price of oil d. increase in the minimum wage
38. The short-run aggregate supply curve would shift to the left for all the reasons
EXCEPT a(n): a. decrease in productivity. b. increase in nominal wages. *c. increase in interest rates. d. increase in the price of commodities used for production.
39. A simultaneous rise in productivity and nominal wages would shift the short-run
aggregate supply curve to the: a. right if the rise in nominal wages is larger than the rise in productivity. b. right if the cost per unit of output rises. c. left if the cost per unit of output falls. *d. left if the rise in nominal wages is larger than the rise in productivity.
40. The short-run aggregate supply curve will increase if: a. commodity prices fall. b. the nominal wage rate falls. c. productivity increases. *d. commodity prices fall, the nominal wage rate falls, or if productivity increases.
41. The short-run aggregate supply curve will decrease if: a. the aggregate price level falls. *b. commodity prices rise. c. government tax revenues fall. d. the aggregate price level falls, commodity prices rise, or if government tax revenues fall.
42. A widespread increase in production costs for most industries would be
represented by a: a. rightward shift of aggregate demand. b. leftward shift of aggregate demand. c. rightward shift of aggregate supply. *d. leftward shift of aggregate supply.
43. If nominal wages fall, then the short-run aggregate: *a. supply curve shifts to the right. b. supply curve shifts to the left. c. demand curve shifts to the right. d. demand curve shifts to the left.
44. An increase in the short-run aggregate supply curve may be caused by a(n): a. decrease in productivity. *b. increase in productivity. c. increase in the price of inputs.
d. increase in wages.
45. A general increase in wages will result in the: a. aggregate demand curve shifting to the right. b. aggregate demand curve shifting to the left. c. short-run aggregate supply curve shifting to the right. *d. short-run aggregate supply curve shifting to the left.
46. A general decrease in wages will result in the: a. aggregate demand curve shifting to the right. b. aggregate demand curve shifting to the left. *c. short-run aggregate supply curve shifting to the right. d. short-run aggregate supply curve shifting to the left.
47. Changes in short-run aggregate supply can be caused by changes in: *a. wages. b. wealth. c. government spending. d. consumption spending.
48. Changes in short-run aggregate supply can be caused by changes in: a. wealth. *b. commodity prices. c. government spending. d. the price level.
49. The short-run aggregate supply curve will shift to the: a. right if commodity prices increase. b. left if there is an increase in productivity. *c. left if nominal wages increase. d. right if government spending increases.
50. When short-run aggregate supply increases, it means that the short-run
aggregate supply curve shifts to the _______ and the quantity of aggregate output that producers are willing to supply at any given aggregate price level ______. a. right; decreases *b. right; increases c. left; decreases d. left; increases
51. When short-run aggregate supply decreases, it means that the short-run
aggregate supply curve shifts to the _______ and the quantity of aggregate output that producers are willing to supply at any given aggregate price level ______. a. right; decreases b. right; increases *c. left; decreases d. left; increases
52. An increase in the minimum wage would likely a. cause the economy to move up the short-run aggregate supply curve from left to right. b. cause the economy to move down the short-run aggregate supply curve from right to left. c. shift the short-run aggregate supply curve to the right. *d. shift the short-run aggregate supply curve to the left.
53. A decrease in health care insurance premiums paid by employers would likely: a. cause the economy to move up the short-run aggregate supply curve from left to right. b. cause the economy to move down the short-run aggregate supply curve from right to left. c. a decrease in premiums would increase SRAS and shift it to the right. *d. shift the short-run aggregate supply curve to the left.
54. Suppose that worker productivity increases because workers' health improves
due to the health insurance they receive as a result of the Affordable Care Act. This increase in productivity will: a. cause the economy to move up the short-run aggregate supply curve from left to right. b. cause the economy to move down the short-run aggregate supply curve from right to left. *c. shift the short-run aggregate supply curve to the right. d. shift the short-run aggregate supply curve to the left.
55. In the long run, nominal wages are: a. sticky downward but flexible in an upward direction. b. sticky upward but flexible in a downward direction. c. sticky in both an upward and downward direction. *d. flexible because contracts and informal agreements are renegotiated in the long run.
56. In the long run, the aggregate price level has: *a. no effect on the quantity of aggregate output. b. a positive effect on the quantity of aggregate output. c. a negative effect on the quantity of aggregate output. d. an impact on aggregate output but no impact on employment.
57. In the long run, changes in the aggregate price level will be accompanied by: a. less than proportional changes in input prices. b. more than proportional changes in input prices. *c. equal proportional changes in input prices. d. changes in input prices that will move in the opposite direction.
58. The long-run aggregate supply curve is: a. upward sloping. b. downward sloping. c. horizontal. *d. vertical.
59. The point where the long-run aggregate supply curve intercepts the horizontal
axis is: a. the point of macroeconomic equilibrium. *b. the economy's potential output. c. the level of real GDP the economy would produce if all prices were flexible and wages were fixed. d. impossible to actually attain.
60. According to the long-run aggregate supply curve, when _________, the
quantity of aggregate output supplied _________. a. nominal wages rise; falls *b. the aggregate price level rises; does not change c. the aggregate price level rises; falls d. the price of commodities falls; rises
61. Because the aggregate price level has no effect on aggregate output in the long
run, the long-run aggregate supply curve is: a. upward sloping. *b. vertical. c. horizontal. d. downward sloping.
62. The long-run aggregate supply curve is vertical because in the long run: a. technological progress outpaces raises in nominal wages. b. all factors of production increase. c. the price of labor is flexible, while the price of physical capital is fixed. *d. all prices are flexible.
63. The long-run supply curve illustrates how the aggregate output supplied is: a. positively related to the aggregate price level. b. negatively related to the aggregate price level. *c. unrelated to the aggregate price level. d. a one-to-one correspondence with the aggregate price level.
64. If all prices, including the nominal wage, rate double in the long run, then
aggregate output supplied would: a. double. b. rise. c. fall. *d. remain unchanged.
65. Potential output is the level of real GDP that: a. exists when the economy experiences only cyclical unemployment. *b. the economy would produce if all prices, including nominal wages, were fully flexible. c. exists when the actual rate of unemployment is zero. d. the economy would produce if all prices, including nominal wages, were sticky.
66. Potential output: *a. is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible. b. varies with the price level. c. is dependent on the level of consumer confidence. d. is greater in periods of expansion than in recessions.
67. The level of output that the economy would produce if all prices, including
nominal wages, were fully flexible is called: a. real GDP.
b. Keynesian GDP. c. structural GDP. *d. potential output.
68. The long run in macroeconomic analysis is a period: a. in which wages and some other prices are sticky. *b. in which nominal wages are flexible. c. greater than 12 months. d. in which the capital stock is held constant.
69. In the long run, wages and prices are considered to be: a. sticky. b. constant. *c. flexible. d. irrelevant.
70. The long-run level of output is known as: a. recognized output. b. structural output. *c. potential output. d. balanced budget output.
71. The point at which the long-run aggregate supply curve touches the X-axis is
known as the: *a. economy's potential output. b. accelerator point. c. multiplier point. d. self-correcting economy point.
72. All will increase the economy's potential output EXCEPT: a. an increase in physical capital. *b. a decrease in the aggregate price level. c. an increase in human capital. d. technological innovation.
73. The long-run aggregate supply curve touches the horizontal axis at the level of a. unplanned investment. b. planned investment expenditure. *c. potential output. d. planned aggregate expenditure.
74. If potential output is increasing over time, it implies that the long-run aggregate
supply curve is: *a. shifting to the right. b. shifting to the left. c. becoming horizontal. d. the same as the short-run aggregate supply curve.
75. Producing an aggregate output level that is higher than potential output is
possible only if nominal wages: a. remain fixed. b. adjust fully in an upward direction. *c. haven't yet fully adjusted upward. d. haven't yet fully adjusted downward.
76. An aggregate output level lower than potential output means there will be: a. high interest rates. b. high inflation. c. low unemployment. *d. high unemployment.
77. Suppose that the aggregate output level is lower than potential output. Which is
NOT true? a. Workers are abundant. b. Jobs are scarce. c. Nominal wages will fall over time. *d. The short-run aggregate supply curve will gradually shift to the left.
78. Which is TRUE with respect to the short-run aggregate supply and the long-run
aggregate supply? *a. The economy can be on both curves simultaneously. b. If the economy is on the short-run aggregate supply curve, it cannot also be on the long-run aggregate supply curve. c. If the economy is on the long-run aggregate supply curve, it cannot also be on the short-run aggregate supply curve. d. The economy can never be in a position where it rests on both curves simultaneously.
79. When the economy is on the short-run aggregate supply curve and to the left of
the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as: a. nominal wages fall and the long-run aggregate supply curve shifts to the left. b. the aggregate price level falls and the long-run aggregate supply curve shifts to the left. *c. nominal wages fall and the short-run aggregate supply curve shifts to the right. d. the aggregate price level falls and the aggregate demand curve shifts to the right.
80. Producing a short-run level of aggregate output that exceeds the economy's
potential output results in a(n): a. downward adjustment in nominal wages. b. upward adjustment in profits per unit of output. c. downward adjustment in production costs. *d. upward adjustment in nominal wages.
81. The short-run aggregate supply curve is _____, and the long-run aggregate
supply curve is _______. a. vertical; vertical *b. upward-sloping; vertical c. upward-sloping; upward-sloping d. vertical; upward-sloping
82. Figure: Aggregate Supply
Reference: Ref 27-2
(Figure: Aggregate Supply) According to the Figure: Aggregate Supply, if the economy is at point E: a. actual output is less than potential output. *b. actual output is more than potential output. c. actual output is equal to potential output. d. it is impossible to determine the relationship between actual and potential output without more information.
83. Figure: Aggregate Supply
Reference: Ref 27-2
(Figure: Aggregate Supply) According to the Figure: Aggregate Supply, if the economy is at point E, which describes the likely adjustment process? *a. Nominal wages increase, and the short-run aggregate supply curve shifts left until actual and potential output are equal. b. Nominal wages increase, and the short-run aggregate supply curve shifts right until potential output is greater than actual output. c. Nominal wages decrease, and the short-run aggregate supply curve shifts right until actual and potential output are equal. d. Nominal wages decrease, and the short-run aggregate supply curve shifts right until potential output is less than actual output.
84. Figure: Aggregate Supply
Reference: Ref 27-2
(Figure: Aggregate Supply) According to the Figure: Aggregate Supply, at point F, potential output is: a. less than actual output and unemployment is high. b. less than actual output and unemployment is low. *c. greater than actual output and unemployment is high. d. greater than actual output and unemployment is low.
85. Between 1929 and 1933, aggregate output and the aggregate price level
_______, and between 1933 to 1937, aggregate output and the aggregate price level _________. a. increased; increased b. increased; decreased *c. decreased; increased d. decreased; decreased
86. In 1942 the aggregate price level was _____ and real GDP was ________ than
it was in 1929. a. higher; higher b. higher; lower *c. lower; higher d. lower; lower
87. Between 1929 and 1942, short-run aggregate supply _______, and long-run
aggregate supply ______. *a. increased; increased b. increased; decreased c. decreased; increased d. decreased; decreased
88. The short-run aggregate supply curve has a positive slope, showing that increases in the aggregate price level will increase the quantity of aggregate output supplied by firms. *a. True b. False
89. Between 1929 and 1933, the U.S. economy moved upward from left to right along its short-run aggregate supply curve. a. True *b. False
90. When aggregate demand decreased between 1929 and 1933, the GDP deflator decreased. *a. True b. False
91. Between 1929 and 1933, real GDP increased by a large amount. a. True *b. False
92. Between 1929 and 1933, as aggregate demand decreased, the unemployment rate increased. *a. True b. False
93. The dollar amount of the wage paid to workers is called the sticky wage. a. True *b. False
94. The nominal wage is the dollar amount of the wage paid to workers.
*a. True b. False
95. If it costs Betsy $10 to bake a cake, and she sells the cake for $25, her profit per cake is $35. a. True *b. False
96. When the aggregate price level increases, firms in perfectly competitive markets will usually experience an increase in profit per unit and will increase the amount of output that they produce. *a. True b. False
97. When the aggregate price level increases, firms in imperfectly competitive markets will usually experience a decrease in profit per unit and will decrease the amount of output that they produce. a. True *b. False
98. Short-run aggregate supply increases when producers are willing to supply more at any given price level. *a. True b. False
99. When short-run aggregate supply increases, it means that the shortrun aggregate supply curve shifts to the right, showing that producers are willing to produce more at each aggregate price level. *a. True b. False
100. An increase in the minimum wage would likely cause an increase in short-run aggregate supply. a. True *b. False
101. An increase in health care insurance premiums paid by employers would likely cause a decrease in short-run aggregate supply and cause the short-run aggregate supply curve to shift to the left. a. True
*b. False
102. If the labor force becomes healthier as a result of better access to health care and productivity increases, short-run aggregate supply is likely to increase. *a. True b. False
103. An increase in the price of oil is likely to cause the short-run aggregate supply curve to shift to the right. a. True *b. False
104. In the long run, the aggregate price level has no effect on the quantity of aggregate output supplied. *a. True b. False
105. Potential output is the level of real GDP that the economy would produce if all prices, including nominal wages, were inflexible. a. True *b. False
106. An increase in the nominal wage will increase potential output. a. True *b. False
107. Between 1929 and 1933, aggregate output and the aggregate price level decreased. *a. True b. False
108. Between 1933 and 1937, aggregate output and the aggregate price level decreased. a. True *b. False
109. In 1942 the aggregate price level was lower and real GDP was higher than in 1929.
*a. True b. False
110. Between 1929 and 1942, short-run aggregate supply increased and long-run aggregate supply decreased. a. True *b. False
111. Between 1929 and 1942, short-run aggregate supply and long-run aggregate supply both increased, partly because of increases in productivity. *a. True b. False
112. The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied. *a. True b. False
113. What is meant by “sticky wages” and how does this explain the shape of the short-run aggregate supply curve? Correct Answer:
When nominal wages are slow to change, they are called “sticky wages.” This means that when there is a surplus of labor, nominal wages are slow to fall. When there is a shortage of labor, nominal wages are slow to rise. If the aggregate price level rises, and nominal wages do not, producers see an increase in profit per unit of output, and will increase aggregate output. This creates a positive relationship between the aggregate price level and quantity of aggregate output supplied, therefore a short-run aggregate supply curve that is upward sloping. 114. If the economy is operating on its short-run aggregate supply curve at an output below potential output, explain the adjustment that will occur. Correct Answer:
If actual output is below potential output, unemployment is high. Because jobs are scarce and workers are plentiful, many workers will be willing to accept jobs paying lower wages or accept pay cuts rather than lose their jobs. As nominal wages decrease, the short-run aggregate supply curve will shift to the right.
115. When the aggregate price level rises:
a. AD will shift right. b. SRAS will shift left. *c. there will be a movement along the SRAS curve. d. AD will shift left.
116. A decrease in the price of a commodity in the short run will: *a. cause producers' profit per unit to increase. b. cause producers' profit per unit to decrease. c. lead to a movement along the AD curve. d. result in less production by producers.
117. A movement along the short-run AS curve occurs, holding everything else
constant, when there is a: a. change in commodity prices. b. supply shock. *c. change in the aggregate price level. d. productivity change.
118. Sticky wages and prices occur: a. in the long run. *b. in the short run. c. in both the short and long run. d. only when the economy is operating above its potential real GDP.
119. If an economy is operating at a real GDP level that is below its potential real
GDP, one will find: *a. relatively high unemployment levels. b. nominal wages moving upwards as the economy moves from the short run to the long run. c. the SRAS curve shifting left as the economy corrects itself from the short run to the long run. d. no change in price levels.
120. When unemployment is high, then in the short run nominal: a. wages will be flexible to downward trends. *b. wages will be inflexible in a downward direction. c. wages will not be affected by the unemployment effects. d. wage contracts will be changed quickly.
121. If nominal wages adjust slowly to changing demand and supply conditions in
labor markets, we refer to them as _____ wages. *a. sticky b. unfair c. inflexible d. rigid
122. A decrease in nominal wages would be represented by a: a. rightward shift of aggregate demand. b. movement from one point to another along an aggregate supply curve. *c. rightward shift of aggregate supply. d. leftward shift of aggregate supply.
123. When there is a widespread improvement in worker productivity, aggregate
supply: a. increases, thereby shifting to the left. *b. increases, thereby shifting to the right. c. decreases, thereby shifting to the right. d. decreases, thereby shifting to the left.
1. During the Great Depression, the United States experienced a ________ the
short-run aggregate supply curve; during the 1979 oil crisis, the United States experienced a _________ in the short-run aggregate supply curve. *a. movement down along; a leftward shift b. movement up along; a leftward shift c. movement up along; a rightward shift d. movement down along; a rightward shift
2. In the late 1970s, the U.S. economy slid to the: a. left along the aggregate supply curve. b. right along the aggregate supply curve. *c. left along the aggregate demand curve. d. right along the aggregate demand curve.
3. A major reason for the end of the Great Depression was an increase in
government spending: a. for Social Security. b. for space exploration. c. for environmental protection. *d. associated with the war effort.
4. An event that shifts the aggregate demand curve is called a(n): a. interest rate effect of an aggregate price level change. b. wealth effect of an aggregate price level change. c. demand expectation. *d. demand shock.
5. In the short run, a positive demand shock: a. reduces aggregate output and increases the aggregate price level. b. increases aggregate output and reduces the aggregate price level. c. reduces aggregate output and the aggregate price level. *d. increases aggregate output and the aggregate price level.
6. All are examples of demand shocks, EXCEPT a(n): a. reduction in money supply. b. tax increase. c. increase in government expenditure. *d. increase in commodity prices.
7. A positive demand shock will: *a. increase the aggregate price level and aggregate output. b. decrease the aggregate price level and increase aggregate output. c. increase the aggregate price level and decrease aggregate output. d. decrease both the aggregate price level and aggregate output.
8. A positive demand shock leads to: *a. higher prices and higher employment. b. higher prices and higher unemployment. c. higher prices and lower output. d. lower prices and lower output.
9. Suppose that political instability in the Middle East temporarily interrupts the
supply of oil to the United States. Which is most likely to occur? a. The short-run aggregate supply curve shifts right, output increases, and prices decrease. *b. The short-run aggregate supply curve shifts left, output decreases, and prices increase. c. The aggregate demand curve shifts left, output decreases, and prices decrease. d. The aggregate demand curve shifts right, output increases, and prices increase.
10. A natural disaster that destroys part of a country's infrastructure is a type of
_________ and therefore shifts the _________ to the _________. a. negative demand shock; aggregate demand curve; right b. negative supply shock; aggregate demand curve; left *c. negative supply shock; short-run aggregate supply curve; left d. negative demand shock; long-run aggregate supply curve; left
11. A negative short-run supply shock: *a. reduces aggregate output and increases the aggregate price level. b. increases aggregate output and reduces the aggregate price level. c. reduces both aggregate output and the aggregate price level. d. increases both aggregate output and the aggregate price level.
12. An increase in the price of imported oil leads to a:
a. positive supply shock. *b. negative supply shock. c. positive demand shock d. negative demand shock.
13. Stagflation may result from a(n): a. increase in the supply of money. b. decrease in the supply of money. *c. increase in the price of imported oil. d. decrease in the price of imported oil.
14. Unexpectedly rising commodity prices lead to a: a. positive supply shock. b. positive demand shock. *c. negative supply shock. d. negative demand shock.
15. When an economy experiences stagflation, it is usually caused by a: a. negative demand shock. b. positive supply shock. *c. negative supply shock. d. positive demand shock.
16. Figure: Macroeconomics Equilibrium
Reference: Ref 29-1
(Figure: Macroeconomic Equilibrium) Refer to the Figure: Macroeconomics Equilibrium. Curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____. 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. aggregate demand; long-run aggregate supply; short-run aggregate supply
17. In the short run, the equilibrium price level and the equilibrium level of total
output are determined by the intersection of: a. LRAS and SRAS. b. LRAS and aggregate demand. *c. SRAS and aggregate demand. d. potential output and LRAS.
18. An increase in investment leads to _______ in the price level and _______ in
real GDP in the short run. a. an increase; no change b. a decrease; no change c. no change; no change *d. an increase; an increase
19. An increase in aggregate demand will generate _______ in real GDP and
_______ in the price level in the short run. *a. an increase; an increase b. an increase; no change c. a decrease; no change d. no change; an increase
20. A decrease in aggregate demand will generate _______ in real GDP and
_______ in the price level in the short run. a. an increase; no change b. a decrease; no change *c. a decrease; a decrease d. no change; an increase
21. Suppose the equilibrium aggregate price level is rising and the equilibrium level
of real GDP is rising. Which most likely caused these changes? a. increase in aggregate supply *b. increase in aggregate demand c. decrease in aggregate supply d. decrease in aggregate demand
22. Suppose that the U.S. government doubles its spending on health care. Which
is most likely to occur? a. The short-run aggregate supply curve shifts right, output increases, and prices decrease.
b. The short-run aggregate supply curve shifts left, output decreases, and prices increase. c. The aggregate demand curve shifts left, output decreases, and prices decrease. *d. The aggregate demand curve shifts right, output increases, and prices increase.
23. An improvement in the business outlook of firms is a type of positive _________
shock and therefore shifts the _________ to the _________. a. supply; long-run aggregate supply curve; right b. demand; aggregate demand curve; left c. supply; short-run aggregate supply curve; right *d. demand; aggregate demand curve; right
24. Which would an economic policymaker rank as the most preferred type of
shock? a. positive demand shock b. negative demand shock *c. positive supply shock d. negative supply shock
25. Which would an economic policymaker rank as the least preferred type of
shock? a. positive demand shock b. negative demand shock c. positive supply shock *d. negative supply shock
26. If membership falls in labor unions and unions become less popular, then
production costs: a. will increase; SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level. b. will fall; there will be a downward movement along SRAS, equilibrium GDP will increase and aggregate price level will fall. c. will not change; AD will shift to the right, increasing equilibrium GDP and aggregate price level. *d. will fall; SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.
27. Suppose the equilibrium aggregate price level is rising and the equilibrium level
of real GDP is falling. Which most likely caused these changes?
a. increase in aggregate supply b. increase in aggregate demand *c. decrease in aggregate supply d. decrease in aggregate demand
28. Suppose the economy is operating in long-run equilibrium. If a positive demand
shock hits the economy, we would expect a short-run increase in real GDP and the price level, and a long-run: *a. decrease in real GDP and an increase in the price level. b. a increase in real GDP and an increase in the price level. c. decrease in real GDP and a decrease in the price level. d. increase in real GDP and a decrease in the price level.
29. Potential real GDP is equal to $10,000 and the current level of real GDP is
equal to $9000. The output gap is therefore equal to: a. –90 percent. b. –110 percent. *c. –10 percent. d. 10 percent.
30. In the long run (as the economy self-corrects), an increase in aggregate
demand will cause the price level to _______ and potential output to _______. a. rise; increase b. fall; decrease *c. rise; remain stable d. fall; remain stable
31. In the long run (as the economy self-corrects), a decrease in aggregate
demand, all other things unchanged, will cause the price level to _______ and potential output to _______. a. rise; increase b. fall; decrease c. rise; remain stable *d. fall; remain stable
32. The intersection of an economy's aggregate demand and long-run aggregate
supply curves: a. determines its equilibrium real GDP in both the long run and the short run. b. determines its equilibrium price level in both the long run and the short run. *c. occurs at the economy's potential output.
d. occurs at high levels of cyclical unemployment.
33. If the economy is currently in a recessionary gap, real GDP will be ________
potential output. *a. below b. the same as c. above d. in equilibrium with
34. If the SRAS curve intersects the aggregate demand curve to the right of LRAS,
the result will be: a. a recessionary gap. *b. an inflationary gap. c. cyclical unemployment. d. long-run equilibrium.
35. When the economy is producing output below potential, it has a(n): a. full-employment output. b. natural level of employment. *c. recessionary gap. d. inflationary gap.
36. A recessionary gap occurs if: *a. actual real GDP is less than potential output. b. actual real GDP is greater than potential output. c. actual real GDP is equal to potential output. d. unemployment is less than the natural rate.
37. Graphically, a recessionary gap is measured as the: a. difference between the actual price level and the equilibrium price level. *b. difference between actual GDP and potential output. c. vertical distance between aggregate demand and aggregate supply at actual real GDP. d. vertical distance between aggregate demand and aggregate supply at potential output.
38. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, the intersection of SRAS with AD in panel (a) indicates: *a. an economy experiencing a recessionary gap. b. an economy experiencing an inflationary gap. c. that the economy is in long-run equilibrium. d. that the economy has an unusually low unemployment rate.
39. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, Yp in panel (b): *a. is the potential output for this economy. b. indicates that the economy is experiencing an inflationary gap. c. indicates that the economy is experiencing a recessionary gap. d. would be associated with considerable unemployment.
40. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, the level of income associated with Y1 in panel (b): a. is equal to potential output. *b. reveals an inflationary gap compared with Yp. c. is a long-run equilibrium. d. is caused by flexible wages and prices.
41. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, the intersection of AD with SRAS in panel (b) indicates: *a. a short-run equilibrium. b. a long-run equilibrium. c. that the economy needs policies to reduce unemployment. d. that the economy is at full employment.
42. An inflationary gap: a. is generally regarded as desirable, especially by people living on a fixed income. *b. means that the economy is operating beyond its potential output. c. means that there are pressures for wages to fall. d. means that SRAS will soon shift rightward.
43. When the economy is producing output above the potential, it has a(n): a. Keynesian gap b. falling wages. c. recessionary gap. *d. inflationary gap.
44. An inflationary gap occurs if: a. actual real GDP is less than potential output. *b. actual real GDP is greater than potential output. c. actual real GDP is equal to potential output. d. unemployment is greater than the natural rate.
45. Figure: An Increase in Aggregate Demand
Reference: Ref 29-3
(Figure: An Increase in Aggregate Demand) According to the Figure: An Increase in Aggregate Demand, the short-run equilibrium at Y2 and P2: a. creates pressure for nominal wages to fall as workers seek to restore lost purchasing power. b. creates pressure for prices to fall, since real GDP exceeds the potential real GDP. c. results in a recessionary gap. *d. results in an inflationary gap.
46. Figure: An Increase in Aggregate Demand
Reference: Ref 29-3
(Figure: An Increase in Aggregate Demand) According to the Figure: An Increase in Aggregate Demand, because of the pressures existing at the short-run equilibrium at Y2 and P2: a. the SRAS will shift to the right. *b. the SRAS curve will shift to the left. c. unemployment will decrease. d. LRAS will shift to the right.
47. Figure: Policy Alternatives
Reference: Ref 29-4
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, suppose that the initial equilibrium is at real GDP level Y1 and price level P2 in panel (a). At real GDP level Y1 there is: a. an inflationary gap. *b. a recessionary gap. c. no gap. d. long-run equilibrium.
48. Figure: Policy Alternatives
Reference: Ref 29-4
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, assume that the economy depicted in panel (a) is in short-run equilibrium with AD1 and SRAS1. If the economy is left to correct itself: a. real interest rates will fall which will shift SRAS rightward. *b. lower wages will result in a gradual shift from SRAS1 to SRAS2. c. long-run equilibrium will be established at YP and P3. d. the aggregate demand curve will shift leftward.
49. Figure: Policy Alternatives
Reference: Ref 29-4
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, assume that the economy depicted in panel (a) is in short-run equilibrium at a real GDP level of Y1. Doing nothing and letting the economy correct itself: a. are called fiscal policy. *b. occur in the long run when wages fall. c. occur in the short run as wages rise. d. occur because the aggregate demand curve shifts.
50. Figure: Policy Alternatives
Reference: Ref 29-4
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, the economy in panel (b) is initially in short-run equilibrium at real GDP level Y1 and price level P2. At real GDP level Y1 there is: a. an inflationary gap. *b. a recessionary gap. c. no gap. d. long-run equilibrium.
51. Inflationary and recessionary gaps are closed by self-correcting adjustments
that shift: *a. the SRAS curve. b. the AD curve. c. the LRAS curve. d. both the SRAS curve and the LRAS curve.
52. An inflationary gap is automatically closed by _______ wages that shift the
_______. a. falling; SRAS curve rightward b. falling; SRAS curve leftward c. rising; SRAS curve rightward *d. rising; SRAS curve leftward
53. An inflationary gap will be eliminated because there is _______ pressure on
wages, causing the _______.
a. downward; long-run aggregate supply curve to shift to the right b. downward; long-run aggregate supply curve to shift to the left c. downward; aggregate demand curve to shift to the left *d. upward; short-run aggregate supply curve to shift to the left
54. A recessionary gap can be closed by _______ wages that shift the _______. *a. falling; SRAS curve rightward b. falling; LRAS curve to the right c. falling; SRAS curve leftward d. rising; SRAS curve rightward
55. A recessionary gap will be eliminated because there is _______ pressure on
wages, causing the _______. *a. downward; short-run aggregate supply curve to shift rightward b. downward; short-run aggregate supply curve to shift leftward c. downward; aggregate demand curve to shift downward d. upward; aggregate demand curve to shift to the left
56. As a recessionary gap is eliminated through self-correcting adjustment, the
equilibrium price level _______ and the equilibrium real output _______. a. rises; decreases b. rises; increases c. falls; decreases *d. falls; increases
57. As an inflationary gap is eliminated through self-correcting adjustment, the
equilibrium price level ________ and the equilibrium real output ________. *a. rises; decreases b. rises; increases c. falls; decreases d. falls; increases
58. Suppose that the economy is in long-run macroeconomic equilibrium and
aggregate demand increases. As the economy moves to short-run macroeconomic equilibrium, there is a(n): a. recessionary gap with high inflation. b. recessionary gap with low inflation. c. inflationary gap with high unemployment. *d. inflationary gap with low unemployment.
59. If the short-run macroeconomic equilibrium is _________ of the economy's
potential output, then there is a(n) ________ and the aggregate price level is expected to ________. a. to the right; inflationary gap; fall b. to the right; recessionary gap; rise c. to the left; inflationary gap; fall *d. to the left; recessionary gap; fall
60. In the long run, inflationary and recessionary gaps are self-correcting because,
eventually: *a. nominal wages rise in order to close an inflationary or fall in order to close a recessionary gap. b. the government applies the right combination of fiscal and monetary policies. c. the multiplier compensates the negative supply or demand shocks. d. nominal wages rise in order to close a recessionary gap and fall to close an inflationary gap.
61. A recessionary gap is when: a. potential output is below aggregate output. b. potential output is receding. *c. aggregate output is below potential output. d. aggregate output is above potential output.
62. A recessionary gap causes: *a. short-run aggregate supply to gradually increase. b. short-run aggregate supply to gradually decrease. c. aggregate demand to gradually increase. d. aggregate demand to gradually decrease.
63. If there is an inflationary gap, which accurately describes the adjustment to
long-run equilibrium? a. Nominal wages fall, and the aggregate demand curve shifts left until the economy reaches long-run equilibrium. b. Nominal wages rise, and the aggregate demand curve shifts right until the economy reaches long-run equilibrium. c. Nominal wages fall, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium. *d. Nominal wages rise, and the short-run aggregate supply curve shifts left until the economy reaches long-run equilibrium.
64. An inflationary gap causes: a. short-run aggregate supply to gradually increase. *b. short-run aggregate supply to gradually decrease. c. aggregate demand to gradually increase. d. aggregate demand to gradually decrease.
65. In the long run, the economy is: a. unstable. *b. self-correcting. c. inflexible. d. uncontrollable.
66. If actual GDP is less than potential output, then the economy is: a. in an inflationary gap. *b. in a recessionary gap. c. in a long-run equilibrium. d. at full employment.
67. Suppose the economy is in a short-run equilibrium where the actual output is
greater than potential output. The economy is in a(n): *a. inflationary gap, nominal wages will increase and SRAS will shift to the left until the actual GDP is equal to the potential GDP in the long run. b. recessionary gap, nominal wages will decrease and AD will shift to the left until the actual GDP is equal to the potential GDP in the long run. c. inflationary gap, prices of goods will increase and AD will shift to the right until the economy is in long-run equilibrium. d. recessionary gap, prices of goods will decrease and LRAS will shift to the left until the economy is in long-run equilibrium.
68. If the economy is in a recessionary gap, then: a. the economy will remain in a recession forever without any kind of government intervention. *b. nominal wages will fall and SRAS will shift to the right until the economy is at full employment. c. AD will shift to the right and prices of goods will rise until the economy goes back to producing potential output. d. nominal wages will rise and SRAS will shift to the left and the economy will eventually restore itself.
69. Suppose that an economy is in an inflationary gap in the short run. In the long
run: *a. the economy's self-correcting mechanism will restore GDP to its potential level. b. there will be spiraling inflation unless the government takes dramatic fiscal measures. c. sustained inflation will make money lose its value. d. a combination of fiscal and monetary policies may lower prices but output will remain higher than potential level.
70. The correct formula for the Output Gap is:
a. b. *c. d.
71. In the long run, the economy is: a. self-fulfilling as commodity prices rise during recessionary gaps and fall during inflationary gaps to move the economy to long-run equilibrium. *b. self-correcting as prices of goods that are sticky in the short run become very flexible in the long run and thus move the economy to full employment. c. fluctuating as nominal wages rise and fall during short-run economic fluctuations. d. self-correcting as nominal wages rise during recessionary gaps and fall during inflationary gaps to move the economy to long-run equilibrium.
72. A negative demand shock can cause: a. a liquidity trap. b. crowding out. *c. a recessionary gap. d. an inflationary gap.
73. An advantage of stabilizing macroeconomic policy over economic self-correction
is that: a. stabilization policies achieve potential output with a lower aggregate price level.
*b. economic self-correction can take a decade or more. c. economic self-correction affects the aggregate price level, but not the aggregate output level. d. stabilization policies are particularly effective to address supply shocks.
74. Which is a negative side effect of using macroeconomic policies to offset a
recessionary gap? a. a crowding-out of private investment b. possibly unpredictable consequences of the stabilizing macroeconomic policies c. a higher aggregate price level *d. all of the provided answer choices are negative side-effect of using macroeconomic policies
75. Which curve is easier to shift? a. short-run aggregate supply curve b. long-run aggregate supply curve *c. aggregate demand curve d. all of the curves easily shift
76. Figure: An Increase in Aggregate Demand
Reference: Ref 29-3
(Figure: An Increase in Aggregate Demand) According to the Figure: An Increase in Aggregate Demand, assume that the economy is initially in long-run equilibrium at YP and P1. Now suppose that there is an increase in the level of government purchases at each price level. This will: a. shift the aggregate demand curve from AD2 to AD1. *b. shift the aggregate demand curve from AD1 to AD2. c. lead to increased output and a decrease in the price level. d. lead to decreased output and price level.
77. Figure: An Increase in Aggregate Demand
Reference: Ref 29-3
(Figure: An Increase in Aggregate Demand) According to the Figure: An Increase in Aggregate Demand, at the Y2 level of real GDP:
a. an inflationary gap exists equal to the sum of Y2 and YP. *b. an inflationary gap exists equal to the difference between Y2 and YP. c. the solution at Y2 is a long-run equilibrium. d. a recessionary gap exists equal to the difference between Y2 and YP.
78. Policy makers can offset the effects of all of the following shocks EXCEPT a: a. positive demand shock by decreasing government spending. b. negative demand shock by cutting taxes. *c. negative supply shock by increasing money supply. d. positive demand shock by increasing taxes.
79. Stabilization policies have: a. not reduced the effects of business cycles caused by either demand shocks or supply shocks. *b. reduced the economic fluctuations caused by demand shocks but have not been effective against supply shocks. c. reduced the economic costs of supply shocks but have not been so successful against demand shocks. d. been successful in reducing the economic fluctuations by neutralizing the effects of both supply and demand shocks.
80. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, in panel (a), an expansionary policy designed to move the economy from Y1 to Yp would attempt to shift the: a. aggregate demand curve to the left by increasing aggregate demand. *b. aggregate demand curve to the right by increasing aggregate demand. c. SRAS curve to the left. d. LRAS curve to the left.
81. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, if the economy is in short-run equilibrium at Y1 in panel (a), the economy is experiencing: *a. a recessionary gap. b. an inflationary gap. c. simultaneous short-run and long-run equilibrium. d. full employment.
82. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, if the economy is in short-run equilibrium at Y1 in panel (a), to return to potential output at YP policy makers should: a. use contractionary stabilization policy. *b. expansionary stabilization policy. c. use policies to shift the SRAS to the left. d. use policies to shift the LRAS to the left.
83. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, if the economy is in short-run equilibrium at Y1 in panel (b), the economy is experiencing: a. a recessionary gap. *b. an inflationary gap. c. simultaneous short-run and long-run equilibrium. d. full employment.
84. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary
and Recessionary Gaps, if the economy is in short-run equilibrium at Y1 in panel (b), to return to potential output at YP policy makers should use: *a. contractionary stabilization policy. b. expansionary stabilization policy. c. policies to shift the SRAS to the left. d. policies to shift the LRAS to the left.
85. Figure: Inflationary and Recessionary Gaps
Reference: Ref 29-2
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, if the economy is in short-run equilibrium at Y1 in panel (b), a contractionary policy to bring the economy back to potential output at YP would attempt to shift the: a. SRAS to the left. b. LRAS to the left. *c. aggregate demand curve to the left by decreasing aggregate demand. d. aggregate demand curve to the right by increasing aggregate demand.
86. When the economy is in a recessionary gap, the government can improve
economic outcomes by a(n): a. increase in taxes and increasing aggregate spending via the multiplier to remove the recessionary gap. *b. increase in the money supply, lowering the interest rate, increasing investment and consumption spending and thus increase aggregate demand. c. cut to government expenditure, decreasing investment and consumption spending and thus increase aggregate supply. d. increase in nominal wages, shifting the short run aggregate supply to the left and thus remove the recessionary gap.
87. Figure: Shifts of the AD–AS Curves
Reference: Ref 29-7
(Figure: Shifts of the AD–AS Curves) According to the Figure: Shifts of the AD–AS Curves, a short run decrease in investment is illustrated by panel: a. (a). *b. (b). c. (c). d. (d).
88. Figure: Shifts of the AD–AS Curves
Reference: Ref 29-7
(Figure: Shifts of the AD–AS Curves) According to the Figure: Shifts of the AD–AS Curves, a short run increase in net exports is illustrated by: *a. (a). b. (b). c. (c). d. (d).
89. Figure: Shifts of the AD–AS Curves
Reference: Ref 29-7
(Figure: Shifts of the AD–AS Curves) According to the Figure: Shifts of the AD–AS Curves, a decrease in wages in the short run is illustrated by panel: a. (a). b. (b). *c. (c). d. (d).
90. Figure: Shifts of the AD–AS Curves
Reference: Ref 29-7
(Figure: Shifts of the AD–AS Curves) According to the Figure: Shifts of the AD–AS Curves, an increase in wages in the short run is illustrated by panel: a. (a). b. (b). c. (c). *d. (d).
91. A positive demand shock will result from: a. a sudden increase in nominal wages. b. an increase in the potential GDP. *c. a move by the Federal Reserve to lower the interest rate. d. consumers and firms becoming more pessimistic about the future.
92. Figure: AD–AS Model I
Reference: Ref 29-8
(Figure: AD–AS Model I) According to the Figure: AD–AS Model I, if the economy is at point X, there is a(n): a. inflationary gap with low unemployment. b. inflationary gap with high unemployment. c. recessionary gap with low unemployment. *d. recessionary gap with high unemployment.
93. Figure: AD–AS Model I
Reference: Ref 29-8
(Figure: AD–AS Model I) According to the Figure: AD–AS Model I, if the economy is at point X, which describes the likely adjustment to long-run equilibrium? a. Nominal wages fall, and the aggregate demand curve shifts left until the economy reaches long-run equilibrium. b. Nominal wages rise, and the aggregate demand curve shifts right until the economy reaches long-run equilibrium. *c. Nominal wages fall, and the short-run aggregate supply curve shifts right until the economy reaches long-run equilibrium. d. Nominal wages fall, and the short-run aggregate supply curve shifts left until the economy reaches long-run equilibrium.
94. Figure: AD–AS Model I
Reference: Ref 29-8
(Figure: AD–AS Model I) According to the Figure: AD–AS Model I, if the economy is at point X, the appropriate fiscal policy is to:
a. increase taxes and decrease government spending. *b. decrease taxes and increase government spending. c. increase the money supply and interest rates. d. decrease the money supply and interest rates.
95. Figure: AD–AS Model I
Reference: Ref 29-8
(Figure: AD–AS Model I) According to the Figure: AD–AS Model I, if the economy is at point X, the appropriate monetary policy is to: a. increase taxes and decrease government spending. b. decrease taxes and increase government spending. *c. increase the money supply and decrease interest rates. d. decrease the money supply and increase interest rates.
96. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, if the price level rises, which will take place? a. SRAS curve will shift to the left. b. SRAS curve will shift to the right. c. AD curve will shift to the left. *d. None of the answer choices provided will take place.
97. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, if commodity prices rise, which will take place? *a. SRAS curve will shift to the left. b. SRAS curve will shift to the right. c. AD curve will shift to the left. d. AD curve will shift to the right.
98. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, if nominal wages fall, which will take place in the short run? a. SRAS curve will shift to the left. *b. SRAS curve will shift to the right. c. LRAS will shift to the right. d. AD curve will shift to the right.
99. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, if productivity increases, which will take place? a. SRAS curve will shift to the left. *b. SRAS curve will shift to the right. c. AD curve will shift to the left. d. AD curve will shift to the right.
100. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, as the size of the labor force increases over time, which will take place? *a. LRAS will shift to the right. b. LRAS will shift to the left. c. AD curve will shift to the left. d. AD curve will shift to the right.
101. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, when consumers and firms become more optimistic about the future, which will take place in the short run?
a. SRAS curve will shift to the left. b. SRAS curve will shift to the right. *c. AD curve will shift to the right. d. AD curve will shift to the left.
102. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, when firms decrease their investment spending, which will take place in the short run? a. LRAS will shift to the left. b. LRAS will shift to the right. c. AD curve will shift to the right. *d. AD curve will shift to the left.
103. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, if the value of household wealth increases, which will take place? a. SRAS curve will shift to the left. b. SRAS curve will shift to the right. *c. AD curve will shift to the right. d. AD curve will shift to the left.
104. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, if there is a significant increase in government spending, which will take place in the short run? a. SRAS curve will shift to the left. b. SRAS curve will shift to the right. c. AD curve will shift to the left. *d. AD curve will shift to the right.
105. Figure: AD–AS Model II
Reference: Ref 29-9
(Figure: AD–AS Model II) According to the Figure: AD–AS Model II, if the central bank reduces the quantity of money that is circulating in the economy, then which will take place? a. LRAS will shift to the right. b. LRAS will shift to the left. *c. AD curve will shift to the left. d. AD curve will shift to the right.
106. Figure: AD–AS
Reference: Ref 29-10
(Figure: AD–AS) According to the Figure: AD–AS, suppose the economy is in an inflationary gap where SRAS1 intersects AD2. The size of the gap is equal to *a. Y1-YP. b. Y1. c. Y1-Y2. d. YP-Y2.
107. Figure: AD–AS
Reference: Ref 29-10
(Figure: AD–AS) According to the Figure: AD–AS, suppose that initially the economy is at long-run equilibrium. If the government cuts taxes, ________. a. SRAS will shift to the right b. SRAS will shift to the left *c. AD will shift to the right d. AD will shift to the left
108. Figure: AD–AS
Reference: Ref 29-10
(Figure: AD–AS) According to the Figure: AD–AS, assume that the economy is in long-run equilibrium. If the Federal Reserve lowers the key interest rate, _______.
*a. the aggregate demand curve will shift to AD2 b. the aggregate demand curve will stay unchanged at AD1 c. there will be a downward movement along the aggregate demand curve AD1 d. the aggregate demand curve will shift to AD3
109. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, in panel (b), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government decides to intervene, it would most likely: a. increase taxes. b. decrease the quantity of money available. *c. increase the level of government purchases of goods and services. d. decrease the level of government purchases of goods and services.
110. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at Y1 in panel (a), it is experiencing: *a. a recessionary gap. b. an inflationary gap. c. simultaneous short-run and long-run equilibrium. d. full employment.
111. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at Y1 in panel (a), it is experiencing: a. full employment.
b. an inflationary gap. c. a liquidity trap. *d. stagflation.
112. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at Y1 in panel (a) and the government increases government spending, the result will likely be: a. an increase in unemployment. b. a decrease in interest rates. *c. inflation. d. deflation.
113. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at Y1 in panel (a) and the government does not intervene, the result will likely be: a. a shift of AD1 to the left. *b. a shift of SRAS1 to SRAS2. c. a shift of LRAS to the left. d. no change in AD or SRAS.
114. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at Y1 in panel (a) and the government decides to intervene, it would most likely a. increase taxes. b. decrease the money supply. *c. increase government spending. d. decrease government spending.
115. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at I1 in panel (b), it is experiencing: *a. a recessionary gap. b. an inflationary gap. c. simultaneous short-run and long-run equilibrium. d. full employment.
116. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at Y1 in panel (a) and the government decreases taxes, the result will likely be a(n): a. increase in unemployment. b. decrease in interest rates. c. ecrease in aggregate demand. *d. increase in aggregate demand.
117. Figure: Policy Alternatives
Reference: Ref 29-11
(Figure: Policy Alternatives) According to the Figure: Policy Alternatives, if the economy is in equilibrium at Y1 in panel (b) and the government does not intervene, the result will likely be a shift of: a. AD1 to AD2. b. SRAS to the left. c. LRAS to the left. *d. SRAS to the right.
118. An inflationary gap created by a demand shock can be addressed by
_________ to _________. a. raising government spending; lower the unemployment rate b. raising taxes; lower the unemployment rate *c. lowering government spending; lower the aggregate price level d. lowering taxes; lower the aggregate price level
119. In response to a negative supply shock, the government decreases taxes. The
most likely result of the government's tax decrease is a(n): *a. decrease in unemployment and an increase in the aggregate price level. b. decrease in unemployment and a decrease in the aggregate price level. c. increase in unemployment and an increase in the aggregate price level. d. increase in unemployment and a decrease in the aggregate price level.
120. Using monetary policy to address a recessionary gap created by a supply
shock involves _________ to _________. a. decreasing the amount of money in circulation; lower the aggregate price level b. increasing interest rates; decrease investment spending c. decreasing interest rates; lower the aggregate price level *d. increasing the amount of money in circulation; lower the unemployment rate
121. The end of the Great Depression was due largely to increased government spending for World War II. *a. True b. False
122. A positive short-run aggregate supply shock increases aggregate output and the aggregate price level. a. True *b. False
123. A negative supply shock raises the production costs and increases the quantity producers are willing to supply at any given price level. a. True *b. False
124. When the economy experiences stagflation, the price level is falling. a. True *b. False
125. Stagflation is the combination of inflation and rising aggregate output. a. True *b. False
126. The economy is in short-run macroeconomic equilibrium when the quantity of aggregate output supplied is equal to the quantity of aggregate output demanded. *a. True b. False
127. In long-run macroeconomic equilibrium, actual aggregate output equals potential output. *a. True b. False
128. An inflationary gap occurs when potential output is above aggregate output. a. True *b. False
129. The economy is self-correcting in the long-run. *a. True b. False
130. Shocks to aggregate demand do NOT affect aggregate output in the long-run. *a. True b. False
131. What is stagflation? How would stagflation exist in the AD–AS model? Correct Answer:
Stagflation is a scenario where real GDP is falling (stagnation) and the aggregate price level is rising (inflation). In the AD–AS model this would be created by a leftward shift in short-run aggregate supply. 132. Suppose the economy is initially in long-run equilibrium and there is a negative demand shock to the economy. Describe the short-run
effects of this demand shock and how the economy will adjust in the long run. Correct Answer:
If the economy is initially at potential real GDP and the AD curve shifts to the left, it will decrease real GDP and the price level along the SRAS curve. This is a recessionary gap. Because of the high level of unemployment, nominal wages eventually fall, which gradually shifts the SRAS to the right. As the SRAS increases, real GDP increases and the price level decreases along the new AD curve. The adjustment process concludes when real GDP again reaches the level of potential real GDP, but at a lower price level. 133. Suppose the economy is initially in long-run equilibrium and there is a positive demand shock to the economy. Describe the short-run effects of this demand shock and how the economy will adjust in the long run. Correct Answer:
If the economy is initially at potential real GDP and the AD curve shifts to the right, it will increase real GDP and the price level along the SRAS curve. This is an inflationary gap. Because of the low level of unemployment, nominal wages eventually rise, which gradually shifts the SRAS to the left. As the SRAS decreases, real GDP decreases and the price level increases along the new AD curve. The adjustment process concludes when real GDP again reaches the level of potential real GDP, but at a higher price level. 134. Suppose the economy is in short-run equilibrium. Use the AD–AS model to predict short-run changes to real GDP and the aggregate price level if the U.S. stock market has a prolonged decrease in shareholder value. Explain your reasoning. Correct Answer:
A long downturn in the stock market will create a decrease in household wealth. This will shift the AD curve to the left, decreasing real GDP and the aggregate price level. 135. Suppose the economy is in short-run equilibrium. Use the AD–AS model to predict short-run changes to real GDP and the aggregate price level if the stock of physical capital is relatively small and falling. Explain your reasoning. Correct Answer:
If firms observe the stock of physical capital falling, this is a signal to firms that they need to invest in new physical capital to replace the declining stock. This increase in investment levels will increase the AD curve, increasing real GDP and the aggregate price level.
136. Suppose the economy is in short-run equilibrium. Use the AD–AS model to predict short-run changes to real GDP and the aggregate price level if commodity prices suddenly increase. Explain your reasoning. Correct Answer:
Producers use commodities to produce final goods and services. If commodity prices are rising, it becomes more expensive to produce those goods and services, and therefore shifts the SRAS to the left. This leftward shift in SRAS will decrease real GDP and increase the aggregate price level.
137. If the government increases spending in the short run, this will: *a. increase aggregate output and aggregate price levels. b. increase aggregate output, but lead to a decrease in aggregate price levels. c. decrease both aggregate output and aggregate price levels. d. decrease aggregate output, but increase aggregate price level.
138. In the short run, when there is an increase in aggregate demand the aggregate
price level will: a. rise and the aggregate output level will decrease. *b. rise and the aggregate output level will increase. c. fall and the aggregate output level will increase. d. fall and the aggregate output level will decrease.
139. A negative demand shock, holding everything else constant: *a. shifts AD to the left and results in lower aggregate price levels and lower real GDP in the short run. b. shifts AS to the left and results in lower aggregate price levels and lower real GDP in the short run. c. moves the economy downward along the AD curve. d. moves the economy upwards along the AD curve.
140. When wages rise, AS shifts: a. left and aggregate price levels falls. b. right and the aggregate output level falls. c. right and the aggregate price level rises. *d. left and the aggregate price level rises.
141. Stagflation occurs when the aggregate price level: a. and the aggregate output level both fall. b. falls and the aggregate output level rises. *c. rises and the aggregate output level falls.
d. and the aggregate output level both rise.
142. A negative supply shock often results in: a. a leftward shift of the AD curve. *b. an increase in the aggregate price level and a decrease in aggregate output. c. no change in the price level. d. a drop in the unemployment level.
143. In the United States during the 1970s, oil prices increased dramatically and
caused: a. AD to shift right. b. AD to shift left. c. SRAS to shift right. *d. SRAS to shift left.
144. If there is a sudden increase in commodity prices, this will lead to a shift in the: a. SRAS curve to the right, resulting in higher aggregate output. b. AD curve to the right, resulting in higher aggregate price levels. *c. SRAS curve to the left, resulting in lower aggregate output. d. AD curve to the left, resulting in lower aggregate price levels.
145. If an economy is in short-run equilibrium such that the level of output is greater
than the potential output, then: *a. nominal wages will rise after some time. b. the economy is in long-run equilibrium. c. the short run AS curve will shift right over time,. d. unemployment in the economy is much higher than the natural rate of unemployment.
146. If an economy is currently in short-run equilibrium where the level of real GDP
is greater than potential output, then, in the long run, one will find nominal wages will: *a. rise and the SRAS curve will shift left, bringing the economy back to its potential real GDP. b. rise, shifting the AD curve to the right and restoring real GDP to its potential level. c. fall and the SRAS curve will shift right, bringing the economy back to its potential real GDP.
d. fall, shifting the AD curve to the left and bringing the economy back to its potential real GDP.
147. In the long run, an increase in AD will result in: a. no changes in the aggregate price level. b. no changes in the aggregate output level. c. increases in both the aggregate price level and the aggregate output level. *d. increases in the aggregate price level but no changes in the aggregate output level.
148. In the long run, the aggregate price level falls. This could result from: *a. a leftward shift in AD. b. a rightward shift in AD. c. a rightward shift in short run AS. d. more spending by consumers.
149. Starting from its potential output, an economy's government increases
spending. In the long run, this economy will produce at: a. an output level that is greater than its potential output. *b. its potential output. c. an output level that is below its potential output. d. its potential output level, but at a lower aggregate price level.
150. In an inflationary gap: *a. aggregate output is greater than potential output. b. aggregate output equals potential output. c. aggregate output is less than potential output. d. short run flexibility will bring the economy back to its potential output without any intervention.
151. An economy is currently operating at an output level below its potential real
GDP. If the government wishes use fiscal policy to bring the economy back to its potential real GDP, it will: a. increase the money supply. *b. increase government spending. c. increase taxation. d. decrease the money supply.
1. All are sources of federal tax revenue EXCEPT: a. the personal income tax. *b. sales taxes. c. social insurance taxes. d. the corporate profits tax.
2. The federal government's largest source of tax revenue is: a. property taxes. *b. personal income and corporate profit taxes. c. sales taxes. d. social insurance taxes.
3. Social insurance programs are: *a. government programs intended to protect families against economic hardships. b. private insurance policies to protect families from hardships caused by government actions. c. private insurance policies that cover gaps in governmentprovided health care. d. programs to help unemployed people have a social life.
4. Which is a government transfer? a. wages paid to U.S. senators b. purchases of tanks for the army *c. Social Security payments to retired auto workers d. payments to contractors for repairs on interstate highways
5. All are sources of state and local tax revenue EXCEPT: *a. social insurance taxes. b. property taxes. c. sales taxes. d. income taxes.
6. Which is NOT an example of government purchases of goods and services? a. a federal prosecutor's salary in a lawsuit against Halliburton b. new pavement for interstate highway I-95 *c. a surgeon's bill reimbursed under the Medicare program d. equipping U.S. air marshals with electroshock weapons
7. Which is NOT an example of government transfers?
a. Medicaid-paid prescription drugs for low-income individuals b. unemployment insurance c. Social Security disability pension *d. reimbursement of personal income tax withheld from wages
8. Government payments to households for which no good or service is provided in
return are called: *a. transfer payments. b. government purchases. c. consumption expenditures. d. investment expenditures.
9. Medicaid, Medicare, and Social Security are examples of: a. unilateral payments. *b. transfer payments. c. monetary policy. d. taxes.
10. The largest source of federal tax revenues is: a. property taxes. *b. personal income taxes. c. corporate income taxes. d. sales taxes.
11. Which represents the largest source of tax revenue for the U.S. federal
government? *a. personal income taxes b. corporate profit taxes c. sales taxes d. social insurance taxes
12. Which is NOT an example of a government transfer payment? *a. environmental protection programs b. Social Security c. Medicare d. Medicaid
13. Spending for Medicare and Medicaid accounts for what percentage of federal
spending?
a. 10 percent *b. 20 percent c. 30 percent d. 40 percent
14. In the basic equation of national income accounting, the government directly
controls _____ and influences ______. *a. G; C and I b. T; G and C c. C; X and M d. I; G and T
15. A change in taxes or a change in government transfers affects consumption
through a change in: a. autonomous consumption. b. the marginal propensity to save. *c. disposable income. d. government spending.
16. The basic equation of national income accounting is GDP = C + I + G + X – IM.
When the government uses fiscal policy to make changes to taxes and transfers, this policy primarily affects: a. IM. b. I. *c. C. d. X.
17. Consumer spending will rise if: *a. government transfers rise. b. the government raises tax rates. c. government transfers fall. d. the government raises tax rates or government transfers fall.
18. Consumer spending will fall if: a. government transfers rise. *b. the government raises tax rates. c. the government lowers tax rates. d. government transfers rise or tax rates are lowered.
19. Which is NOT a method of fiscal policy?
a. changing tax rates b. government transfers c. government purchases of goods and services *d. changes in the money supply
20. Suppose the economy is in a recessionary gap. To move equilibrium aggregate
output closer to the level of potential output, the best fiscal policy option is to: a. decrease government purchases. *b. decrease taxes. c. decrease government transfers. d. increase real interest rates.
21. If the current level of real GDP lies below potential GDP, then an appropriate
fiscal policy would be to increase _____, which will shift the _____ curve to the _____. a. government purchases; AD; left. b. transfer payments; AS; right. c. tax rates; AD; right. *d. government purchases; AD; right.
22. Suppose the economy is in an inflationary gap. To move equilibrium aggregate
output closer to the level of potential output, the best fiscal policy option is to: a. lower tax rates. *b. decrease government purchases. c. increase the investment tax credit. d. lower the real interest rate.
23. If the current level of real GDP lies above potential GDP, then an appropriate
fiscal policy would be to _____, which will shift the AD curve to the _____. a. decrease government purchases; right. b. increase government purchases; left. *c. decrease government purchases; left. d. raise tax rates; right.
24. Figure: Short-Run Equilibrium
Reference: Ref 30-1
(Figure: Short-Run Equilibrium) The Figure: Short-Run Equilibrium
shows the current short-run equilibrium in the economy. Appropriate fiscal policy action in this situation would be a(n): *a. decrease in transfer payments. b. increase in government purchases. c. decrease in tax rates. d. increase in the investment tax credit.
25. Figure: Short-Run Equilibrium
Reference: Ref 30-1
(Figure: Short-Run Equilibrium) The Figure: Short-Run Equilibrium reflects a short-run inflationary gap. According to the labeling on the graph, the size of the inflationary gap is equal to: a. P2 – P1. *b. Y1 – YP. c. P2 – P0. d. P1 – P0.
26. Figure: Short-Run Equilibrium
Reference: Ref 30-1
(Figure: Short-Run Equilibrium) According to the Figure: Short-Run Equilibrium, if the economy is at equilibrium at Y1 and P1, it is in a(n): a. recessionary gap. *b. inflationary gap. c. high level of unemployment. d. liquidity trap.
27. Figure: Short-Run Equilibrium
Reference: Ref 30-1
(Figure: Short-Run Equilibrium) According to the Figure: Short-Run Equilibrium, if the economy is at equilibrium at Y1 and P1, the government should use __________ fiscal policy to shift the aggregate demand curve to the ________. a. expansionary; right b. expansionary; left c. contractionary; right *d. contractionary; left
28. Figure: Short-Run Equilibrium
Reference: Ref 30-1
(Figure: Short-Run Equilibrium) According to the Figure: Short-Run Equilibrium, if the economy is at equilibrium at Y1 and P1, the appropriate policy to return the economy to potential output would be a(n): a. increase in transfer payments. b. increase in government spending. *c. increase in taxes. d. decrease in taxes.
29. Figure: Short- and Long-Run Equilibrium
Reference: Ref 30-2
(Figure: Short- and Long-Run Equilibrium) Using the Figure: Short- and Long-Run Equilibrium, which would be the appropriate response of the government upon viewing the state of the economy? a. Expand aggregate demand by increasing taxes to close the inflationary gap. b. Reduce aggregate demand by cutting taxes to close the inflationary gap. *c. Expand aggregate demand by cutting taxes to close the recessionary gap. d. Reduce aggregate demand by increasing taxes to close the recessionary gap.
30. Figure: Short- and Long-Run Equilibrium
Reference: Ref 30-2
(Figure: Short- and Long-Run Equilibrium) According to the Figure: Short- and Long-Run Equilibrium, if the economy is at equilibrium at E1, it is experiencing a(n):
*a. recessionary gap. b. inflationary gap. c. high level of unemployment. d. liquidity trap.
31. Figure: Short- and Long-Run Equilibrium
Reference: Ref 30-2
(Figure: Short- and Long-Run Equilibrium) According to the Figure: Short- and Long-Run Equilibrium, if the economy is at equilibrium at E1, the government should use __________ fiscal policy to shift the aggregate demand curve to the ________. *a. expansionary; right b. expansionary; left c. contractionary; right d. contractionary; left
32. Figure: Short- and Long-Run Equilibrium
Reference: Ref 30-2
(Figure: Short- and Long-Run Equilibrium) According to the Figure: Short- and Long-Run Equilibrium, if the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output would be a(n): *a. increase in transfer payments. b. decrease in transfer payments. c. increase in taxes. d. decrease in government spending.
33. If the economy is at equilibrium below potential output, there is a(n): *a. recessionary gap, and expansionary fiscal policy is appropriate. b. inflationary gap, and expansionary fiscal policy is appropriate. c. recessionary gap, and contractionary fiscal policy is appropriate. d. inflationary gap, and contractionary fiscal policy is appropriate.
34. Expansionary fiscal policy:
a. increases long-run aggregate supply. b. decreases long-run aggregate supply. *c. increases aggregate demand. d. decreases aggregate demand.
35. If the economy is at potential output and consumption spending suddenly
decreases because of a fall in consumer confidence, the appropriate fiscal policy is a(n): a. decrease in government transfers. *b. increase in government spending. c. decrease in government spending. d. increase in the money supply to decrease interest rates.
36. Which is an expansionary fiscal policy? a. increase in the money supply that decreases interest rates b. increase in taxes that reduces the budget deficit and decreases consumption c. decrease in government spending on the space program *d. increase in unemployment benefits
37. If the economy is at equilibrium above potential output, there is a(n): a. recessionary gap, and expansionary fiscal policy is appropriate. *b. inflationary gap, and contractionary fiscal policy is appropriate. c. recessionary gap, and contractionary fiscal policy is appropriate. d. inflationary gap, and expansionary fiscal policy is appropriate.
38. If the economy experiences a decline in overall spending and thus a
contraction, the government could counter this by: a. raising tax rates. b. decreasing government transfers. *c. increasing government spending. d. decreasing the investment tax credit.
39. Figure: Short- and Long-Run Equilibrium II
Reference: Ref 30-3
(Figure: Short- and Long-Run Equilibrium II) According to the Figure: Short- and Long-Run Equilibrium II, which would be the appropriate response on the part of the government upon viewing the state of the economy? a. Increase government spending to close the recessionary gap. b. Decrease government spending to close the recessionary gap. c. Lower tax rates to close the inflationary gap. *d. Raise tax rates to close the inflationary gap.
40. Figure: Short- and Long-Run Equilibrium II
Reference: Ref 30-3
(Figure: Short- and Long-Run Equilibrium II) According to the Figure: Short- and Long-Run Equilibrium II, if the economy is at equilibrium at E1, it is experiencing a(n): a. recessionary gap. *b. inflationary gap. c. high level of unemployment. d. liquidity trap.
41. Figure: Short- and Long-Run Equilibrium II
Reference: Ref 30-3
(Figure: Short- and Long-Run Equilibrium II) According to the Figure: Short- and Long-Run Equilibrium II, if the economy is at equilibrium at E1, the government should use __________ fiscal policy to shift the aggregate demand curve to the ________. a. expansionary; right b. expansionary; left
c. contractionary; right *d. contractionary; left
42. Figure: Short- and Long-Run Equilibrium II
Reference: Ref 30-3
(Figure: Short- and Long-Run Equilibrium II) According to the Figure: Short- and Long-Run Equilibrium II, if the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output would be a(n): a. increase in government spending. *b. decrease in government spending. c. increase in transfer payments. d. decrease in taxes.
43. A reduction in government transfers ________, therefore shifting the aggregate
demand curve to the ________. a. increases labor costs to companies, increasing investment; left b. decreases government purchases of goods and services, decreasing consumption; right c. increases the marginal propensity to save, decreasing consumption; right *d. decreases disposable income and consumption; left
44. A cut in taxes ________, therefore shifting the aggregate demand curve to the
________. a. decreases government transfers and consumption; right *b. increases disposable income and consumption; right c. decreases the marginal propensity to save, increasing consumption; left d. increases corporate profits and investment; left
45. An increase in government transfers is an example of ________ because it
________. a. expansionary fiscal policy; shifts the aggregate demand curve to the left, increasing aggregate output b. contractionary fiscal policy; shifts the aggregate demand curve to the left, decreasing aggregate output *c. expansionary fiscal policy; shifts the aggregate demand curve to the right, increasing aggregate output d. contractionary fiscal policy; shifts the aggregate demand curve to the right, decreasing aggregate output
46. To close a recessionary gap by employing fiscal policy, the government could: a. increase national savings so that the interest rate falls. b. lower the annual income exempt from paying the personal income tax. *c. lower the corporate income tax rate. d. lower the amount of unemployment insurance benefits.
47. To close an inflationary gap by employing fiscal policy, the government could: *a. reduce budget allocations to interstate highway maintenance. b. increase federal subsidies to state universities. c. lower the corporate income tax rate. d. raise the average amount awarded for a disability pension.
48. Contractionary fiscal policy includes: a. increasing government purchases. b. increasing government transfers. *c. raising tax rates. d. decreasing money growth.
49. Figure: Inflationary and Recessionary Gaps
Reference: Ref 30-4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, at E1, the economy: a. is in equilibrium. b. has an inflationary gap. *c. has a recessionary gap. d. is booming.
50. Figure: Inflationary and Recessionary Gaps
Reference: Ref 30-4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, at E2, the economy:
*a. is in equilibrium. b. has an inflationary gap. c. has a recessionary gap. d. is booming.
51. Figure: Inflationary and Recessionary Gaps
Reference: Ref 30-4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, at E3, the economy: a. is in equilibrium. *b. has an inflationary gap. c. has a recessionary gap. d. is stagnating.
52. Figure: Inflationary and Recessionary Gaps
Reference: Ref 30-4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, a movement from AD1 to AD3 could be caused by: a. increased government purchases. b. increased government transfers. c. lower tax rates. *d. increased government purchases, increased government transfers, or lower tax rates.
53. Figure: Inflationary and Recessionary Gaps
Reference: Ref 30-4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, a movement from AD3 to AD1 could be caused by: a. increased government purchases. b. increased government transfers. *c. higher tax rates. d. increased government purchases, increased government transfers, or higher tax rates.
54. Figure: Inflationary and Recessionary Gaps
Reference: Ref 30-4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, which measures an inflationary gap? a. Y3 – Y1. *b. Y3 – Y2. c. Y2 – Y1. d. Y3 – Y0.
55. Figure: Inflationary and Recessionary Gaps
Reference: Ref 30-4
(Figure: Inflationary and Recessionary Gaps) According to the Figure: Inflationary and Recessionary Gaps, which measures a recessionary gap? a. Y3 – Y1. b. Y3 – Y2. *c. Y2 – Y1. d. Y3 – Y0.
56. A government might want to increase aggregate demand to: a. close an inflationary gap. *b. close a recessionary gap. c. lower prices in the economy. d. lower employment in the economy.
57. An inflationary gap occurs when: a. we need to increase prices. b. real output is too low. c. potential output exceeds actual output. *d. actual output exceeds potential output.
58. Figure: Fiscal Policy I
Reference: Ref 30-5
(Figure: Fiscal Policy I) According to the Figure: Fiscal Policy I, suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. *c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
59. Figure: Fiscal Policy I
Reference: Ref 30-5
(Figure: Fiscal Policy I) According to the Figure: Fiscal Policy I, suppose that this economy is in equilibrium at E2. If there is a decrease in government purchases, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. *b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
60. Figure: Fiscal Policy I
Reference: Ref 30-5
(Figure: Fiscal Policy I) According to the Figure: Fiscal Policy I, suppose that this economy is in equilibrium at E1. If there is a decrease in taxes, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. *c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
61. Figure: Fiscal Policy I
Reference: Ref 30-5
(Figure: Fiscal Policy I) According to the Figure: Fiscal Policy I, suppose that this economy is in equilibrium at E2. If there is an increase in taxes, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. *b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
62. Figure: Fiscal Policy I
Reference: Ref 30-5
(Figure: Fiscal Policy I) According to the Figure: Fiscal Policy I, suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, then: *a. AD2 will shift to the right, causing an increase in the price level and an increase in real GDP. b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
63. Figure: Fiscal Policy II
Reference: Ref 30-6
(Figure: Fiscal Policy II) According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E1. If there is a decrease in government transfers, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. *d. AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP.
64. Figure: Fiscal Policy II
Reference: Ref 30-6
(Figure: Fiscal Policy II) According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E2. If there is a decrease in government transfers, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. *b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP.
65. Figure: Fiscal Policy II
Reference: Ref 30-6
(Figure: Fiscal Policy II) According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E2. If there is an increase in government transfers, then: *a. AD2 will shift to the right, causing an increase in the price level and an increase in real GDP. b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP.
66. Figure: Fiscal Policy II
Reference: Ref 30-6
(Figure: Fiscal Policy II) According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E1. If there is a decrease in government purchases, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. *d. AD1 will shift to the left, causing a decrease in the price level and a decrease in real GDP.
67. Figure: Fiscal Policy II
Reference: Ref 30-6
(Figure: Fiscal Policy II) According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, then: a. AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP. b. AD2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. *c. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
68. Figure: Fiscal Policy II
Reference: Ref 30-6
(Figure: Fiscal Policy II) According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E1. If there is an increase in taxes, then: a. AD1 will shift to the left, causing an increase in the price level and a decrease in real GDP. *b. AD1 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD2 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD2 will shift to the right, causing a decrease in the price level and an increase in real GDP.
69. Figure: Fiscal Policy II
Reference: Ref 30-6
(Figure: Fiscal Policy II) According to the Figure: Fiscal Policy II, suppose that this economy is in equilibrium at E1. If there is a decrease in taxes, then: *a. AD1 will shift to the right, causing an increase in the price level and an increase in real GDP. b. AD1 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. c. AD2 will shift to the right, causing an increase in the price level and an increase in real GDP. d. AD2 will shift to the right, causing a decrease in the price level and an increase in real GDP.
70. Fiscal policy that increases aggregate demand is: a. balanced. b. supplemental. c. contractionary. *d. expansionary.
71. Fiscal policy that decreases aggregate demand is: a. balanced. b. supplemental. *c. contractionary.
d. expansionary.
72. Expansionary fiscal policy includes: a. increasing taxes. b. increasing the money supply. c. decreasing government expenditures. *d. increasing government expenditures.
73. Expansionary fiscal policy includes: *a. decreasing taxes. b. increasing taxes. c. increasing the money supply. d. decreasing government expenditures.
74. Contractionary fiscal policy includes: a. decreasing taxes. b. decreasing the money supply. *c. decreasing government expenditures. d. increasing government expenditures.
75. Contractionary fiscal policy includes: a. decreasing taxes. *b. increasing taxes. c. increasing the money supply. d. increasing government expenditures.
76. An expansionary fiscal policy either _______ government spending or _______
taxes. a. increases; increases b. decreases; increases *c. increases; decreases d. decreases; decreases
77. A contractionary fiscal policy either _______ government spending or _______
taxes. a. increases; increases *b. decreases; increases c. increases; decreases d. decreases; decreases
78. An expansionary fiscal policy: a. usually decreases a government budget deficit or increases a government budget surplus. b. may include decreases in government spending. c. may include increases in taxes. *d. may include decreases in taxes.
79. A contractionary fiscal policy: *a. decreases a government budget deficit or increases a government budget surplus. b. may include increases in government spending. c. may include reductions in taxes. d. may include discretionary increases in transfer payments.
80. A recessionary gap can be closed with: a. contractionary monetary policy. b. an increase in taxes. c. a decrease in government purchases. *d. expansionary fiscal policy.
81. An inflationary gap can be closed with: a. expansionary monetary policy. b. a decrease in taxes. *c. a decrease in government purchases. d. expansionary fiscal policy.
82. Expansionary fiscal policy causes the aggregate demand curve to shift to the
_______ and is used to close a(n) _______ gap. a. right; inflationary *b. right; recessionary c. left; inflationary d. left; recessionary
83. Contractionary fiscal policy causes the aggregate demand curve to shift to the
_______ and is used to close a(n) _______ gap. a. right; inflationary b. right; recessionary *c. left; inflationary d. left; recessionary
84. If there is an inflationary gap in the economy, fiscal policy will likely involve
action to: a. shift aggregate demand to the right. b. leave aggregate demand alone. *c. shift aggregate demand to the left. d. shift both aggregate demand and aggregate supply the left.
85. If there is a recessionary gap in the economy, fiscal policy would likely involve
action to: *a. shift aggregate demand to the right. b. shift aggregate demand to the left. c. leave aggregate demand alone and shift aggregate supply to the left. d. shift aggregate demand to the right and shift aggregate supply to the left.
86. Figure: Fiscal Policy Choices
Reference: Ref 30-7
(Figure: Fiscal Policy Choices) According to the Figure: Fiscal Policy Choices, in panel (a), the economy is initially at output level Y1 and there is: a. an inflationary gap. *b. a recessionary gap. c. equilibrium at full employment. d. no gap.
87. Figure: Fiscal Policy Choices
Reference: Ref 30-7
(Figure: Fiscal Policy Choices) According to the Figure: Fiscal Policy Choices, in panel (b), if real GDP is equal to Y1, there is: *a. an inflationary gap. b. a recessionary gap. c. equilibrium at full employment. d. no gap.
88. Figure: Fiscal Policy Choices
Reference: Ref 30-7
(Figure: Fiscal Policy) According to the Figure: Fiscal Policy Choices, contractionary fiscal policy would most likely be used to shift aggregate demand in panel _______ from _______. *a. (b); AD1 to AD2 b. (a); AD2 to AD1 c. (a); AD1 to AD2 d. (b); AD2 to AD1
89. Figure: Fiscal Policy Choices
Reference: Ref 30-7
(Figure: Fiscal Policy) According to the Figure: Fiscal Policy Choices, expansionary fiscal policy would most likely be used to shift aggregate demand in panel _______ from _______. a. (b); AD1 to AD2 b. (a); AD2 to AD1 *c. (a); AD1 to AD2 d. (b); AD2 to AD1
90. Figure: Fiscal Policy Choices
Reference: Ref 30-7
(Figure: Fiscal Policy) According to the Figure: Fiscal Policy Choices, if the government uses discretionary fiscal policy for the economy in panel (a) when real GDP is Y1, government spending is likely to be _______ and taxes are likely to be _______. a. reduced; cut b. increased; increased c. reduced; increased *d. increased; cut
91. Figure: Fiscal Policy Choices
Reference: Ref 30-7
(Figure: Fiscal Policy) According to the Figure: Fiscal Policy Choices, if the government uses fiscal policy for the economy in panel (b) when real GDP is Y1, government spending is likely to be _______ and taxes are likely to be _______. a. reduced; cut b. increased; increased *c. reduced; increased d. increased; cut
92. Figure: Fiscal Policy Options
Reference: Ref 30-8
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD′, which is the most appropriate fiscal policy? a. decrease government spending and increase income tax rates. b. decrease government spending and maintain income tax rates. c. increase government spending and increase income tax rates. *d. increase government spending and maintain income tax rates.
93. Figure: Fiscal Policy Options
Reference: Ref 30-8
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD′, which is the most appropriate fiscal policy? a. increase government spending and increase income tax rates. *b. increase government spending and decrease income tax rates. c. decrease government spending and increase income tax rates. d. decrease government spending and maintain income tax rates.
94. Figure: Fiscal Policy Options
Reference: Ref 30-8
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is ADʺ, which is the most appropriate fiscal policy? a. increase government spending and decrease income tax rates b. increase government spending and maintain income tax rates
c. decrease government spending and decrease income tax rates *d. decrease government spending and maintain income tax rates
95. Figure: Fiscal Policy Options
Reference: Ref 30-8
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is ADʺ, which is the most appropriate fiscal policy? *a. decrease government spending and increase income tax rates. b. decrease government spending and decrease income tax rates. c. increase government spending and maintain income tax rates. d. increase government spending and decrease income tax rates.
96. Figure: Fiscal Policy Options
Reference: Ref 30-8
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD: a. a contractionary fiscal policy may be warranted. b. an expansionary fiscal policy may be warranted. *c. no change in fiscal policy is warranted. d. the economy is in an inflationary gap.
97. Figure: Fiscal Policy Options
Reference: Ref 30-8
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD′: a. a contractionary fiscal policy may be warranted. *b. an expansionary fiscal policy may be warranted. c. the economy is in long-run equilibrium. d. the economy is experiencing an inflationary gap.
98. Figure: Fiscal Policy Options
Reference: Ref 30-8
(Figure: Fiscal Policy Options) According to the Figure: Fiscal Policy Options, if the aggregate demand curve is AD″: a. the economy is in long-run equilibrium. b. an expansionary fiscal policy may be warranted. *c. a contractionary fiscal policy may be warranted. d. the economy is experiencing a recessionary gap.
99. Each is an expansionary fiscal policy EXCEPT: a. an increase in government transfers. b. an increase in government purchases. *c. an increase in tax rates. d. lowering marginal tax rates.
100. A contractionary fiscal policy is one that reduces aggregate demand by
decreasing: *a. government purchases. b. money supply. c. interest rates. d. taxes.
101. Policy makers use a contractionary fiscal policy when they want to close: a. a recessionary gap. b. any kind of output gap. *c. an inflationary gap. d. an open economy.
102. Figure: AD–AS
Reference: Ref 30-9
(Figure: AD–AS) According to the Figure: AD–AS, suppose the economy is producing the output level Yp and a negative demand shock shifts the AD1 curve to AD3. The economy now has a(n): a. inflationary gap, which can be closed by expansionary fiscal policy. b. recessionary gap, which can be closed by contractionary fiscal policy. *c. recessionary gap, which can be closed by expansionary fiscal policy. d. inflationary gap, which can be closed by contractionary fiscal policy.
103. Figure: AD–AS Reference: Ref 30-9
(Figure: AD–AS) According to the Figure: AD–AS, consider an economy that is producing an output level of Y1. This economy is in a(n): a. recessionary gap, which can be closed by expansionary fiscal policy. *b. inflationary gap, which can be closed by contractionary fiscal policy. c. inflationary gap, which can be closed by expansionary fiscal policy. d. recessionary gap, which can be closed by contractionary fiscal policy.
104. Scenario: Fiscal Policy
Consider the economy of Arcadia. The households of Arcadia spend 75 percent of their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs. Reference: Ref 30-10
(Scenario: Fiscal Policy) Refer to the information provided in the Scenario: Fiscal Policy. Suppose the actual real GDP in Arcadia is 500 billion arcs. This economy has: *a. a recessionary gap. b. production at the full-employment level. c. an inflationary gap. d. a liquidity trap.
105. Which is NOT an argument against the use of expansionary fiscal policy? a. Government spending may crowd out private spending.
b. Government borrowing may crowd out private investment spending. *c. Government borrowing may reduce the marginal propensity to consume. d. Government budget deficits may lead to reduced private spending.
106. Government spending will not crowd out private spending if: a. all of the resources in the economy are employed. b. aggregate income is at its potential level. *c. there is an inflationary gap. d. there is a recessionary gap.
107. Under which condition is expansionary fiscal policy most likely to crowd out
private spending? a. The unemployment rate is 15 percent. *b. Aggregate income is $500 billion above its potential level. c. Aggregate income is $800 billion below its potential level. d. Aggregate output is below its potential level by $300 billion.
108. Government borrowing will not crowd out private investment spending if
unemployment is: *a. high and the fiscal expansion causes an increase in incomes and saving at each interest rate. b. high and the fiscal expansion causes an increase in incomes and a decrease in saving at each interest rate. c. low and the fiscal expansion causes an increase in incomes and a decrease in saving at each interest rate. d. low and the fiscal expansion causes a decrease in incomes and a decrease in saving at each interest rate.
109. After the American Recovery and Reinvestment Act in 2009, government
borrowing: a. increased, and interest rates increased to record levels. *b. increased, but interest rates remained very low. c. decreased, and interest rates increased. d. decreased, and interest rates decreased.
110. Some argue that budget deficits will lead to reduced private spending because: a. the government will purchase so many goods and services that it will create a shortage of consumer goods and services. b. budget deficits will reduce interest rates on savings and decrease consumers' wealth.
*c. consumers, anticipating paying higher taxes in the future, will reduce current consumption in order to save money to pay the future taxes. d. the government will have to increase transfer payments in order to finance the deficit.
111. If the economy is at full employment, expansionary fiscal policy is most likely to
lead to: a. lower inflation rates. *b. higher inflation rates. c. increases in unemployment. d. decreases in interest rates.
112. One of the shortcomings of fiscal policy is that it: a. has significant time lags which make it more effective. b. takes effect immediately, thus it is the best policy to use at crunch time. c. affects aggregate demand indirectly through the interest rate. *d. has time lags and sometimes it may end up destabilizing the economy as a result of these lags.
113. Government's efforts to stabilize the business cycle through fiscal policy can
destabilize the economy because of: *a. lags in the process of crafting a budget appropriate to the circumstances. b. a negative interaction between fiscal and monetary policy due to the multiplier effect. c. a tendency of prices to change faster than the interest rate. d. business cycles that are closely synchronized to the political cycle.
114. Discretionary fiscal policy may fail to stabilize the economy or may even make
the economy less stable because of: a. its ineffectiveness. b. government waste. *c. lags in deciding on and implementing a policy change. d. the business cycle.
115. Time lags associated with policy decision making and implementation suggest
that: a. increases in spending to fight a recessionary gap can be timed correctly.
b. increases in spending to fight a recessionary gap may occur too early. *c. increases in spending to fight a recessionary gap may occur too late. d. most information is old before the public is aware of it.
116. Suppose the government increases taxes by more than is necessary to close
an inflationary gap. Which would most likely result? a. Equilibrium real GDP will be more than anticipated. *b. The economy could move into a recession. c. The economy will generate a larger inflationary gap than anticipated. d. This will not have any adverse effects on the economy, since inflation has been abated.
117. Suppose the government increases spending more than is necessary to close
a recessionary gap. Which is likely to result? *a. The economy will experience inflation. b. The price level will decline. c. The equilibrium real GDP will fall. d. The equilibrium real GDP will fall short of potential GDP.
118. Decreasing funding to explore space will shift the aggregate: a. supply curve to the left. b. supply curve to the right. *c. demand curve to the left. d. demand curve to the right.
119. The decision to build more aircraft carriers to keep employment high is an
example of: a. prudent defense spending. *b. expansionary fiscal policy. c. neutral fiscal policy. d. being prepared to defend our country.
120. All are examples of fiscal policy EXCEPT: a. increasing the size of reimbursements under Medicaid. *b. reducing the money supply in order to raise the interest rate. c. increasing personal income tax deductions for home ownership. d. reducing federal subsidies to state universities.
121. Fiscal policy is the uses of taxes, government transfers, or government purchases to shift the aggregate demand curve. *a. True b. False
122. Medicare covers much of the cost of medical care for Americans under the age of 65 with low incomes. a. True *b. False
123. When faced with a recessionary gap, the government can increase taxes and cut spending to close it. a. True *b. False
124. Expansionary fiscal policy pushes the aggregate demand curve to the right. *a. True b. False
125. An example of contractionary fiscal policy would include increased government transfers. a. True *b. False
126. One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap. *a. True b. False
127. Some economists argue that when a government tries too hard to stabilize the economy through fiscal or monetary policy, it can end up making the economy less stable. *a. True b. False
128. What is meant by the term social insurance? Give an example of a social insurance program.
Correct Answer:
Social insurance is any government program that is intended to protect households from economic hardship. Examples include Social Security, Medicare, Medicaid, unemployment insurance, and food stamps. 129. The economy is in a recessionary gap. What are the fiscal policy options available to the government? Correct Answer: Cut taxes, increase transfer payments, and/or increase government purchases.
130. The economy is in an inflationary gap. What are the fiscal policy options available to the government? Correct Answer: Raise taxes, decrease transfer payments, and/or decrease government purchases.
131. Many economists caution against extremely active stabilization policy because of time lags in its use. Explain this rationale. Correct Answer:
It takes several months for enough economic data to be gathered and analyzed, so there is a lag in the recognition of a recessionary or inflationary gap. There is also a time lag in crafting appropriate legislative action to remedy the economy. Once the law has been passed, there is a time lag in implementing the policy. Because of these time lags, the policy makers may be far behind the actual business cycle, thereby engaging in policy that is no longer necessary or perhaps even counterproductive.
132. The primary taxes at the federal level for the United States are: a. the property tax, sales taxes, and income taxes. *b. personal income taxes, corporate profit taxes, and social insurance taxes. c. sales taxes and fees. d. property taxes and user fees.
133. In terms of dollar costs, in the United States the three primary transfer
payments are: *a. Social Security, Medicare, and Medicaid. b. Social Security, education, and welfare. c. welfare, interest payments on the debt, and military spending. d. Social Security, interest payments on the debt, and education.
134. Sales taxes, property taxes, income taxes, and fees of various kinds: a. fund government spending at the federal level. *b. provide revenue for spending by state and local governments. c. are the least used types of revenue generation used by state governments. d. are examples of implicit liabilities.
135. Transfer payments are payments that: *a. governments make to households even if the government did not receive a good or service from the household. b. governments make to households when the government receives a good or service. c. erode the purchasing power of the economy. d. are essentially tax refunds.
136. Social insurance is: a. essentially any type of spending by the federal government. b. available only when the economy is in an inflation. *c. a government program designed to protect individuals or families from economy hardship. d. available only when the economy is below the full employment level.
137. If the economy exhibited an inflationary gap, the government should follow
a(n): a. expansionary policy, which would shift the AD curve to the right. b. contractionary policy, which would shift the AD curve to the right. c. expansionary policy, which would shift the AD curve to the left. *d. contractionary policy, which would shift the AD curve to the left.
138. When potential output is less than actual aggregate output: *a. the economy faces an inflationary gap. b. the SRAS curve intersects the AD curve to the left of the LRAS curve. c. the government should follow an expansionary policy to correct the problem. d. a decrease in taxes would solve the problem.
139. When the government decreases government spending, the: *a. AD curve will shift to the left. b. SRAS curve will shift to the left. c. government's budget balance will move toward a deficit. d. government debt will increase.
140. An economy is in the midst of a recession. An example of a government policy
aimed at moving the economy back to potential GDP is a(n): a. increase in taxes. *b. increase in government spending on infrastructure improvements. c. increase in the property tax. d. decrease in unemployment benefits.
141. An expansionary fiscal policy: a. in the presence of a budget deficit would decrease the size of the government debt. *b. would shift AD to the right and increase the size of the government budget deficit. c. would shift AD to the left and decrease the size of the government budget deficit. d. would not be effective in the presence of a budget surplus.
142. The existence of lags makes: a. fiscal policy more effective than monetary policy. b. monetary policy more effective than fiscal policy. *c. both fiscal and monetary policy more challenging to implement. d. both fiscal and monetary policy more effective.
143. Time lags in the implementation of fiscal policy: a. make it easier for policy makers to effectively use fiscal policy. b. render such policies useless in combating recessions. *c. must be considered by policy makers in the implementation of fiscal policy. d. are less problematic than those facing monetary policy.
1. President Johnson's use of a temporary 10 percent surcharge on income taxes is
a classic example of: a. expansionary fiscal policy. *b. contractionary fiscal policy. c. expansionary monetary policy. d. contractionary monetary policy.
2. The 2009 U.S. stimulus was a(n) _________ fiscal policy that ________
aggregate demand. *a. expansionary; increased b. expansionary; decreased c. contractionary; increased d. contractionary; decreased
3. Lyndon Johnson's tax surcharge was a(n): *a. contractionary fiscal policy that shifted aggregate demand to the left. b. contractionary fiscal policy that shifted aggregate demand to the right. c. expansionary fiscal policy that shifted aggregate demand to the left. d. expansionary fiscal policy that shifted aggregate demand to the right.
4. Assume that the marginal propensity to consume is 0.8 and potential output is
$800 billion. The government spending multiplier is: a. 0.8. b. 1.25. *c. 5. d. 4.
5. Assume that marginal propensity to consume is 0.8 and potential output is $800
billion. If the actual real GDP is $700 billion, which policy would bring the economy to potential output? a. Increase government spending by $25 billion. b. Increase government spending by $100 billion. *c. Increase government spending by $20 billion. d. Decrease government spending by $100 billion.
6. The multiplier effect of changes in government purchases of goods and services
is equal to:
a. 1 / (1 – MPS). *b. 1 / (1 – MPC). c. MPS / (1 – MPC). d. MPC / (1 – MPS).
7. If the marginal propensity to save is 0.25, and the government increases its
purchases of goods and services by $100 million, then real GDP increases by: a. $25 million. b. $175 million. *c. $400 million. d. $2800 million.
8. A $100 million increase in government spending increases equilibrium GDP by: a. $100 million. *b. more than $100 million. c. less than $100 million. d. zero.
9. If the MPC is 0.9, then the government spending multiplier is: a. 0.1. b. 1.11. c. 9. *d. 10.
10. If the MPC is 0.8 and government spending decreases by $50 million, then
equilibrium GDP will decrease by: a. $40 million. b. $50 million. c. $200 million. *d. $250 million.
11. If the government spends an extra $5 billion on goods and services: a. GDP will go up by $5 billion. b. GDP will remain unchanged. c. GDP will increase by less than $5 billion. *d. GDP will increase by more than $5 billion.
12. If the marginal propensity to save is 0.1, then the government spending
multiplier has a value of a. one-tenth.
b. 9. *c. 10. d. one-ninth.
13. Figure: Short-Run Equilibrium
Reference: Ref 31-1
(Figure: Short-Run Equilibrium) The Figure: Short-Run Equilibrium shows the economy in short-run equilibrium. To move the economy to potential GDP, the government should reduce government spending by an amount equal to: a. (Y1 – YP) b. (Y1 – YP) / (1 – MPC) c. (Y1 – YP)MPC *d. (Y1 – YP)(1 – MPC)
14. If the marginal propensity to consume is 0.75 and the federal government
increases spending by $100 billion, the income expenditure model would predict that real GDP will increase by: a. $100 billion. b. $750 billion. *c. $400 billion. d. $300 billion.
15. If the marginal propensity to consume is 0.80 and the federal government
decreases spending by $200 billion, the income–expenditure model predicts that real GDP will fall by: a. $160 billion. b. $200 billion. c. $800 billion. *d. $1000 billion.
16. The marginal propensity to consume is: *a. always equal to one. b. between zero and one. c. always greater than one. d. often negative.
17. If the marginal propensity to consume is 0.75, the multiplier for government
purchases of goods and services will be: a. 0.75 b. 1.33 *c. 4 d. 7.5
18. If the marginal propensity to consume is 0.75 and government purchases of
goods and services decrease by $30 billion, real GDP will: a. increase by $30 billion. b. increase by $22.5 billion. c. decrease by $30 billion. *d. decrease by $120 billion.
19. If policy makers want to increase real GDP by $100 billion and the marginal
propensity to consume is 0.75, they should ________ government purchases of goods and services by _____. *a. increase; $25 billion b. increase; $33 billion c. increase; $100 billion d. decrease; $100 billion
20. If policy makers want to decrease real GDP by $100 billion and the marginal
propensity to consume is 0.6, they should ________ government purchases of goods and services by _____. a. decrease; $100 billion b. decrease; $60 billion *c. decrease; $40 billion d. increase; $100 billion
21. Suppose that the marginal propensity to consume is 0.75. If government
spending for goods and services increases by $30 billion, what will be the total effect on real GDP? a. It will increase by $30 billion. b. It will increase by $22.5 billion. c. It will decrease by $22.5 billion. *d. It will increase by $120 billion.
22. Suppose that the marginal propensity to consume is 0.80. If government
spending for goods and services increases by $30 billion, what will be the total effect on real GDP? *a. It will increase by $150 billion. b. It will increase by $6 billion. c. It will decrease by $6 billion. d. It will increase by $30 billion.
23. Which statement is TRUE? *a. An increase in government purchases of goods and services is an example of an autonomous increase in aggregate spending. b. An increase in government purchases of goods and services is an example of an autonomous decrease in aggregate spending. c. An increase in government purchases of goods and services is an example of an increase in the multiplier. d. An increase in government purchases of goods and services is an example of a decrease in the multiplier.
24. If the marginal propensity to consume is 0.9, then the tax multiplier will be: a. less than zero. b. greater than 10. *c. less than 10. d. zero, because there is no multiplier effect from taxes.
25. Suppose an economy is producing real GDP of $300 billion. The potential
output is equal to $400 billion, and the MPC is equal to 0.80. Then the government should follow a policy of: a. raising taxes by $25 billion to bring the economy to potential output. b. cutting taxes by $33.33 billion to bring the economy to potential output. c. raising taxes by $33.33 billion to bring the economy to potential output. *d. cutting taxes by $25 billion to bring the economy to potential output.
26. Consider an economy whose households save 20 percent of their income. If the
government lowers its transfers by $100 billion, then the real GDP will: a. decrease by $125 billion. *b. decrease by $400 billion. c. increase by $125 billion. d. decrease by $500 billion.
27. Suppose that marginal propensity to consume is equal to 0.9 and the
government increases its spending by $200 billion. This new increase in spending is financed by a fresh increase in taxes equal to $200 billion. As a result of this, GDP will: a. not change at all. b. decrease by $200 billion. c. increase by $2000 billion. *d. increase by $200 billion.
28. Suppose the MPC = 0.8 and the government cuts taxes by $40 billion. Which
will be the likely effect? a. Real GDP will increase by $200 billion. b. Real GDP will decrease by $200 billion. *c. Real GDP will increase by $160 billion. d. Real GDP will decrease by $160 billion.
29. Assume that marginal propensity to consume is 0.8 and potential output is $800
billion. The tax multiplier is: a. exactly 0.8. b. zero. c. greater than 5. *d. less than 5.
30. The multiplier effect of changes in government transfers is: a. greater than the multiplier effect of a change in government spending. b. zero, because transfer payments do not have an effect on aggregate demand. *c. less than the multiplier effect of a change in government spending. d. impossible to determine.
31. If the marginal propensity to save is 0.25, investment spending is $600 million,
and the government increases its transfers by $100 million, then real GDP increases by: a. $25 million. b. $150 million. *c. $300 million. d. $1800 million.
32. Changes in taxes and government transfers shift the aggregate demand curve
______ government purchases. a. by more than b. by exactly as much as *c. by less than d. in inverse proportion to
33. If the MPS is 0.1, then the tax multiplier is: a. exactly 0.1. b. more than 10. *c. less than 10. d. exactly 10.
34. If the MPC is 0.8 and government transfers decrease by $50 million, then
equilibrium GDP will decrease by: a. $40 million. b. $50 million. *c. $200 million. d. $250 million.
35. A cut in taxes will have a greater impact on aggregate demand if it is given to: a. people with a low MPC. *b. people with a high MPC. c. everyone in the economy. d. those who hold a large amount of wealth.
36. An equivalent change in government transfers shifts the aggregate demand
curve _______ than a change in government spending for goods and services and has a _______ effect on real GDP. a. more; smaller b. more; larger *c. less; smaller d. less; larger
37. An equivalent change in taxes shifts the aggregate demand curve _______ than
a change in government spending for goods and services and has a _______ effect on real GDP. a. more; smaller b. more; larger *c. less; smaller d. less; larger
38. For a marginal propensity to consume of 0.9, the multiplier effect of a $100
billion increase in government purchases of goods and services is larger than the multiplier effect of $100 billion tax cuts because: a. the government pays a higher price than households for the same goods and services. b. the production of the goods and services that the government purchases has a bigger impact on real GDP than does the production of consumer goods. c. many households fail to file their income tax and claim their refunds. *d. in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent.
39. If the marginal propensity to consume is 0.75, the multiplier for taxes and
transfer payments is *a. less than 4. b. equal to 4. c. greater than 4. d. equal to 0.75.
40. If the marginal propensity to consume is 0.75 and taxes increase by $30 billion,
real GDP will: a. increase by exactly $30 billion. b. decrease by exactly $30 billion. *c. decrease by less than $120 billion. d. decrease by more than $120 billion.
41. If the marginal propensity to consume is 0.75 and transfer payments increase
by $30 billion, real GDP will: a. increase by exactly $30 billion. b. decrease by exactly $30 billion. c. increase by more than $120 billion. *d. increase by less than $120 billion.
42. If policy makers want to increase real GDP by $100 billion and the marginal
propensity to consume is 0.75, they should ________ taxes by ________. *a. decrease; more than $25 billion. b. decrease; less than $25 billion. c. increase; more than $25 billion. d. increase; less than $25 billion.
43. If policy makers want to decrease real GDP by $100 billion and the marginal
propensity to consume is 0.6, they should _______ transfer payments by _______. a. increase; less than $40 billion *b. increase; more than $40 billion c. decrease; less than $40 billion d. decrease; more than $40 billion
44. If government transfer payments rise by $100 billion, and this increases real
GDP by $100 billion, then we can conclude that the multiplier for government transfers is: a. positive, but less than one. b. greater than one. *c. equal to one. d. zero.
45. If government transfer payments rise by $100 billion, and this increases real
GDP by $120 billion, then we can conclude that the multiplier for government transfers is: a. positive, but less than one. *b. greater than one. c. equal to one. d. zero.
46. Discretionary fiscal policy involves: a. changing the money supply to influence interest rates and investment spending. *b. using government spending or tax policy to affect aggregate demand. c. lifting trade barriers on imports. d. policy to raise the natural rate of unemployment.
47. Discretionary fiscal policy refers to: a. any change in interest rates. b. any change in money supply. *c. changes in government spending or taxes to close a recessionary or inflationary gap. d. changes in taxes to account for externalities and control pollution.
48. Suppose the government increases spending to fund tuition assistance for
qualified college students. Which is likely to result? a. Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand. b. Automatic stabilizers will decrease the contractionary impact of the increase in aggregate demand. c. Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand. *d. Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.
49. Congress increases personal income tax rates in order to balance the budget.
Which is likely to result? a. Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand. *b. Automatic stabilizers will decrease the contractionary impact of the decrease in aggregate demand. c. Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand. d. Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand.
50. When the economy expands, which is true? a. Income tax receipts will rise but sales tax revenues will remain the same. b. Income tax receipts will fall but sales tax revenues will rise. c. Income tax receipts will stay the same unless the government changes the tax rates. *d. Income tax receipts and sales tax revenues will both rise.
51. The presence of an automatic stabilizer in government tax revenue that occurs
when GDP rises: a. has no impact on the size of the multiplier. b. increases the size of the multiplier. *c. decreases the size of the multiplier. d. may either increase or decrease the size of the multiplier.
52. The fact that tax receipts fall during a recession: a. makes the multiplier stronger. b. has no impact on the multiplier. *c. reduces the adverse effect of the initial fall in aggregate demand. d. acts as an automatic contractionary fiscal policy.
53. Government spending and taxation changes that cause fiscal policy to be
expansionary when the economy contracts and contractionary when the economy expands are known as: a. discretionary fiscal policy. *b. automatic stabilizers. c. autonomous spending policies. d. destabilizing fiscal policies.
54. Because the revenue from personal income taxes increases as disposable
income increases, the: *a. magnitude of the multiplier effect decreases. b. marginal propensity to consume decreases as income increases. c. magnitude of the multiplier effect increases. d. marginal propensity to save increases as income decreases.
55. Government tax revenue rises and falls with the business cycle as: a. the multiplier effect of taxes and government transfers. b. a discretionary fiscal policy. c. the multiplier effect of government purchases. *d. an automatic stabilizer.
56. Automatic stabilizers are government spending and taxation changes that cause
fiscal policy to be: *a. expansionary when the economy contracts. b. contractionary when the economy contracts. c. neutral when the economy contracts. d. ineffective when the economy contracts.
57. An example of an automatic stabilizer is: *a. tax receipts rising when GDP rises. b. a discretionary increase in taxes. c. government purchases rising when GDP rises. d. government transfers rising when GDP rises.
58. An example of an automatic stabilizer that works when the economy contracts is
a: a. rise in tax receipts. b. fall in government purchases. c. discretionary decrease in government purchases.
*d. rise in government transfers as more people receive unemployment insurance benefits.
59. Which is an automatic stabilizer? a. military spending on the war in Iraq *b. unemployment compensation payments to unemployed autoworkers c. disability payments to war veterans d. Medicare payments to the elderly
60. Consider the following statements. Which is CORRECT? a. Automatic stabilizers indicate deliberate action by policy makers. b. Discretionary fiscal policy shows automatic adjustments without any specific effort by policy makers. *c. Discretionary fiscal policy indicates deliberate action by policy makers. d. Automatic stabilizers are risky to use and sometimes can get the economy destabilized.
61. When the economy is in a recession: *a. tax receipts decrease but unemployment insurance payments increase. b. both tax receipts and unemployment insurance payments increase. c. tax receipts increase but unemployment insurance payments decrease. d. both tax receipts and unemployment insurance payments decrease.
62. If the government increases its spending when the economy is in an expansion,
then the presence of automatic stabilizers: a. may or may not affect the government spending multiplier. b. will increase the government spending multiplier. c. will not have any effect on the size of the government spending multiplier. *d. will decrease the government spending multiplier.
63. Government transfer payments rise when the economy is contracting and fall
when the economy is expanding. In this role, transfer payments are described as: *a. automatic stabilizers. b. discretionary fiscal policy. c. balanced budget policy. d. deficit reduction policy.
64. Which statement is TRUE? a. An increase in transfer payments will have a larger effect on GDP than will an increase in government spending of the same amount. b. Taxes that increase with GDP will increase the size of the multiplier. *c. Taxes that increase with GDP will reduce the size of the multiplier. d. The size of the multiplier is independent of income taxes.
65. Government spending and taxation rules that serve to automatically dampen
swings of the business cycle are known as: a. discretionary monetary policy. b. discretionary fiscal policy. *c. automatic stabilizers. d. growth multipliers.
66. Suppose that the unemployment rate increases during a recession, and more
unemployment benefits are paid as a result. This increase in unemployment benefits is considered to be a(n): *a. an automatic stabilizer. b. a discretionary fiscal policy intended to be expansionary. c. a discretionary fiscal policy intended to be contractionary. d. an effective means of closing an inflationary gap.
67. Which statement is FALSE? a. More people receive unemployment benefits when the economy is depressed than during periods of overall prosperity. b. Unemployment benefits serve as an automatic stabilizer. c. Medicaid benefits serve as an automatic stabilizer. *d. Over the course of the business cycle, automatic changes in transfer payments tend to increase the size of the multiplier.
68. The American Recovery and Reinvestment Act of 2009 was a fiscal stimulus
totaled: a. $135 billion b. $390 billion c. $550 billion *d. $787 billion.
69. The research of Reinhart and Rogoff showed that: a. economies typically recover from a financial crisis within a year. *b. financial crises tend to be followed by a prolonged period of high unemployment. c. financial crises tend to produce an increase in the multiplier. d. expansionary fiscal policy can produce a permanently higher growth rate of GDP.
70. If government transfer payments rise by $100 billion, and this increases real
GDP by $75 billion, then we can conclude that the multiplier is: *a. positive, but less than one. b. greater than one. c. equal to one. d. zero.
71. Temporary tax cuts enacted by Congress to fight a recession are considered to
be: a. automatic stabilizers. *b. a discretionary fiscal policy intended to be expansionary. c. a discretionary fiscal policy intended to be contractionary. d. an effective means of closing an inflationary gap.
72. Assume that marginal propensity to consume is 0.8 and potential output is $800
billion. If the actual real GDP is $700 billion, which policy would bring the economy to potential output? a. Decrease taxes by $100 billion. b. Increase taxes by $100 billion. *c. Decrease taxes by $25 billion. d. Decrease government transfers by $25 billion.
73. Assume that marginal propensity to consume is 0.8 and potential output is $800
billion. If the actual real GDP is $850 billion, which policy would bring the economy to potential output? a. Increase taxes by $50 billion. b. Increase taxes by $10 billion. *c. Increase taxes by $12.5 billion. d. Increase transfers by $12.5 billion.
74. Scenario: Fiscal Policy
Consider the economy of Arcadia. The households of Arcadia spend 75 percent of
their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs. Reference: Ref 31-2
(Scenario: Fiscal Policy) Refer to the information provided in the Scenario: Fiscal Policy. The government spending multiplier in Arcadia is equal to: a. 5. b. three-fourths. *c. 4. d. 3.
75. Scenario: Fiscal Policy
Consider the economy of Arcadia. The households of Arcadia spend 75 percent of their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs. Reference: Ref 31-2
(Scenario: Fiscal Policy) Refer to the information provided in the Scenario: Fiscal Policy. If actual output is 500 billion arcs, what should the government do to restore the economy to potential output? a. increase taxes by 25 billion arcs b. decrease taxes by 25 billion arcs *c. increase government spending by 25 billion arcs d. decrease government spending by 25 billion arcs
76. Scenario: Fiscal Policy
Consider the economy of Arcadia. The households of Arcadia spend 75 percent of their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs. Reference: Ref 31-2
(Scenario: Fiscal Policy) Refer to the information provided in the Scenario: Fiscal Policy. Suppose the government decides to tax its citizens. The tax multiplier is: a. greater than the government spending multiplier. *b. less than the government spending multiplier. c. zero, because changes in taxes have no effect on aggregate demand. d. equal to the government spending multiplier.
77. Scenario: Fiscal Policy
Consider the economy of Arcadia. The households of Arcadia spend 75 percent of their income. There are no taxes and no foreign trade. The currency of Arcadia is called the arc. The level of potential output in Arcadia is 600 billion arcs. Reference: Ref 31-2
(Scenario: Fiscal Policy) Refer to the information provided in the Scenario: Fiscal
Policy. Suppose that actual output is 700 billion arcs, and the government of Arcadia decides to tax its citizens. To bring the economy to potential output, the government should: *a. increase taxes by 33.33 billion arcs. b. decrease taxes by 33.33 billion arcs. c. keep taxes at zero. d. decrease both taxes and government spending by 0.33 billion arcs.
78. Suppose the economy is in a recessionary gap. Which fiscal policy option is
likely to increase real GDP by the largest amount? a. decrease in taxes *b. increase in government purchases c. increase in transfer payments d. increase in government purchases, paid for by an increase in taxes
79. Assume that the marginal propensity to consume is 0.8 and potential output is
$800 billion. If current real GDP is $700 billion: a. there is an inflationary gap. *b. there is a recessionary gap. c. the economy is in long-run equilibrium. d. government transfers should be decreased.
80. Assume that the marginal propensity to consume is 0.8 and potential output is
$800 billion. If current GDP is $850 billion: *a. there is an inflationary gap. b. there is a recessionary gap. c. the economy is in long-run equilibrium. d. taxes should be decreased.
81. Assume that the marginal propensity to consume is 0.8 and potential output is
$800 billion. If current real GDP is $850 billion, which policy would bring the economy to potential output? a. Decrease government spending by $50 billion. b. Increase government spending by $50 billion. c. Decrease government transfers by $50 billion. *d. Decrease government spending by $10 billion.
82. Suppose the economy is operating at an output level of $4000 billion. Assume
furthermore that potential output is $5000 billion and the marginal propensity to consume is 0.75. Which would be required to close this recessionary gap? a. $25 billion increase in government spending b. $25 billion increase in taxes *c. $250 billion increase in government spending d. $1000 billion increase in government spending
83. Suppose the economy is operating at an output level of $5400 billion. Assume
furthermore that potential output is $5000. Which would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75? a. Raise taxes by $400 billion. b. Increase spending by $400 billion. *c. Decrease spending by $100 billion. d. Increase spending by $100 billion.
84. Assume that the MPC = 0.8 and the government increases spending by $100
billion, financing this spending with a $100 billion tax increase. Which will be the likely effect of this action? *a. Real GDP will expand by $100 billion. b. Real GDP will contract by $100 billion. c. Real GDP will expand by $500 billion. d. Real GDP will expand by $400 billion.
85. The 2009 U.S. stimulus was an expansionary fiscal policy that increased aggregate demand. *a. True b. False
86. Lyndon Johnson's tax surcharge was an expansionary fiscal policy that increased aggregate demand. a. True *b. False
87. The size of the multiplier increases as the size of the marginal propensity to consume increases. *a. True b. False
88. The marginal propensity to consume is the percentage of a household's income that is used to pay income tax.
a. True *b. False
89. If the marginal propensity to consume is 0.80, the multiplier for government purchases of goods and services will be 1.25. a. True *b. False
90. If the marginal propensity to consume is 0.80 and government purchases of goods and services decrease by $30 billion, real GDP will decrease by $24 billion. a. True *b. False
91. An increase in government spending for goods and services is an autonomous increase in aggregate spending. *a. True b. False
92. If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government purchases of goods and services by $75 billion. a. True *b. False
93. If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should decrease government purchases of goods and services by $40 billion. *a. True b. False
94. The tax and government transfer payment multiplier is smaller than the government purchases multiplier because all of an increase in government purchases is spent, while less than 100 percent of tax cuts or increase in government transfers are spent. *a. True b. False
95. Suppose the MPC = 0.8. If the government were to cut taxes by $100 billion, then real GDP would increase by $400 billion.
*a. True b. False
96. The tax multiplier for someone living below the poverty line is smaller than the tax multiplier for someone with an annual income of $1 million. a. True *b. False
97. An equivalent change in government transfers shifts the aggregate demand curve by more than a change in government spending for goods and services and has a larger effect on real GDP. a. True *b. False
98. An equivalent change in taxes shifts the aggregate demand curve by less than a change in government spending for goods and services and has a smaller effect on real GDP. *a. True b. False
99. For a marginal propensity to consume of 0.9, the multiplier effect of a $100 billion increase in government purchases of goods and services is smaller than the multiplier effect of a $100 billion tax cut. a. True *b. False
100. The multiplier effect of an increase in transfer payments is smaller than the multiplier effect of an equivalent increase in government purchases of goods and services, because some of the transfer payment is likely to be saved. *a. True b. False
101. If the marginal propensity to consume is 0.80, the multiplier for taxes and transfer payments will be more than 5. a. True *b. False
102. If the marginal propensity to consume is 0.80 and government transfers decrease by $30 billion, real GDP will decrease by less than $150 billion. *a. True b. False
103. If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government transfers by $75 billion. a. True *b. False
104. If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should increase taxes by more than $40 billion. *a. True b. False
105. The effect of automatic stabilizers is to increase the size of the multiplier. a. True *b. False
106. If government purchases decrease so the budget may be balanced, some government transfers will automatically increase, reducing the multiplier effect. *a. True b. False
107. Taxes increase as GDP rises. This is an example of an automatic stabilizer. *a. True b. False
108. Discretionary government spending is an example of an automatic stabilizer. a. True *b. False
109. Discretionary fiscal policy is fiscal policy that is the direct result of deliberate actions by policy makers rather than an automatic adjustment. *a. True b. False
110. The Works Progress Administration, a government program that put millions of unemployed Americans to work building bridges, roads, and parks in the 1930s, is an example of an automatic stabilizer. a. True *b. False
111. Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts, and automatically contractionary when the economy expands. *a. True b. False
112. Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically contractionary when the economy contracts, and automatically expansionary when the economy expands. a. True *b. False
113. Medicaid, food stamps, and sales taxes are all examples of automatic stabilizers. *a. True b. False
114. A lump sum tax is a tax whose rate increases as income increases. a. True *b. False
115. The American Recovery and Reinvestment Act, known as the Obama stimulus of 2009, is an example of discretionary fiscal policy. *a. True b. False
116. The government spending and tax multipliers of the Obama stimulus were both greater than 5. a. True *b. False
117. The Obama stimulus was too small to avert persistently high unemployment. *a. True b. False
118. Suppose that real GDP is $500 and potential GDP is $1000, while the marginal propensity to consume is 0.9. If the government is going to engage in government spending and does not impose taxes, what specific fiscal policy action should policy makers take? Correct Answer:
The MPC = 0.9, so the multiplier is 1 / (1 – 0.9) = 10. Because real GDP needs to increase by $500, government spending must increase by $50. 119. Suppose that real GDP is $1500 and potential GDP is $1200, while the marginal propensity to consume is 0.8. If the government is going to engage in government spending and imposes no taxes, what specific fiscal policy action should policy makers take? Correct Answer:
The MPC = 0.8, so the multiplier is 1 / (1 – 0.8) = 5. Because real GDP ought to decrease by $300, government spending must decrease by $60. 120. Suppose that real GDP is $1300 and potential GDP is $1800, while the marginal propensity to consume is 0.6. If the government is going to engage in government spending and imposes no taxes, what specific fiscal policy action should policy makers take? Correct Answer:
The MPC = 0.6, so the multiplier is 1 / (1 – 0.6) = 2.5. Because real GDP ought to increase by $500, government spending must increase by $200. 121. Why does a $1000 tax cut generate a smaller multiplier effect than a $1000 increase in government purchases? Correct Answer:
When a household receives $1000 of additional disposable income, the household will save a portion of it and consume the rest. The upward shift in the AE function is something less than $1000. However, the $1000 of new government purchases is a direct injection of money into the economy. The AE function shifts upward by the full amount of $1000. From there, the spending multiplier will increase total spending
throughout the economy, but because households save part of the tax cut, the eventual increase in total spending will be smaller. 122. Explain the difference between automatic stabilizers and discretionary fiscal policy measures. Provide examples to clarify the distinctions. Correct Answer:
Automatic stabilizers are spending and taxation rules that automatically help to slow down recessions and also help to slow down economic expansions, without requiring deliberate action by lawmakers. For example, more people qualify for unemployment benefits during a recession. This puts transfer payments in the hands of more people, thus helping to expand the economy. Discretionary fiscal policy is fiscal policy that is the direct result of deliberate actions by lawmakers. For example, the president and Congress might pass an economic stimulus package during a recession to give tax breaks to most households. This deliberate reduction in taxes acts as expansionary fiscal policy.
123. Holding everything else constant, the multiplier effect for: a. taxes is the same as that for changes in autonomous aggregate spending. *b. aggregate autonomous spending is bigger than that for taxes. c. taxes is bigger than that for aggregate autonomous spending. d. taxes and aggregate autonomous spending is always equal to 0.
124. The MPC: a. is the change in consumption divided by the change in saving. *b. is higher for unemployed individuals than for people who own stock. c. is equal to the MPS + 1. d. tells policy makers the additional amount of investment spending that would accompany an additional amount of government spending.
125. When policy makers make a deliberate fiscal policy decision: *a. it is called discretionary fiscal policy. b. it is an example of an automatic stabilizer. c. no lag effects will result. d. the value of the multiplier will be reduced.
126. Automatic stabilizers act like: a. automatic expansionary fiscal policy when the economy is in an inflation.
*b. automatic expansionary fiscal policy when the economy is in a recession. c. an additional multiplier effect. d. automatic contractionary policy when the economy is in a recession.
127. When the government decides to increase taxes in order to fight an inflationary
gap, it is: a. most likely to increase the size of the budget deficit. *b. an example of discretionary fiscal policy. c. an example of an automatic stabilizer. d. likely to dampen the effects of inflation but will not lead to a correction.
128. The multiplier effect of government purchases of goods and services: *a. has a more direct and bigger impact than an equal amount of tax changes. b. has a less direct and smaller impact than an equal amount of tax changes. c. is a type of automatic stabilizer. d. is useful for recessions but not for inflations.
129. The 2009 American Recovery and Reinvestment Act was an example of a(n): a. automatic stabilizer. b. contractionary government policy. c. contractionary monetary policy. *d. expansionary fiscal policy.
1. The federal budget tends to move toward _____ as the economy ____. *a. deficit; contracts b. deficit; expands c. surplus; contracts d. a balanced budget; contracts
2. Which represents the government budget balance most accurately? a. T + G + TR b. T + G – TR *c. T – G – TR d. T + TR – G
3. A government budget surplus would be contractionary because of all EXCEPT
that: *a. increases in government purchases are contractionary. b. decreases in government purchases are contractionary. c. increases in taxes are contractionary. d. decreases in government transfers are contractionary.
4. The budget balance is calculated as: *a. T – G – TR. b. T + G – TR. c. T – G + TR. d. T + G + TR.
5. The government budget balance equals taxes: a. plus government purchases plus government transfers. *b. minus government purchases minus government transfers. c. minus government purchases plus government transfers. d. plus government purchases minus government transfers.
6. The effect of a government deficit on the economy is: a. contractionary. *b. expansionary. c. neutral. d. biased.
7. A government surplus is contractionary because: a. increases in taxation are contractionary.
b. decreases in government purchases are contractionary. c. decreases in government transfers are contractionary. *d. increases in taxation, decreases in government purchases, and decreases in government transfers are contractionary.
8. Expansionary fiscal policies: *a. make the budget surplus smaller. b. make the budget deficit smaller. c. affect only taxes. d. affect only government spending.
9. The government has a budget deficit if: a. its total revenues are equal to its total expenditures. *b. its total revenues are less than its total expenditures. c. its total revenues are greater than its total expenditures. d. the money supply is less than total expenditures.
10. The government has a budget surplus if: a. its total revenues are equal to its total expenditures. b. its total revenues are less than its total expenditures. *c. its total revenues are greater than its total expenditures. d. the money supply is less than total expenditures.
11. If the government's total revenues are less than its total expenditures, then it
has a budget: *a. deficit. b. surplus. c. balance. d. equality.
12. If the government's total revenues are greater than its total expenditures, then it
has a budget: a. deficit. *b. surplus. c. balance. d. equality.
13. Changes in the budget balance: a. can be the result of fluctuations in the economy. b. can cause fluctuations in the economy.
*c. can be both the result of and the cause of changes in the economy. d. are always bad idea.
14. The government budget balance is the: a. sum of all taxes collected. b. difference between estimated tax revenue and actual tax revenue. c. difference between estimated government spending and actual government spending. *d. difference between government tax revenue and total spending on purchases and transfers.
15. Which statement is TRUE? a. Other things equal, an expansionary fiscal policy will increase the budget balance for that year. *b. Other things equal, an expansionary fiscal policy will reduce the budget balance for that year. c. Other things equal, a contractionary fiscal policy will reduce the budget balance for that year. d. The budget balance is independent of the fiscal policy stance.
16. Which fiscal policy would make a budget surplus smaller or a budget deficit
larger? *a. increase in government purchases of goods and services b. lower government transfers c. higher taxes d. lower interest rates
17. Which fiscal policy would make a budget surplus larger or a budget deficit
smaller? a. increase in government purchases of goods and services *b. lower government transfers c. lower taxes d. higher interest rates
18. An increase in government spending of $300 billion and a tax cut of $300 billion
will have _______ effects on the budget balance and _______ effects on real GDP. a. equal; equal *b. equal; unequal c. unequal; equal d. unequal; unequal
19. An increase in government transfer payments of $250 billion and a tax cut of
$250 billion will have _______ effects on the budget balance and _______ effects on real GDP. *a. equal; equal b. equal; unequal c. unequal; equal d. unequal; unequal
20. When the unemployment rate increases, the budget: a. is unaffected. *b. tends to move into deficit. c. tends to move into a surplus. d. remains neutral.
21. Because of the role of automatic stabilizers and discretionary fiscal policy, the
historical record of the United States since 1970 shows that the budget tends to: a. move into a deficit during expansions. b. move into a surplus during recessions. *c. move into a deficit during recessions. d. remain balanced throughout expansions and recessions.
22. The cyclically adjusted budget deficit fluctuates ______ the actual budget
deficit. a. more than *b. less than c. about the same as d. inversely with
23. If the economy is operating well below potential output, which is likely? *a. The cyclically adjusted budget balance deficit is smaller than the actual budget balance. b. The cyclically adjusted budget balance deficit is larger than the actual budget balance. c. The cyclically adjusted budget balance and the actual budget balance are unrelated. d. The cyclically adjusted budget balance and the actual budget balance are the same.
24. The cyclically adjusted budget balance is an estimate of:
a. the contractionary fiscal policy needed to close an inflationary gap. b. the tax increase needed to compensate for larger government transfers so that the budget remains balanced. c. the expansionary fiscal policy needed to close a recessionary gap. *d. what the budget balance would be if real GDP were exactly equal to potential output.
25. The cyclically adjusted budget balance refers to the: a. size of the budget in the current year. b. average size of the budget over the long run. c. swings in the budget as the business cycle changes. *d. budget balance if actual output were equal to potential output.
26. Over the past few decades in the United States, large federal budget deficits
have been most often caused by: a. decreased spending on welfare payments. b. excessive spending by the state governments. *c. a depressed economy. d. excessive tax increases.
27. A cyclically adjusted budget balance: a. shows what the budget balance would be with a significant amount of cyclical unemployment. *b. is an estimate of what the budget balance would be if real GDP were equal to potential output. c. is a good indicator of the structural deficit that exists in the economy. d. is the same as the national debt, and it rises as interest cost is accrued.
28. The cyclically adjusted budget deficit: a. is no different from the actual budget deficit. *b. fluctuates less than the actual budget deficit. c. fluctuates more than the actual budget deficit. d. remains unchanged throughout the business cycles.
29. Budget deficits almost always: a. decrease with inflation and increase with deflation. *b. increase when unemployment increases and fall when unemployment falls.
c. decrease when unemployment increases and increase when unemployment falls. d. increase when aggregate price level increases and fall when aggregate price level falls.
30. The U.S. federal budget showed a surplus in which year? a. 1993 b. 1996 *c. 2000 d. 2005
31. All else equal, when the unemployment rate decreases, the budget: a. will always be balanced. b. surplus gets smaller or the budget deficit gets larger. *c. surplus gets larger or the budget deficit gets smaller. d. is unaffected.
32. The cyclically balanced budget is important because it: a. is an estimate of the amount of expansionary fiscal policy that is needed to close an inflationary gap. b. is an estimate of the amount of contractionary fiscal policy that is needed to close a recessionary gap. c. indicates the amount of tax revenue that will be available for implicit liabilities. *d. helps to determine if the government's taxation and spending policies are sustainable in the long run.
33. Since 1970, as a percentage of GDP, the budget deficit has: *a. never been more than 12 percent. b. been as high as 50 percent. c. been zero for most of the period. d. been between zero and ‒20 percent in most years.
34. Economists believe that the budget should be balanced each fiscal year. Is this
correct? a. Yes, a budget should be balanced annually, otherwise persistent budget deficits can cause havoc in the economy. b. Yes, as the law states that both the federal and state government budgets should always be balanced. c. Yes, since the balanced budget multiplier is larger, hence it makes the economy grow faster.
*d. No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.
35. States that are required by their constitution to have annually balanced budgets
are likely to: a. have less severe business cycles than those not required to balance their budget. *b. have more severe business cycles than those not required to balance their budget. c. grow faster than those not required to balance their budget. d. have a better quality of life than those not required to balance their budget.
36. If legislation were introduced to require the budget to be balanced at all times: *a. fiscal policy could not operate as an automatic stabilizer of the business cycle. b. the effectiveness of monetary policy as an automatic stabilizer of the business cycle would decrease. c. the effectiveness of fiscal policy as an automatic stabilizer of the business cycle would increase. d. monetary policy could not operate as an automatic stabilizer of the business cycle.
37. Most economists believe that a balanced budget requirement would: *a. undermine the role of taxes and transfers as automatic stabilizers. b. enhance the effect of automatic stabilizers in the economy. c. strengthen the ability of policy makers to conduct discretionary fiscal policy. d. not have any impact on the role of taxes and transfers as automatic stabilizers.
38. Which statement is FALSE? *a. Most economists agree that it would be a good idea to require an annually balanced budget. b. The role of taxes and transfers as automatic stabilizers would be undermined if the budget is required to balance annually. c. During recessions, the budget balance is reduced. d. During periods of prosperity, the budget balance increases.
39. A law requiring the federal budget to be balanced each year would likely: *a. make business cycles more severe.
b. make business cycles less severe. c. have no impact on the severity of business cycles. d. increase the effectiveness of automatic stabilizers.
40. The stability pact, signed by many of the European countries that adopted the
euro, limited each member nation's deficit to 3 percent of GDP. This: a. enhanced the ability of each of the member countries to conduct fiscal policy. b. enhanced the ability of each of the member countries to conduct monetary policy. *c. limited each member country's ability to use fiscal policy. d. did away with budget deficits all together.
41. The stability pact signed in 1999 by the European nations that adopted a
common currency, the euro, required each government to: a. balance its budget annually. *b. keep its actual budget deficit below 3 percent of its country's GDP. c. keep its cyclically balanced budget to below 3 percent of its country's GDP. d. supply a certain amount of euros each year.
42. The new stability pact signed in 2011 by the European nations that had adopted
a common currency, the euro, required each government to: a. balance its budget annually. b. keep its actual budget deficit below 3 percent of its country's GDP. *c. keep its structural budget balance to 0.5 percent or less of its country's GDP. d. supply a certain amount of euros each year.
43. What can the federal government do to finance a deficit? a. cut taxes b. increase spending c. reduce interest rates *d. borrow funds
44. What was the main financial problem that the government of Greece faced in
2009? a. It had a large budget surplus, which it needed to invest, but was unable to find investments that offered a high rate of return.
b. It had a large budget surplus, but the president vetoed attempts to use the surplus to give tax refunds to the citizens. c. It had a large budget deficit, but the parliament refused to raise transfer payments to reduce the deficit. *d. It had a large budget deficit, but most of its creditors were unwilling to make loans to Greece or charged extremely high interest rates to compensate them for the risk of loss.
45. Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During
the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is: a. $10.5 trillion. b. $6.5 trillion. c. $9 trillion. *d. $7.5 trillion.
46. When the government has a deficit, it will most likely finance the deficit by: a. cutting the salaries of the president and Congress. b. selling some military bases. *c. borrowing the money. d. charging higher admission fees at national parks.
47. If government spending increases and taxes decrease: a. implicit liabilities will increase. b. implicit liabilities will decrease. *c. the public debt will increase. d. the public debt will decrease.
48. According to the text, the public debt of the U.S. federal government at the end
of fiscal year 2011 equaled about: a. $13.3 trillion. *b. $10.1 trillion. c. $7.4 trillion. d. $14.8 trillion.
49. When the budget is in deficit, the government generally: a. raises taxes. *b. increases the public debt. c. sells public assets like national parks. d. decreases military spending.
50. Public debt is: a. taxes minus government purchases minus government transfers. b. government debt held by foreigners. *c. government debt held by individuals and institutions outside the government. d. the government deficit divided by GDP.
51. Suppose that the budget deficit of a country remains level for five years. Which
is true concerning the fiscal stance of this government? a. The federal debt will remain constant. b. The federal debt will fall. *c. The federal debt will rise. d. The federal debt will either remain constant or fall.
52. The national debt _______ in years in which the federal government incurs a
_______. a. falls; deficit b. rises; surplus c. stays the same; surplus *d. rises; deficit
53. The national debt: a. is the sum of all past federal surpluses. *b. grows when the government runs a deficit. c. grows when the government runs a surplus. d. did not exist until 1998.
54. The difference between a budget deficit and government debt is that: *a. a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the amount the government owes. b. debt is the amount by which government spending exceeds tax revenues, whereas a deficit is the amount the government owes. c. a deficit is measured as of a particular point in time, whereas debt is measured over time. d. a deficit is a stock variable, whereas debt is a flow variable.
55. In the United States in 2011, public debt accounted for about _______ of GDP. a. 12 percent b. 18 percent *c. 68 percent
d. 91 percent
56. The U.S. government fiscal year runs from _____ to _____ of the following
calendar year. a. May 1; April 30 b. July 1; June 30 *c. October 1; September 30 d. December 1; November 30
57. When the government borrows funds in financial markets to pay for budget
deficits: a. planned aggregate spending decreases rather than increases. b. the multiplier effect of government purchases increases. *c. private investment spending may be crowded out. d. the interest rate and savings decrease.
58. The larger the amount of outstanding public debt, the: a. lower the tax revenue the government must collect. b. more spending the government can afford. c. smaller the crowding out of private investment spending. *d. larger the fraction of the federal budget deficit that must be devoted to interest payments.
59. When government borrowing raises interest rates and therefore dampens
private investment, then: a. the rate of long-run economic growth will be higher. *b. we say that crowding out has occurred. c. we say that there is a surplus of loanable funds. d. we say that crowding in has occurred.
60. Which statement is TRUE? a. Argentina's debt default ushered in a period of prosperity for the country. b. A government that borrows to pay interest on its outstanding debt will easily reduce its debt in a short period of time. *c. Governments that print money to pay off debt face the problem of inflation. d. Countries that run persistent budget deficits will have higher growth rates in the long run.
61. A government would be able to pay off its debt if:
a. both GDP and the government's debt grow at the same rate. b. the debt–GDP ratio is increasing. *c. GDP grows faster than the government's debt. d. the debt grows faster than GDP.
62. Consider an economy that already has a sizable budget deficit. If the economy
is facing a major downturn, the government should: *a. stimulate the economy by raising expenditure as long as the debt–GDP ratio is declining. b. stimulate the economy by raising expenditure irrespective of the size of the debt–GDP ratio. c. not stimulate the economy by raising expenditure because of the burden of debt. d. not increase government expenditure since the budget needs to be balanced.
63. Fiscal experts in the United States are currently most concerned about the
country's: *a. implicit liabilities. b. high debt–GDP ratio. c. risk of debt default. d. low debt–GDP ratio.
64. If the average retirement age decreases: *a. implicit liabilities will increase. b. implicit liabilities will decrease. c. implicit liabilities will be unaffected. d. the public debt will immediately increase.
65. Spending promises made by governments that are effectively a debt, despite
the fact that they are not included in the usual debt statistics, are known as: *a. implicit liabilities. b. explicit liabilities. c. implicit assets. d. explicit assets.
66. Implicit liabilities of a government are: a. bonds held by foreigners. *b. spending promises, like Social Security benefits, that are effectively debt although no bond is associated with the promise. c. debt of a country adjusted for the price ratio.
d. the ratio of a country's debt to its GDP.
67. Implicit liabilities refer to the promises made by the government, such as: a. aid to foreign countries. b. building roads and bridges. *c. Social Security and Medicare payments. d. contributions to the National Endowment for the Arts.
68. Social Security spending is projected to: *a. increase because of the impact of the baby boom. b. decrease because of the impact of the baby boom on the budget. c. stay the same over the next decade. d. increase for this decade and then decline.
69. The Social Security trust fund refers to the: a. cash held in a savings account by the government. *b. government bonds held by the Social Security system. c. money held by the government from the Medicare tax. d. interest earned over time by the money from Social Security taxes.
70. Spending promises made by the government that are effectively a debt,
although they are not included in the usual debt statistics, are known as: a. burden of debt. b. structural deficit. *c. implicit liabilities. d. constructive debt.
71. Spending promises that are made by the government, and are effectively a
debt, are known as a. trust fund expenses. b. dedicated benefits. c. demographic transfers. *d. implicit liabilities.
72. A budget deficit necessarily indicates that fiscal policy is expansionary. a. True *b. False
73. Higher government transfers or lower taxes make budget surpluses smaller and budget deficits larger. *a. True b. False
74. Lower government transfers or higher taxes make a budget surpluses smaller and budget deficits larger. a. True *b. False
75. Fiscal policy measures of the same dollar amount will have equal effects on the budget balance, but may change real GDP by different amounts. *a. True b. False
76. An increase in government transfer payments of $100 billion and a tax cut of $100 billion will have equal effects on the budget balance and unequal effects on real GDP. a. True *b. False
77. Changes in the budget balance may be the result of discretionary economic policy, or they may be caused by fluctuations in the economy. *a. True b. False
78. Economists have found that the business cycle and the budget balance are unrelated. a. True *b. False
79. A budget deficit usually decreases when the unemployment rate increases. a. True *b. False
80. The cyclically adjusted budget balance is an estimate of what the budget balance would be if real GDP were exactly equal to potential output. *a. True b. False
81. The cyclically adjusted balanced budget is an estimate of what the budget balance would be when there is a recessionary gap and real GDP is less than potential output. a. True *b. False
82. The cyclically adjusted balanced budget deficit doesn't fluctuate as much as the actual budget balance. *a. True b. False
83. In most years since 1970, the actual budget deficit has been more than 25 percent of GDP. a. True *b. False
84. Most economists oppose an annually balanced budget because it would undermine automatic stabilizers. *a. True b. False
85. Most economists oppose a constitutional amendment requiring the federal budget to be balanced annually. *a. True b. False
86. Most economists believe that the government should balance the budget on average, allowing deficits in years in which the economy is in recession to be offset by surpluses during years of expansion. *a. True b. False
87. If the government was required to balance the budget during a recession, it would need to decrease taxes, increase government spending, or do both. a. True *b. False
88. If the government was required to balance the budget during a recession, it would need to increase taxes, decrease government spending, or do both. *a. True b. False
89. In 1999 many European countries signed a stability pact in which they agreed to accept the dollar as their common currency. a. True *b. False
90. In 1999 many European countries signed a stability pact in which they agreed to limit their actual budget deficits to less than 3 percent of their country's GDP. *a. True b. False
91. In 2011 many European countries signed a stability pact in which they agreed to keep their structural budget balanced. a. True *b. False
92. The main problem with the European stability pacts of 1999 and 2011 was that they forced countries to follow contractionary fiscal policies during a recession in order to reduce budget deficits to the required level. *a. True b. False
93. Forty-nine of the fifty states in the UnitedStates are required to have an annually balanced budget, which worsens the severity of the business cycle. *a. True b. False
94. The main problem facing the government of Greece in 2009 was that it had a large budget surplus. a. True *b. False
95. In 2009 many lenders refused to make more loans to Greece because they were not confident that Greece was able to repay their debt. *a. True b. False
96. In 2009 Greece received emergency loans from other European countries and the International Monetary Fund that included requirements for the Greek government to cut spending which worsened the Greek recession. *a. True b. False
97. A fiscal year for the federal government runs from January 1 to December 31. a. True *b. False
98. Public debt is government debt held by individuals and institutions outside the government. *a. True b. False
99. If the public debt is $12 trillion at the beginning of the fiscal year, government spending and transfers are $2 trillion, and tax revenues are $3 trillion, at the end of the fiscal year the public debt is $13 trillion. a. True *b. False
100. When governments borrow in financial markets to pay for budget deficits, interest rates may increase and crowd out private investment spending. *a. True b. False
101. All else equal, as a country's public debt grows, the portion of its budget devoted to interest payments on the debt will decrease. a. True *b. False
102. If a country has a very high level of public debt, lenders may insist on austerity measures like raising taxes and decreasing government spending, which causes economic conditions to deteriorate. *a. True b. False
103. The debt-GDP ratio is a way to assess the ability of a government to pay its debts because it is an indicator of the potential taxes that the government can collect. *a. True b. False
104. If the debt-GDP ratio increases over time, it means that the government's burden of paying the debt is decreasing and default is less likely. a. True *b. False
105. If a government has large consecutive budget deficits each year, its debt-GDP ratio will increase if the public debt is growing faster than GDP. *a. True b. False
106. If a government has large consecutive budget deficits each year, but its GDP is growing faster than its debt, the debt-GDP ratio will increase. a. True *b. False
107. If debt increases faster than GDP, the debt–GDP ratio will fall. a. True *b. False
108. The promise to pay Social Security benefits to the baby boomers is an example of the implicit liabilities of the U.S. government. *a. True b. False
109. Suppose that economic policy makers need to increase real GDP by $100, and they want to have as little impact on the budget balance as possible. Should they increase government purchases of goods and services, increase transfer payments, or decrease taxes? Correct Answer:
Policy makers should increase government purchases, rather than increase transfers or decrease taxes, because the impact on real GDP of government purchases is larger than the same dollar amount of an increase in transfers or a decrease in taxes. Therefore, it would require fewer government funds to increase real GDP by $100 using government spending compared to taxes or transfers. Thus the effect on the budget balance would be smaller when government spending is used. 110. Ignoring the potential impact of discretionary fiscal policy, why does the budget surplus get smaller or the deficit get larger when unemployment increases? Correct Answer:
In the absence of discretionary fiscal policy, the budget deficit gets larger or a surplus gets smaller because of automatic stabilizers. As unemployment increases, government transfer payments, such as unemployment benefits, automatically increase. Since income and spending decrease as unemployment increases, income tax and sales tax revenues both decrease. Less tax revenue and more transfer payments add to a deficit or reduce a surplus. 111. Explain why most economists think a constitutional amendment requiring the federal government to balance the budget annually is a bad idea. Correct Answer:
If the economy is in a recession, tax revenues automatically decrease and government transfers automatically increase, both of which add to a deficit or reduce a surplus. To reverse this trend and ensure a balanced budget, policy makers would have to increase taxes, decrease government spending, or do both. These contractionary policies would worsen the recession. In the case of an expansion, tax revenues increase and transfers decrease, causing a smaller deficit or larger surplus. The actions required to reverse the trend and ensure a balanced budget, (lower taxes, more spending, or both), are expansionary and could cause problems with inflation.
112. Most economists do not support a law that requires the federal budget to be balanced every year. Explain why. Correct Answer:
Because of automatic stabilizers, the budget tends to be in deficit during recessions and turn toward a surplus during expansions. If the economy were in a recession and the law required a balanced budget, the government would be required to increase taxes, decrease transfers or decrease government purchasing. This would only worsen the recession.
113. The government's budget balance is: a. T – G. b. G – T – TR. *c. T – G – TR. d. T + TR – G.
114. During a recessionary gap: *a. holding everything else constant, the budget deficit would increase. b. contractionary fiscal policy would help correct this problem. c. an increase in taxes or a decrease in government purchases would shift the AD curve to the right. d. unemployment would most likely be falling.
115. Holding everything else constant, the government's budget balance during an
expansion will: *a. increase. b. remain the same. c. decrease. d. be equal to 100.
116. During an expansion, economists generally believe that an economy should: a. balance its budget. b. run a budget deficit. *c. run a budget surplus. d. be able to pay off all of its debt.
117. The government deficit: a. is the essentially the same as the government debt. b. is much higher than the government debt. *c. measures the difference between the amount government spends and the amount it collects in tax revenues in a given period.
d. is the total amount of money a government owes at a particular point in time.
118. Public debt is: *a. the total debt owed by the government to individuals and institutions outside of government b. the total amount that the government owes during a given fiscal year. c. likely to increase when the government uses contractionary fiscal policy. d. the amount that the government owes itself.
119. A government encounters a recessionary gap and uses expansionary fiscal
policy to correct the problem. It may: *a. find the policy ineffective, especially if a budget deficit is present, since crowding out may occur. b. find the policy ineffective if it has to borrow in order to increase government spending. c. cause its budget balance to move toward a surplus. d. decrease the level of public debt in the short run.
120. When government spending results in persistent deficits that necessitate
borrowing, thereby leading to a reduction in private investment, it is referred to as: a. implicit liabilities. b. transfer payments. *c. crowding out. d. automatic stabilizers.
121. If a government's debt is increasing but its GDP is increasing faster, one will
find the government's: a. total debt falling. *b. debt–GDP ratio falling. c. deficit falling. d. ability to pay falling.
122. Social Security and Medicare: *a. are examples of implicit liabilities. b. are often included in debt statistics. c. are discretionary types of fiscal policy. d. result in less spending by government.
123. Funding for Social Security and Medicare: a. must come from government borrowing. *b. comes from dedicated taxes. c. is likely to increase with the retirement of baby boomers. d. can be accomplished with lower taxes in the future.
1. Money is anything that: *a. serves as a medium of exchange for goods and services. b. can be converted into silver with relatively little loss in value. c. can be converted into gold with relatively little loss in value. d. is traded in the stock market.
2. Money is: a. paper money and coins but not checks. b. currency and stocks. *c. anything that can easily be used to buy goods and services. d. not represented by any of the above.
3. An economy that lacks a medium of exchange must use a(n): a. anarchist system. *b. barter system. c. communist system. d. expanding system.
4. Which asset is the MOST liquid? *a. $50 bill b. $50 Amazon.com gift certificate c. 100 shares of Microsoft stock d. economics textbook
5. Which combination of assets is considered to be money? a. currency in circulation, checkable bank deposits, and credit cards *b. currency in circulation, checkable bank deposits, and travelers' checks c. currency in circulation and in bank vaults, checkable bank deposits, and travelers' checks d. currency in circulation and in bank vaults, checkable bank deposits, and credit cards
6. Which would NOT fit the economist's definition of money? a. currency b. checkable bank deposits c. coins *d. bonds
7. Which asset is the MOST liquid? a. checkable bank deposits *b. currency c. stocks d. money market mutual funds
8. Which is an asset that most people would consider money? a. house b. shares of stock in a company *c. checking account balance d. car
9. Money is any asset: a. the government says is money. *b. that can easily be used to purchase goods and services. c. that has a positive value. d. the government says is money and that has a positive value.
10. Which asset is an example of money? *a. $20 bill in your pocket b. valuable work of art c. baseball signed by a famous player d. shares of stock in a profitable company
11. Which is considered to be money? a. Google stock b. bonds c. credit cards *d. checking account deposits
12. The double coincidence of wants problem can be solved by: a. more resources. b. more production. *c. money. d. economic growth.
13. An example of a double coincidence of wants is a(n):
*a. car mechanic who wants a TV, finding an owner of an electronics store who wants a car repaired. b. car dealer who wants a TV, finding an electronics store owner who wants money. c. electronics store owner who wants car repairs, finding a car mechanic who wants money. d. car dealer who wants a new employee, finding a car mechanic who wants money.
14. The narrowest definition of money excludes: *a. currency in the vault at the bank. b. traveler's checks. c. currency in circulation. d. checkable bank deposits.
15. Currency in circulation includes cash:
I. held by the public II. in the vaults of commercial banks III. in the vault of the Federal Reserve
*a. I only. b. II only. c. III only. d. I, II, and III.
16. Money is: a. the same thing as wealth. b. the measure of the market value of an asset. *c. any asset that can easily be used to purchase goods and services. d. the sum of all economic activity.
17. Which statement is FALSE? a. Money plays a crucial role in generating gains from trade, because it makes indirect exchange possible. *b. Any item with intrinsic value is considered to be money. c. Currency and checkable bank deposits are both considered to be money. d. Money solves the problem of finding a double coincidence of wants.
18. All of the following are roles of money EXCEPT a: *a. measure of wealth. b. medium of exchange. c. unit of account. d. store of value.
19. When you are using money to purchase a new MP3 player, money is serving as
a: a. store of value. *b. medium of exchange. c. unit of account. d. double coincidence of wants.
20. Suppose a group of people decided to create their own economic system with
cartons of milk serving as money. If we decided to use this “liquid asset” as our medium of exchange and all prices were measured in cartons of milk, milk would still not be a good form of money because it would not be a good: a. medium of exchange. b. unit of account. *c. store of value. d. near-money.
21. “Tuition at State University this year is $8000.” Which function of money does
this statement best illustrate? a. store of value b. medium of exchange *c. unit of account d. means of deferred payment
22. Which is NOT considered one of the three roles of money? a. It serves as a medium of exchange. b. It acts as a store of value. *c. It is a highly illiquid asset. d. It is a unit of account.
23. When we use money to buy groceries, money is playing the role of a: *a. medium of exchange. b. reserve of wealth. c. unit of account. d. store of value.
24. The medium-of-exchange function means that money is used: a. as the common denominator of prices. b. as the common denominator of future payments. *c. to pay for goods and services. d. to accumulate purchasing power.
25. Buying a ticket to a football game with a $20 bill means money is functioning as
a: *a. medium of exchange. b. store of value. c. unit of account. d. standard of deferred payment.
26. The functions of money are: a. expander of economic activity, medium of exchange, and store of value. b. medium of exchange, store of value, and factor of production. c. store of value, medium of exchange, and determinant of investment. *d. store of value, unit of account, and medium of exchange.
27. When a person makes price comparisons among products, money is being
used as a(n): *a. unit of account. b. expander of economic activity. c. medium of exchange. d. checkable deposit.
28. When you buy a ticket to the rodeo, you are using money as a(n): a. expander of economic activity. b. store of value. c. factor of production. *d. medium of exchange.
29. When you discover money in your coat that you placed there last winter, you
unexpectedly find you were using money as a(n): a. medium of exchange. b. expander of economic activity. c. factor of production. *d. store of value.
30. When we keep part of our wealth in a savings account, money is playing the
role of: a. medium of exchange. b. unit of account. c. barter. *d. store of value.
31. When we put a price on a meal, money is playing the role of: a. medium of exchange. *b. unit of account. c. barter token. d. store of value.
32. When people use money to purchase downloaded music, they are using money
as a: *a. medium of exchange. b. store of value. c. unit of account. d. store of account.
33. The store-of-value function of money is: a. necessary and distinctive. b. not necessary but distinctive. *c. necessary but not distinctive. d. not necessary and not distinctive.
34. When you or your parents pay the tuition at college, money is being used as a: a. unit of account. b. store of value. *c. medium of exchange d. unit of account, a store of value, and a medium of exchange.
35. When you are looking at a car's price to decide if you can afford it, you are
using money as a: *a. unit of account. b. store of value. c. medium of exchange. d. medium of exchange and a unit of account.
36. Because money is an asset that can be traded for goods and services, we say
that it is: a. a store of value. b. a unit of account. *c. a medium of exchange. d. the same thing as wealth.
37. Because money holds its purchasing power over time, we say that it is: *a. a store of value. b. a unit of account. c. a medium of exchange. d. the same thing as wealth.
38. Because money is a commonly accepted measure used to set prices and make
economic calculations, we say that it is: a. a store of value. *b. a unit of account. c. a medium of exchange. d. the same thing as wealth.
39. Commodity-backed money is: *a. a medium of exchange with no intrinsic value. b. equivalent to commodity money. c. a medium of exchange with alternative economic uses. d. gold and silver coins used for exchange.
40. When countries replaced gold and silver coins with paper money exchangeable
for certain amounts of precious metals, the monetary system evolved from using: a. commodity money to using fiat money. b. commodity-backed money to using fiat money. *c. commodity money to using commodity-backed money. d. fiat money to using commodity-backed money.
41. Commodity money is: a. whatever the government has decreed is money. *b. a good used as a medium of exchange that has other uses. c. money used for commodity futures trading. d. whatever people accept as money.
42. Money that has value apart from its use as money is: a. fiat money. b. currency. c. convertible paper money. *d. commodity money.
43. Money that the government has ordered to be accepted as money is: *a. fiat money. b. currency. c. convertible paper money. d. commodity money.
44. Money that some authority, generally a government, has ordered to be
accepted as a medium of exchange is called _______ money. *a. fiat b. intrinsic c. bank-created d. debt
45. Currency in the United States today is _______ money. *a. fiat b. intrinsic c. commodity d. commodity-backed
46. Money whose value derives entirely from its official status as a means of
exchange is known as: a. commodity money. b. commodity-backed money. *c. fiat money. d. bank reserves.
47. The U.S. dollar is an example of: a. commodity-backed money. *b. fiat money. c. commodity money. d. near-money.
48. The U.S. dollar is defined as:
*a. fiat money, because it was created by an act of law. b. faith money, because we trust the government to defend its value. c. commodity-backed money, because it is convertible into gold. d. commodity money, because it is widely used to buy commodities.
49. Fiat money: a. is currency from Italy. b. can include currency backed by gold but not by silver. c. is currency backed by the gold in Fort Knox. *d. has advantages over commodity-backed money.
50. The U.S. dollar in your pocket today is best described as: a. commodity money. b. near-money. *c. fiat money. d. commodity-backed money.
51. A medium of exchange that has intrinsic value in other uses is known as: a. paper currency. b. fiat money. c. commodity-backed money. *d. commodity money.
52. Which statement about fiat money is FALSE?
a. With fiat money, the supply of money can be adjusted more easily than with commodity money. b. Fiat money is money whose value derives entirely from its official status as a means of exchange. *c. With fiat money, there is no risk of counterfeiting. d. With fiat money, there is a risk that governments may abuse the power to print money freely.
53. Prior to the Civil War: a. the U.S. government issued paper money but only in small quantities. b. the U.S. government did not allow banks to issue private money. *c. the U.S. government did not issue paper money. d. all private money issued by banks was of equal value.
54. After 1873, the U.S. government: a. stopped redeeming greenbacks for gold. *b. guaranteed the value of a dollar in terms of gold. c. guaranteed the value of a dollar in terms of gold or silver. d. stopped the use of commodity-backed money.
55. Which was used as money by European settlers in the American colonies
before the Revolutionary War ? I. dixies II. tobacco III. paper money issued by the newly created Federal Reserve a. I only *b. II only c. III only d. I, II, and III
56. In the nineteenth century before the Civil War, most commodity-backed money
in the United States was: a. issued by the U.S. Treasury Department. b. issued by the Federal Reserve and redeemable for gold coins. *c. issued by private banks and redeemable for silver coins. d. borrowed from banks in Europe.
57. A share of stock is considered: *a. an asset for the owner of the stock. b. part of M2. c. a liability for the owner of the stock. d. part of the money supply.
58. A bond is considered: *a. an asset for the owner of the bond that is not part of the money supply. b. M1. c. M2. d. a liability for the owner of the bond that is part of the money supply.
59. The primary difference between M1 and M2 is that: a. the dollar amount of M1 is much larger than the dollar amount of M2.
b. M1 includes checkable deposits, but M2 does not. c. M2 includes checkable deposits, but M1 does not. *d. M2 includes savings deposits and time deposits, but M1 does not.
60. Suppose you find a $50 bill that you put in a coat pocket last winter. If you
deposit it in your checking account: a. M1 increases by $50. b. M2 increases by $50. c. M1 and M2 both increase by $50. *d. there is no change in M1 or M2.
61. If you transfer $1000 from your savings account to your checking account: a. M1 decreases by $1000, and M2 increases by $1000. *b. M1 increases by $1000, and M2 decreases by $1000. c. M1 and M2 don't change. d. M1 increases by $1000, but M2 doesn't change.
62.
Reference: Ref 33-1
(Table: Monetary Aggregates) Refer to the information in the Table: Monetary Aggregates. The value of M1 is: a. $880 billion. *b. $895 billion. c. $2005 billion. d. $920 billion.
63.
Reference: Ref 33-1
(Table: Monetary Aggregates) Refer to the information in the Table: Monetary Aggregates. M2 is: a. $2805 billion. b. $3340 billion. *c. $3355 billion. d. $2005 billion.
64. Suppose Ronny decides to withdraw all of the cash out of his checking account
and open a single time deposit account at the same bank. As a result of this transaction: a. M2 falls but M1 remains unchanged. b. M1 and M2 both fall. c. M1 and M2 both remain unchanged. *d. M1 falls but M2 remains unchanged.
65. Which is NOT included in M1? *a. savings deposits b. checkable bank deposits c. currency d. traveler's checks
66. If monetary aggregates were ranked from most liquid to least liquid, the order
would be: *a. M1 and M2. b. stocks and bonds, M2, and M1. c. M2, private equity investments, and M1. d. gold, M1, and M2.
67. Which is true concerning the monetary aggregates? a. M2 includes the gold stock but not M1. *b. M2 includes M1. c. The gold stock backs M2 but not M1. d. M1 includes M2 but not the gold stock.
68. Saving deposits are counted in: a. M1 but not in M2. b. vault cash but not in M2. *c. M2 but not in M1. d. M1, M2, and the gold stock.
69. The largest monetary aggregate is: a. M1, because it contains all the currency in circulation. *b. M2, because it contains currency in circulation, all bank deposits, other deposits, and deposit-like assets. c. the reserves in the vaults of Federal Reserve banks, because they are the money multiplier.
d. the total volume of stocks and bonds, because they store most of the national wealth.
70. Which is near-money? a. traveler's check b. credit card c. debit card *d. savings account
71. Which financial asset belongs to M2 but not to M1? *a. savings account b. checkable deposit c. currency d. travelers' checks
72. When a waiter deposits his cash tips in his savings account: a. M2 increases. *b. M1 decreases. c. M2 decreases. d. M3 increases.
73. Included in the M1 definition of money are: *a. checkable bank deposits. b. savings deposits. c. U.S. Treasury bills. d. demand deposits, savings deposits, and U.S. Treasury bills.
74. Included in the M2 definition of money is(are): a. currency in circulation. b. money market funds. c. travelers' checks. *d. currency in circulation, money market funds, and travelers' checks.
75. If the currency in circulation is $100 million, checkable bank deposits are $500,
savings deposits are $300 million, and travelers' checks are $10 million, then the M1 money supply is: a. $100 million. b. $410 million. *c. $610 million.
d. $900 million.
76. Suppose you transfer $500 from your checking account to your savings
account. With this transaction, M1 _____ and M2_____. a. increases; stays the same b. stays the same; increases c. decreases; increases *d. decreases; stays the same
77. Suppose you transfer $500 from your savings account to your checking
account. With this transaction, M1 _____ and M2_____. a. increases; decreases *b. increases; stays the same c. decreases; decreases d. stays the same; decreases
78. Which is part of M1? a. short-term certificates of deposit b. shares of corporate stock c. currency in a bank's vault *d. checking account balances
79. Which is part of M1? a. long-term certificates of deposit b. corporate bonds *c. currency in a person's purse d. money market fund account balances
80. Which is part of M1? a. gold b. shares of corporate stock c. currency in a bank's vault *d. travelers' checks
81. M1 consists of: a. currency only. b. currency and checkable deposits only. c. currency in circulation and checkable deposits only. *d. currency in circulation, checkable deposits, and travelers checks only.
82. The Federal Reserve reports on two main monetary aggregates: a. M2 and total debt. b. M1 and currency held by banks. *c. M1 and M2. d. M1 and total stock purchases.
83. Table: Components of the Money System
Reference: Ref 33-2
(Table: Components of the Money Supply) Refer to the information in the Table: Components of the Money System. The money supply measured by M1 is: a. $325 billion. *b. $450 billion. c. $1,425 billion. d. $1875 billion.
84. Table: Components of the Money System Reference: Ref 33-2
(Table: Components of the Money Supply) Refer to the information in the Table: Components of the Money System. The money supply measured by M2 is: a. $450 billion. b. $1425 billion. *c. $1725 billion. d. $2075 billion.
85. Checkable deposits are about _______ of M1. a. 100 percent b. 60 percent *c. 54 percent d. 10 percent
86. Currency is about _______ of M1. a. 10 percent *b. 46 percent c. 75 percent d. 100 percent
87. Currency, checkable deposits, and traveler's checks are about _______ of M1. a. 10 percent b. 55 percent c. 75 percent *d. 100 percent
88. Near-moneys are: a. paper money. b. fiat money. *c. highly liquid financial assets. d. any financial assets.
89. Currency in circulation, traveler's checks, and checkable bank deposits are the
components of: *a. M1 only. b. M2 only. c. both M1 and M2. d. M3 only.
90. Which statement about the relationship between M1 and M2 is TRUE? a. M1 is larger than M2, because M2 does not include currency in circulation. b. M1 is larger than M2, because M1 includes near-moneys, and M2 does not. *c. M2 is larger than M1, because M2 includes near-moneys, and M1 does not. d. Of these two measures of the money supply, M2 is the narrower definition.
91. In April of 2013, the value of M1 was a. $85 billion. b. $103 billion. c. $119 billion. *d. $2514 billion.
92. Money is whatever the government decrees is money. a. True *b. False
93. Money is the most liquid asset in the economy. *a. True b. False
94. Trade without money requires a double coincidence of wants. *a. True b. False
95. A debit card is money because it gives access to a bank account. *a. True b. False
96. An asset is liquid if it can be converted to cash quickly with little or no loss of value. *a. True b. False
97. Checkable deposits are bank accounts on which people can write checks. *a. True b. False
98. A gift certificate which can be used to buy goods at Walmart is money. a. True *b. False
99. Money is unique because it is the only asset that can be used as a store of value. a. True *b. False
100. When Angela puts the cash she earns from tutoring economics in her desk drawer to save for Christmas shopping, she is using money primarily as a store of value. *a. True b. False
101. Commodity-backed money's value is guaranteed by a promise that it can be converted into a useful good. *a. True b. False
102. Commodity-backed money is a medium of exchange with no intrinsic value, whose ultimate value is guaranteed by a promise that it can be converted into valuable goods. *a. True b. False
103. Fiat money has value because the government has declared that it can be exchanged for gold or silver. a. True *b. False
104. Commodity-backed money is more efficient than commodity money because commodity-backed money ties up fewer resources than commodity money. *a. True b. False
105. Before the Civil War, private banks, not the U.S. government, issued dollar bills which could be redeemed for silver coins. *a. True b. False
106. Before the Revolutionary War, clamshells were used by some of the European settlers as commodity money. *a. True b. False
107. A “dixie” was the nickname for the first gold coin issued by the U.S. Treasury.
a. True *b. False
108. One problem with the dollar bills issued by private banks in the nineteenth century was that if the issuing bank failed, the money was worthless. *a. True b. False
109. Today, U.S. dollars are redeemable for gold or silver. a. True *b. False
110. Included in the M2 definition of money are demand deposits. *a. True b. False
111. All assets that are included in M1 are also included in M2. *a. True b. False
112. Although money itself does not directly produce anything, explain how it adds to welfare. Correct Answer:
Money increases welfare because it makes transactions easier. Without money, people would have to rely on barter. In order for trade to occur in a barter system, there must be a “double coincidence of wants,” which means two parties will trade only if each has something that the other one wants. Since money is universally accepted, this reduces the transactions costs of trade and increases welfare. Additionally, since money provides a common measurement for which to gauge costs and benefits, it improves the ability of individuals to make good economic decisions which also increases welfare. 113. If professional basketball superstar LeBron James signed his jersey and gave it to you, it would certainly be a valuable asset. Why would this valuable asset not serve as a very good form of money if you took it to a shopping mall, looking to purchase a pair of shoes? Use the three roles of money in your explanation. Correct Answer:
The jersey would not be a very good medium of exchange. You would have to find a shoe store that was willing to exchange a pair of shoes for a jersey. This is called the “double coincidence of wants” and it explains why a barter system is inefficient. Even if you found a shoe store that was willing to make this trade, the owner of the shoe store would have to hope his landlord would exchange the jersey for his monthly rent payment, and so on. The jersey might not be a very good store of value. Maybe the value of LeBron's signed jersey rises or maybe it falls over time. The value of such a commodity really depends upon the future of LeBron's career. What if you spill nachos on the jersey or run it through the washing machine and shrink it? The value might instantly crash. The jersey would also not be a good unit of account because prices of shoes and other goods at the mall are not set in LeBron James jerseys. Suppose the shoe store would give you a pair of shoes for two-thirds of the jersey and a coffee shop would give you a pound of coffee for one-third of a jersey. You would have to start cutting this valuable asset into pieces and would instantly make it worthless to anyone. 114. Using gold as an example, what is the difference between commodity money and commodity-backed money? Correct Answer:
Gold has been used as commodity money for thousands of years. Gold has intrinsic value because gold coins, used as money, can be melted and shaped into other items like jewelry. Paper money evolved as a medium of exchange but could be taken back to the issuing bank and exchanged for an equivalent amount of gold. Gold was no longer used as money, but it was the commodity behind (backing) the money. 115. It's your birthday, and your uncle opens up his wallet and gives you a $20 bill. You take the $20 and deposit it in your checking account. What is the effect of this transaction on M1 or M2? Explain. Correct Answer:
Nothing happened to M1 or M2. You deposited currency already in circulation in a checking account. Since both currency and checking deposits are part of M1, nothing happened to M1. And because M1 is a part of M2, nothing happened to M2. 116. It's your birthday, and your uncle opens up his wallet and gives you a $20 gift card to the local movie theater. You take the $20 gift card and use it to watch a movie and buy some popcorn and soda. What is the effect of this transaction on M1 or M2? Explain. Correct Answer:
Gift cards are not money because they cannot be used to purchase goods beyond the company that issued the card. Your uncle prepaid for your movie and popcorn and soda when he purchased the gift card from the theatre. You are now consuming those goods and services. Because you could not, say, take the gift card to the gas station and redeem it for gasoline, it is not considered money.
117. Money is: a. any form of wealth. *b. an asset that can be easily used to purchase goods and services. c. only currency which is designated by law. d. only currency in circulation.
118. The need for a double coincidence of wants is necessary: a. in order to use money. *b. if one engages in barter exchanges. c. anytime credit cards or debit cards are used. d. results in more exchanges taking place.
119. In order for an asset to be considered money, it must be: *a. able to serve as medium of exchange, standard unit of account, and store of value. b. available in sufficient quantities and designated as such by law. c. fiat money also. d. backed by some precious commodity such as gold.
120. Fiat money is: a. the same as commodity money. *b. money backed by a government's decree that it be accepted as a means of payment. c. money which is backed by gold or silver. d. used in barter exchanges.
121. The use of counterfeit money leads to: a. costs for a government only if government has endorsed fiat money. b. losses only if consumers recognize that counterfeit money is present. *c. lost revenue to pay for operations of the economy's government. d. problems only when commodity-backed money is used.
122. Paper money in the United States, which has no intrinsic value but can be
converted into a valuable good on demand and is used as a medium of exchange, is an example of:
*a. fiat money. b. commodity-backed money. c. a stock. d. a bond.
123. The most liquid form of money is: *a. M1. b. M2. c. stocks and bonds. d. houses.
124. Debit cards: *a. are considered part of the money supply, since they allow access to a part of the money supply. b. are not generally accepted as a medium of exchange. c. are less liquid than stocks and bonds. d. create a liability for the user of the card.
125. Traveler's checks and checkable deposits are: *a. part of M1. b. considered near-monies. c. part of the monetary base. d. not considered part of the M grouping.
126. M2 is made up of: *a. M1 plus near-monies. b. M1 plus stocks and bonds. c. only near monies. d. any assets that are not very liquid.
127. Currency held in bank vaults and bank deposits held at the Federal Reserve
are: a. part of M1. b. part of M2. c. part of M3. *d. not part of the money supply.
1. Banks don't lend out all of the funds deposited because: a. it would not be profitable. *b. they have to satisfy any depositor who wants to withdraw funds. c. they need to reduce their liquidity position. d. they need to make more money on interest-bearing deposits.
2. Bank reserves are: a. the fraction of deposits kept in gold with the Federal Reserve. b. the deposits lent to finance illiquid investments. *c. the fraction of deposits kept in the form of very liquid assets. d. gold kept in the bank's vault.
3. Banks can lend money because: a. they have so much to lend. *b. they know not everyone wants their deposits back at the same time. c. there is a high demand for loans. d. they know how much cash they have in their vault.
4. The reserve ratio is the: a. bank's holdings of gold. b. government's holdings of gold at Fort Knox. *c. fraction of deposits that banks hold in their vaults plus their deposits at the Federal Reserve. d. ratio of gold to the paper money in the economy.
5. Table: Balance Sheet
Reference: Ref 34-1
(Table: Balance Sheet) Refer to the information in the Table: Balance Sheet. If the reserve ratio is 25 percent and the bank is exactly meeting its reserve requirement, deposits are: a. $5000. b. $15,000. c. $60,000. *d. $80,000.
6. Table: Balance Sheet Reference: Ref 34-1
(Table: Balance Sheet) Refer to the information in the Table: Balance Sheet. If the reserve ratio is 25 percent and the bank is exactly meeting its reserve requirement and the bank is exactly meeting its reserve requirement, loans are: a. $5000. b. $15,000. *c. $60,000. d. $80,000.
7. The reserve ratio is the fraction of its: *a. deposits that a bank holds as reserves. b. loans that a bank is required to hold. c. loans that a bank holds as reserves. d. assets that a bank is required to hold.
8. Among the assets of a bank are: a. deposits. *b. loans. c. borrowings. d. deposits and loans.
9. Among the liabilities of banks are: *a. deposits. b. loans. c. reserves. d. loans and reserves.
10. If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000,
and $15,000 on deposit at the Federal Reserve, then its reserve ratio is: a. 5 percent. b. 10 percent. c. 12.5 percent. *d. 25 percent.
11. Bank reserves are: a. the money in bank vaults only.
b. the amount of cash that a bank must hold to pay FDIC insurance premiums. *c. the currency held at bank vaults plus bank deposits at the Federal Reserve. d. one hundred percent of checkable bank deposits.
12. A reserve ratio is the: a. proportion of cash and security reserves the bank holds. *b. fraction of deposits that the bank is required to hold. c. loan-to-deposit ratio in the bank's balance sheet. d. money belonging to the bank's largest depositors.
13. Reserve requirements: a. set the maximum amount of reserves a bank must hold. *b. set the minimum amount of reserves a bank must hold. c. are established by Congress. d. are set by the American Bankers Association.
14. The reserve ratio is defined as the ratio of: a. bank assets to bank liabilities. b. bank assets to bank reserves. c. customers' bank deposits to bank assets. *d. bank reserves to customers' bank deposits.
15. Which statement is TRUE? a. A bank's assets include its loans and its deposits. b. A bank's liabilities include its loans and its deposits. *c. Deposits are liabilities for a bank; loans are assets. d. Deposits are assets for a bank; loans are liabilities.
16. The fraction of customer deposits that a bank holds as reserves is known as
the: a. the liquidity ratio. b. the safety factor. *c. the reserve ratio. d. the deposit back-up.
17. Banks are illiquid because their: a. deposits are less liquid than their loans. *b. loans are less liquid than their deposits.
c. assets are greater than their liabilities. d. liabilities are greater than their assets.
18. Which is NOT true about bank runs? a. They may start as a result of a rumor that a bank is in financial trouble. b. Many banks' depositors try to withdraw their funds due to fears of a bank failure. *c. Bank runs typically only happen to small banks with few financial assets. d. Bank runs often lead to a loss of faith in other banks, causing additional bank runs.
19. A bank run can break a bank because: a. borrowers default on their loans, and the bank's assets become worthless. *b. banks cannot quickly convert illiquid loans into liquid assets without facing a large financial loss. c. depositors' panic spreads to borrowers, who want to take additional loans from the bank. d. the bank's reserves kept with the Federal Reserve are in the form of illiquid U.S. Treasury bonds.
20. Bank runs in the United States during the 1930s had a large negative impact on
the economy because: a. capital requirements prevented bank managers from taking additional lending risks. b. the reserve ratio was set too high. c. the Federal Reserve system did not exist at the time. *d. the loss of confidence at one bank quickly extended to other banks.
21. A bank run occurs when: a. too many people are trying to borrow more at one time. *b. many bank depositors are trying to withdraw their funds from the bank. c. interest rates start to increase. d. interest rates are higher than inflation rates.
22. A major problem with bank runs is that they: *a. spread to other banks. b. cause inflation, because the money moves so fast in the economy.
c. cause interest rates to fall. d. cause both inflation and interest rates to fall.
23. What name is given to the situation in which many of a bank's depositors try to
withdraw their funds due to fears of a bank failure? a. market failure b. foreclosure c. deposit flight *d. bank run
24. The government has almost eliminated the possibility of bank runs by instituting
protective measures. All are such measures EXCEPT the: a. capital requirements. b. reserve requirements. *c. loan guarantee. d. deposit insurance.
25. The guarantee by the FDIC to reimburse bank customers up to $250,000 per
deposit in the event of bank problems is called: a. fractional reserve banking. b. reserve requirements. c. discount rate. *d. deposit insurance.
26. Probably the most important feature of deposit insurance is that it: a. is paid for by the federal government. b. costs so little to buy the policies to keep your money safe. *c. protects the economy against bank runs. d. ensures that banks will always make a profit.
27. Which is NOT one of the main features designed to protect depositors and the
economy against bank runs? a. deposit insurance b. capital requirements c. reserve requirements *d. interest rate ceilings
28. All are examples of bank regulations designed to prevent bank runs EXCEPT: a. reserve requirements. b. deposit insurance.
*c. the federal funds rate. d. capital requirements.
29. Capital requirements for banks include all EXCEPT: a. an attempt to reduce a bank owner's incentive for excessive risk taking. b. an attempt to offset the change in incentives caused by deposit insurance. c. the excess of a bank's assets over its deposits and other liabilities. *d. an attempt to reduce deposits.
30. If a bank has assets equal to $100 million dollars, according to practice with a 7
percent reserve requirement, its liabilities should NOT exceed: a. $7 million. b. $70 million. *c. $93 million. d. $107 million.
31. Which acts to protect depositors from a bank run by insuring all deposits up to
$250,000? *a. FDIC b. capital requirements c. reserve requirements d. the discount window
32. In the United States, what is the approximate minimum reserve ratio for
checkable bank deposits? a. 5 percent *b. 10 percent c. 20 percent d. 33 percent
33. The arrangement in which the Federal Reserve stands ready to lend money to
banks in trouble is known as: a. the reserve requirement. b. deposit insurance. *c. the discount window. d. the reserve window.
34. The existence of banks:
*a. results in the money supply being larger than the amount of currency in circulation. b. inhibits the creation of money. c. makes the money supply equal to the amount of currency in circulation. d. results in the money supply being less than the amount of currency in circulation.
35. Banks create money when they: *a. make loans. b. take deposits. c. hold excess reserves. d. pay withdrawals to depositors.
36. Scenario: Money Creation
The reserve requirement is 20 percent, and Leroy deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. Reference: Ref 34-2
(Scenario: Money Creation) According to the Scenario: Money Creation, which is an accurate description of the bank's balance sheet immediately after the deposit? *a. Reserves increase by $1000, and demand deposits increase by $1000. b. Reserves increase by $1000, and demand deposits decrease by $1000. c. Reserves decrease by $1000, and demand deposits decrease by $1000. d. Reserves decrease by $200, and demand deposits increase by $1000.
37. Scenario: Money Creation
The reserve requirement is 20 percent, and Leroy deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. Reference: Ref 34-2
(Scenario: Money Creation) According to the Scenario: Money Creation, how much of the $1000 deposit is the bank required to keep in reserves? a. $1000 b. $100 *c. $200 d. $800
38. Scenario: Money Creation
The reserve requirement is 20 percent, and Leroy deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. Reference: Ref 34-2
(Scenario: Money Creation) According to the Scenario: Money Creation, how much money can the bank lend based on the $1000 deposit? a. $1000 b. $200 *c. $800 d. $0
39. Scenario: Money Creation
The reserve requirement is 20 percent, and Leroy deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. Reference: Ref 34-2
(Scenario: Money Creation) According to the Scenario: Money Creation, what is the maximum expansion in the money supply possible? a. $1000 b. $1800 *c. $4000 d. $5000
40. Scenario: Money Creation
The reserve requirement is 20 percent, and Leroy deposits the $1000 check he received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves and the public does NOT want to hold any currency. Reference: Ref 34-2
(Scenario: Money Creation) According to the Scenario: Money Creation, by how much did the monetary base change? *a. $0 b. $800 c. $1000 d. $4000
41. Scenario: Money Supply Changes
The reserve requirement is 10% and Jack withdraws $5,000 from his checkable bank deposit to pay for a trip to New York City. Assume that banks do not hold any
excess reserves and that the public holds no currency, only checkable bank deposits. Reference: Ref 34-3
(Scenario: Money Supply Changes) According to the Scenario: Money Supply Changes, which is an accurate description of the bank's balance sheet after the withdrawal? *a. Reserves decrease by $5000, and checkable deposits decrease by $5000. b. Reserves decrease by $5000, and checkable deposits increase by $5000. c. Reserves increase by $5000, and checkable deposits decrease by $5000. d. Reserves increase by $500, and checkable deposits increase by $5000.
42. Scenario: Money Supply Changes
The reserve requirement is 10% and Jack withdraws $5,000 from his checkable bank deposit to pay for a trip to New York City. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. Reference: Ref 34-3
(Scenario: Money Supply Changes) According to the Scenario: Money Supply Changes, as a result of the withdrawal, required reserves _______ by ________. a. increase; $5000 b. increase; $500 c. decrease; $5000 *d. decrease; $500
43. Scenario: Money Supply Changes
The reserve requirement is 10% and Jack withdraws $5,000 from his checkable bank deposit to pay for a trip to New York City. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. Reference: Ref 34-3
(Scenario: Money Supply Changes) According to the Scenario: Money Supply Changes, as a result of the withdrawal, excess reserves _______ by ________. a. increase; $5000 b. increase; $500 *c. decrease; $4500 d. decrease; $500
44. Scenario: Money Supply Changes
The reserve requirement is 10% and Jack withdraws $5,000 from his checkable
bank deposit to pay for a trip to New York City. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. Reference: Ref 34-3
(Scenario: Money Supply Changes) According to the Scenario: Money Supply Changes, by how much would the bank's loans decrease as a result of the withdrawal? a. $5000 *b. $4500 c. $500 d. $0
45. Scenario: Money Supply Changes
The reserve requirement is 10% and Jack withdraws $5,000 from his checkable bank deposit to pay for a trip to New York City. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits. Reference: Ref 34-3
(Scenario: Money Supply Changes) According to the Scenario: Money Supply Changes, by how much will the money supply contract as a result of the withdrawal? a. $0 b. $5000 *c. $45,000 d. $50,000
46. Scenario: Money Supply Changes II
Charlotte withdraws $8000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20 percent and that banks do not hold excess reserves. Reference: Ref 34-4
(Scenario: Money Supply Changes II) According to the Scenario: Money Supply Changes II, how will the bank's balance sheet be affected by the withdrawal? a. Reserves increase by $8000, and checkable deposits increase by $8000. b. Reserves increase by $1600, and checkable deposits decrease by $1600. *c. Reserves decrease by $8000, and checkable deposits decrease by $8000. d. Reserves decrease by $1600, and checkable deposits decrease by $1600.
47. Scenario: Money Supply Changes II
Charlotte withdraws $8000 from her checkable bank deposit to pay tuition this
semester. Assume that the reserve requirement is 20 percent and that banks do not hold excess reserves. Reference: Ref 34-4
(Scenario: Money Supply Changes II) According to the Scenario: Money Supply Changes II, as a result of the withdrawal, required reserves: *a. decrease by $1600. b. decrease by $6400. c. decrease by $8000. d. don't change.
48. Scenario: Money Supply Changes II
Charlotte withdraws $8000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20 percent and that banks do not hold excess reserves. Reference: Ref 34-4
(Scenario: Money Supply Changes II) According to the Scenario: Money Supply Changes II, as a result of the withdrawal, excess reserves ______ by ________. a. increase; $8000 b. decrease; $8000 *c. decrease; $6400 d. decrease; $1600
49. Scenario: Money Supply Changes II
Charlotte withdraws $8000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20 percent and that banks do not hold excess reserves. Reference: Ref 34-4
(Scenario: Money Supply Changes II) According to the Scenario: Money Supply Changes II, as a result of the withdrawal, loans ______ by ________. a. increase; $8000 b. decrease; $8000 *c. decrease; $6400 d. decrease; $1600
50. Scenario: Money Supply Changes II
Charlotte withdraws $8000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20 percent and that banks do not hold excess reserves. Reference: Ref 34-4
(Scenario: Money Supply Changes II) According to the Scenario: Money Supply Changes II, by how much will the money supply contract as a result of the withdrawal?
a. $40,000 b. $0 c. $8000 *d. $32,000
51. Scenario: Holding Cash
Suppose that the public holds 50 percent of the money supply in currency and the reserve requirement is 20 percent. Banks hold no excess reserves. A customer deposits $6000 in her checkable deposit. Reference: Ref 34-5
(Scenario: Holding Cash) According to the Scenario: Holding Cash, as a result of the deposit, required reserves can increase by a maximum of: a. $0 *b. $1200 c. $3000 d. $6000
52. Scenario: Holding Cash
Suppose that the public holds 50 percent of the money supply in currency and the reserve requirement is 20 percent. Banks hold no excess reserves. A customer deposits $6000 in her checkable deposit. Reference: Ref 34-5
(Scenario: Holding Cash) According to the Scenario: Holding Cash, as a result of the deposit, the bank's loans will increase by: a. $6000 b. $1200 c. $3000 *d. $4800
53. Scenario: Holding Cash
Suppose that the public holds 50 percent of the money supply in currency and the reserve requirement is 20 percent. Banks hold no excess reserves. A customer deposits $6000 in her checkable deposit. Reference: Ref 34-5
(Scenario: Holding Cash) According to the Scenario: Holding Cash, assume that after receiving the deposit, the bank lends out its excess reserves. When the loan is spent, ________ of the loan will be deposited in a checkable deposit, and _____ will be held by the public as cash. a. $6000; $0 b. $4800; $1200 *c. $2400; $2400 d. $3000; $3000
54. Scenario: Holding Cash
Suppose that the public holds 50 percent of the money supply in currency and the reserve requirement is 20 percent. Banks hold no excess reserves. A customer deposits $6000 in her checkable deposit. Reference: Ref 34-5
(Scenario: Holding Cash) According to the Scenario: Holding Cash, the money multiplier is: a. equal to 2. b. greater than 5. c. equal to 5. *d. less than 5.
55.
Reference:
Ref 34-6
(Scenario: Monetary Base and Money Supply) According to the Scenario: Monetary Base and Money Supply, how much is M1? a. $325 billion *b. $330 billion c. $380 billion d. $480 billion
56.
Reference: Ref 34-6
(Scenario: Monetary Base and Money Supply) According to the Scenario: Monetary Base and Money Supply, how much is the monetary base? a. $325 billion b. $330 billion *c. $225 billion d. $175 billion
57.
Reference: Ref 34-6
(Scenario: Monetary Base and Money Supply) According to the Scenario: Monetary Base and Money Supply, how much are required reserves? *a. $50 billion b. $100 billion c. $150 billion
d. $250 billion
58.
Reference: Ref 34-6
(Scenario: Monetary Base and Money Supply) According to the Scenario: Monetary Base and Money Supply, how much are excess reserves? a. $50 billion *b. $100 billion c. $150 billion d. $250 billion
59.
Reference: Ref 34-6
(Scenario: Monetary Base and Money Supply) According to the Scenario: Monetary Base and Money Supply, by how much can checkable bank deposits increase? a. $100 billion b. $250 billion *c. $500 billion d. $1650 billion
60.
Reference:
Ref 34-7
(Table: ABC Bank's Balance Sheet) Refer to the Table: ABC Bank's Balance Sheet. If the minimum reserve ratio for ABC Bank is 10 percent, then the bank is required to maintain minimum reserves of: *a. $10 million. b. $15 million. c. $9.5 million. d. $7.5 million.
61.
Reference: Ref 34-7
(Table: ABC Bank's Balance Sheet) According to the information in the Table: ABC Bank's Balance Sheet, the bank is holding excess reserves of: a. $17 million. b. $15 million. *c. $5 million. d. $25 million.
62. Which would be the initial effect if an individual made a $10,000 cash deposit in
a bank? a. The money supply would rise by $10,000. b. The money supply would fall by $10,000. *c. The money supply would not be affected by the deposit. d. The money supply would fall but by less than the $10,000 deposit.
63. Suppose the reserve ratio is 20 percent and Sam's bank is exactly meeting its
reserve requirement and wishes to hold no excess reserves. If Sam deposits $500 into his checking account, his bank can increase loans by: a. $500. b. $2500. c. $100. *d. $400.
64. Suppose the reserve ratio is 20 percent. If Holly deposits $1000 of cash into her
checking account and her bank lends $600 to Freda, the money supply: a. remains the same. b. decreases by $1000. c. decreases by $600. *d. increases by $600.
65. Suppose a bank does NOT hold excess reserves and the reserve ratio is 20
percent. If Molly deposits $1000 of cash into her checking account and the bank lends $600 to Freda, from Molly's deposit, the bank can lend an additional: a. $400. *b. $200. c. $1000. d. $5000.
66. Suppose that initially a bank has excess reserves of $800 and the reserve ratio
is 20 percent. Then Andy deposits $1000 of cash into his checking account and the bank lends $600 to Molly. As a result of Andy's deposit, that bank can lend an additional: a. $200. *b. $1000. c. $800. d. $2400.
67. Suppose that initially a bank has excess reserves of $800 and the reserve ratio
is 30 percent. Then Andy deposits $1000 of cash into his checking account and the bank lends $600 to Molly. As a result of Andy's deposit, that bank can lend an additional: a. $100. b. $800. *c. $900. d. $300.
68. Suppose a bank has excess reserves of $50 and the reserve ratio is 20 percent.
If Andy deposits $5000 of cash into his checking account and the bank lends $2500 to Molly, the money supply: a. is increased by $7500. *b. is increased by $2500. c. remains unchanged. d. is decreased by $5000.
69. Suppose your grandma sends you $100 for your birthday and you deposit that
$100 into your checking account at the local bank. The reserve ratio is 10 percent. Based upon this deposit, the bank's reserves have increased by _____ and the bank's checkable deposits have increased by _____. *a. $100; $100 b. $100; $90 c. $90; $100 d. $10; $100
70. If banks were required to keep 100 percent of deposits in reserves, they could: a. make more loans. *b. make no loans. c. create more deposits. d. use excess reserves for loans.
71. If a bank has deposits of $100,000, cash on hand of $10,000 and $15,000 on
deposit at the Federal Reserve, and the required reserve ratio is 0.2, then the bank has: a. no excess reserves. *b. excess reserves of $5,000. c. insufficient reserves to meet requirements. d. an insufficient deposit to loan ratio.
72. Suppose a bank receives a $5000 deposit and the reserve ratio is 25 percent.
Based on this deposit alone and assuming that the bank was previously meeting its reserve requirement, the bank can lend out: a. $4500. b. $4000. *c. $3750. d. $3500.
73. Suppose a bank receives a $5000 deposit and the reserve ratio is 25 percent.
For this deposit, the bank is required to keep in reserve: *a. $1250. b. $1000. c. $200. d. $500.
74. Suppose the required reserve ratio is 10 percent and a depositor withdraws
$500 from her checkable deposit. The money supply will ______ if the banking system does NOT hold any excess reserves and the public does NOT want to hold any currency. a. be unchanged b. decrease by $500 *c. decrease by $4500 d. decrease by $5000
75. When a bank customer deposits cash in her checking account: a. M1 falls by the amount of the deposit. b. M1 rises by the amount of the deposit. *c. bank reserves increase by the amount of the deposit. d. bank reserves fall by the amount of the deposit.
76. When a bank issues a loan to a customer: a. bank assets fall by the amount of the loan. b. bank assets rise by the amount of the loan. c. the composition of bank assets changes so that bank reserves increase and the value of bank loans decreases. *d. the composition of bank assets changes so that bank reserves decrease and the value of bank loans increases.
77. Which statement is FALSE? a. In issuing loans to their customers, banks increase the money supply.
*b. A loan issued by a bank creates a new liability for the bank. c. A loan issued by a bank reduces bank reserves and increases the value of its loans. d. When a bank issues a loan, the composition of its assets changes.
78. Suppose your grandma sends you $100 for your birthday and you deposit that
$100 in your checking account at the local bank. The reserve ratio is 10 percent. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as _____. a. $90; $1000 b. $100; $900 *c. $90; $900 d. $100; $1000
79. In a deposits-only monetary system with a 5 percent required reserve ratio, a
bank deposit of $1000 could increase the total amount of bank deposits by a maximum of: a. $5000. b. $10,000. *c. $20,000. d. $50,000.
80. The money multiplier and the required reserve ratio are: a. independent of one another. b. directly related to one another. *c. inversely related. d. both greater than 1.
81. Suppose that there are no excess reserves in the banking system and the
current amount of demand deposits is equal to $100,000. If the monetary authorities lower the required reserve ratio from 10 percent to 5 percent, which will likely follow? a. The amount of excess reserves in the banking system will fall. b. The amount of excess reserves in the banking system will remain the same. c. The money-creating potential of the banking system will decline. *d. The money-creating potential of the banking system will rise.
82. Suppose an economy has $200,000 of demand deposits and $40,000 of excess
reserves, with a 10 percent required reserve ratio. If the monetary authorities raise the required reserve ratio to 20 percent, then which will likely follow?
a. The excess reserves will rise by 10 percent. b. The excess reserves will fall by 10 percent. c. There will be no more excess reserves in the system. *d. Excess reserves will decrease by $20,000.
83. Assuming that the public holds no currency and banks hold no excess reserves,
the _______ multiplier is equal to _______. a. reserve; the required reserve ratio b. bank loan; the required reserve ratio divided by 1 *c. money; 1 divided by the required reserve ratio d. excess reserve; change in reserves divided by the change in deposits
84. Suppose a bank gets a new deposit of $100 cash and it has a 20 percent
required reserve ratio and is just meeting its reserve requirement. If the bank lends the maximum amount of money allowed as a result of this deposit, then the checkable deposits increase by: a. $20. b. $100. *c. $500. d. $1000.
85. Suppose the banking system does NOT hold excess reserves and the reserve
ratio is 20 percent. Assume that the banking system is exactly meeting its reserve requirement, and the public wishes to hold no currency. If Sam deposits $500 cash into his checking account, the banking system can increase the money supply by: a. $5000. *b. $2000. c. $2500. d. $400.
86. Suppose the banking system does NOT hold excess reserves and the reserve
ratio is 25 percent. Assume that the banking system is exactly meeting its reserve requirement, and the public wishes to hold no currency. If Molly deposits $1000 cash into her checking account, the banking system can increase the money supply by: a. $5000. b. $1000. *c. $3000. d. $4000.
87.
Reference: Ref 34-8
(Scenario: Assets and Liabilities of the Banking System) According to the Scenario: Assets and Liabilities of the Banking System, if the reserve ratio is 5 percent and the banking system does NOT want to hold excess reserves, and the public does NOT want to hold any currency, how much more can be added to the money supply? a. $666,667 b. $111,111 c. $250,000 *d. $1 million
88.
Reference: Ref 34-8
(Scenario: Assets and Liabilities of the Banking System) ) According to the Scenario: Assets and Liabilities of the Banking System, if the reserve ratio is 9 percent and the banking system does NOT want to hold excess reserves, and the public does NOT want to hold any currency, how much more can be added to the money supply? a. $666,667 *b. $111,111 c. $250,000 d. $1 million
89.
Reference: Ref 34-8
(Scenario: Assets and Liabilities of the Banking System) ) According to the Scenario: Assets and Liabilities of the Banking System, if the reserve ratio is 8 percent and the banking system does NOT want to hold excess reserves, and the public does NOT want to hold any currency, how much more can be added to the money supply? a. $666,667 b. $111,111 *c. $250,000 d. $1 million
90.
Reference: Ref 34-8
(Scenario: Assets and Liabilities of the Banking System) ) According to the Scenario: Assets and Liabilities of the Banking System, if the reserve ratio is 6 percent and the banking system does NOT want to hold excess reserves, and the public does NOT want to hold any currency, how much more can be added to the money supply?
*a. $666,667 b. $111,111 c. $250,000 d. $1 million
91. Assume that the banks do not hold any excess reserves and the reserve ratio is
20 percent. Assume that the banking system is exactly meeting its reserve requirement, and the public wishes to hold no currency. If Sarah deposits $5000 in cash in her checking account, the money supply can potentially increase by: *a. $20,000. b. $25,000. c. $5000. d. $1000.
92. Assume that banks do not hold excess reserves, and the public does not hold
currency. Suppose the reserve ratio is 25 percent; the money multiplier is: a. 5. b. 0.25. *c. 4. d. 0.04.
93. Assume that banks do not hold excess reserves, and the public does not hold
currency. The money multiplier is equal to: *a. 1 divided by the reserve ratio. b. 1 divided by excess reserves. c. 1 minus the reserve ratio. d. the reserve ratio plus excess reserves divided by the reserve ratio.
94. Suppose the required reserve ratio is 25 percent and a customer deposits $300
into her checkable deposit. The money supply will ______ if the banking system does NOT hold any excess reserves and the public does NOT want to hold any currency. a. increase by $1200 *b. increase by $900 c. increase by $300 d. be unchanged
95. Which is a component of BOTH the monetary base and the money supply? a. bank reserves at the Fed b. currency in bank vaults c. demand deposits
*d. currency in circulation
96. A decrease in bank deposits that is matched by an increase in currency in
circulation: a. decreases the monetary base. b. does not affect the monetary base. *c. increases the monetary base. d. increases the money supply.
97. When a bank deposit is withdrawn and kept as currency, bank reserves
decrease and the: a. monetary base decreases. *b. monetary base does not change. c. monetary base increases. d. money supply decreases.
98. The money multiplier is equal to: *a. the ratio of the money supply to the monetary base. b. the ratio of the monetary base to the money supply. c. the money supply divided by the reserve ratio. d. about 3.9 in the United States.
99. The monetary base is the sum of: *a. reserves held by the banks and currency in circulation. b. checkable bank deposits and bank reserves. c. savings deposits and currency in circulation. d. checkable bank deposits and currency in circulation.
100. Which is TRUE concerning the monetary base in the United States? a. Currency in circulation is not part of the monetary base. *b. Bank reserves are part of the monetary base. c. Most of the monetary base consists of checkable deposits. d. The money multiplier is the ratio of the monetary base to the money multiplier.
101. The monetary base is the sum of: a. bank assets and bank liabilities. b. M1 and M2. c. currency in circulation and checkable bank deposits. *d. currency in circulation and reserves held by banks.
102. Which statement is TRUE?
*a. Currency in circulation is counted as both part of the money supply and part of the monetary base. b. Bank reserves are counted as both part of the money supply and part of the monetary base. c. Checkable bank deposits are counted as both part of the money supply and part of the monetary base. d. The money supply is the same thing as the monetary base.
103. In normal times the money multiplier in the United States has fluctuated
between: a. 5.0 and 10.0. b. 4.0 and 6.0. *c. 1.5 and 3.0. d. 0.5 and 1.0.
104. In the United States, only the U.S. Treasury can create money. a. True *b. False
105. Bank reserves are the currency banks hold in their vaults minus the deposits at the Federal Reserve. a. True *b. False
106. Bank assets tend to be less liquid than their liabilities. *a. True b. False
107. Banks are financial intermediaries that use the bank deposits of its customers, which are liquid assets, to finance the illiquid investments of borrowers. *a. True b. False
108. Bank reserves are the sum of M1 and M2. a. True
*b. False
109. A bank run occurs when shares of bank stocks become irrationally popular and their price is bid up too high. a. True *b. False
110. Bank runs today are not as frequent or as harmful to the economy as they were in the 1930s because today depositors are protected with FDIC deposit insurance. *a. True b. False
111. A bank's capital is the sum of a bank's assets, deposits, and other liabilities. a. True *b. False
112. In the UnitedStates banks are required to keep capital equal to at least 7 percent of the value of their assets. *a. True b. False
113. The discount window is the branch of the Federal Reserve that monitors banks to be sure that they are meeting reserve and capital requirements. a. True *b. False
114. If banks temporarily don't have sufficient funds to pay their depositors they can borrow the needed funds at the Federal Reserve discount window. *a. True b. False
115. If a bank has excess reserves of $3000 and the reserve requirement is 20 percent, the maximum potential increase in the money supply is $600. a. True *b. False
116. If a bank has deposits of $10,000, reserves of $5000, and the reserve requirement is 20 percent, its excess reserves are $3000. *a. True b. False
117. If a bank has deposits of $10,000, reserves of $5000, and the reserve requirement is 20 percent, it can make loans of $5000. *a. True b. False
118. If a bank has $2000 in excess reserves and a 10 percent reserve requirement, the maximum potential increase in the money supply is $20,000. *a. True b. False
119. The monetary base is currency in circulation plus bank reserves. *a. True b. False
120. Suppose you take $100 to the bank and make a deposit in your checking account. Making small talk, you ask the teller, “Do you make money here?” A little surprised, the teller responds, “Of course not, only the U.S. Treasury makes money.” Is the teller correct or incorrect? Explain. Correct Answer:
In the literal sense, the U.S. Treasury is the only agency that actually prints the new paper money, but all banks create money. When you deposit your $100, the bank is required to put a small fraction in reserve but can lend the remainder to other customers. This creates money because those borrowers can use their loan to buy goods and the sellers of those goods make deposits into other banks and the process repeats. 121. What is a bank run, how can it begin, and why is it dangerous for the greater economy? Correct Answer:
A bank run occurs when many depositors of a bank decide to withdraw their money. If depositors were worried that a particular bank was having financial difficulties, many people might decide to withdraw their funds “just in case.” A bank does not keep all of the deposits in reserve (the vault), because some of those deposits have
been invested in other assets or lent to borrowers in the community. So if too many people rush to withdraw their funds, the bank can literally run out of money. This is damaging to the economy because if one bank fails, news of this failure can spread to depositors of other banks, thus leading to another bank failure, and another, and another. 122. Eli receives $200 in cash for his birthday and deposits the money in his checking account at River Town Bank. a. How does this deposit initially change the T-account of River Town Bank? How does it affect the money supply? b. If the bank maintains a reserve ratio of 15 percent, how will River Town respond to the new deposit? c. If every time River Town makes a loan, the loan results in a new checkable deposit in a different bank equal to the amount of the loan, by how much could the money supply in the economy expand in total? Correct Answer:
a. On the asset side of the T-account, reserves rise by $200. On the liability side of the T-account, checkable deposits rise by $200. There has been no change in the money supply as currency in circulation is now a checkable deposit and both fall into the definition of M1. b. The bank will hold $30 as reserves (15 percent of $200) and lend the remaining $170 to borrowers. c. The money supply could expand by $200 / 0.15 – $200 = $1133.33. Note: We subtract the initial cash deposit of $200 because that was money already in the money supply. 123. What will happen to the money supply if Jamie withdraws $400 from her checking account and the required reserve ratio is 5 percent? Correct Answer: The money supply will contract by $400 / 0.05 - $400 = $7600.
124. When a person deposits money in a bank, this: a. creates only an asset for the bank. b. creates only a liability for the bank. *c. creates a liability and an asset for the bank. d. is most likely to result in a decrease in the money supply.
125. Suppose a bank faces a 10 percent required reserve ratio and it has $100 in
required reserves. If it is fully loaned out, what is the amount of deposits into this bank? a. $900 b. $10 *c. $1000 d. $10,000
126. A bank's capital is the: a. sum of its total assets and total liabilities. *b. difference between its total assets and its total liabilities. c. difference between its total assets and its total required reserves. d. sum of its liabilities.
127. The existence of deposit insurance: a. can increase the possibility of bank runs. b. often makes banks more accountable for their actions and less likely to engage in risky behavior. c. essentially serves the same function as a fractional reserve system. *d. leads depositors to be less inclined to monitor bank operations.
128. Deposit insurance: a. is essentially the same as a bank's required reserves. *b. provides depositors with assurances that they will receive their deposits even if there are questions about a bank's soundness. c. can be used only if depositors lose deposits in excess of $250,000. d. creates more incentive for banks to carefully consider to whom they lend funds.
129. When a bank lends excess reserves to a customer: a. this does not affect the money supply. *b. the money supply is increased. c. the money supply is decreased. d. it has the same effect as when one customer writes a check to another customer at a different bank.
130. When banks extend loans: a. the money supply decreases. *b. the money supply increases. c. the money supply is unaffected, since no new money was printed. d. they do so with their required reserves.
131. If the required reserve ratio rises: a. the money multiplier will also rise. *b. the banking system must keep more of a deposit in its reserves. c. the amount of reserves in the banking system will decrease. d. excess reserves will also rise.
132. Currency in circulation plus bank reserves: *a. form the monetary base. b. are equal to M1 plus M2. c. equals the required reserves for a bank. d. equals the excess reserves for a bank.
133. If banks decide to hold some of their excess reserves instead of lending them
all out, then: *a. the money multiplier will be less than 1 divided by the required reserve ratio. b. a loan of $1 will lead to a change in the money supply by a multiple amount equal to 1 divided by the required reserve ratio. c. the money multiplier becomes 1 divided by the excess reserves. d. depositors will have to borrow more in order to increase the money supply.
1. Decisions about monetary policy are made by: a. the president and Congress. b. the President's Council of Economic Advisors. *c. the Federal Open Market Committee. d. representatives of banks that are members of the Federal Reserve System.
2. In the United States, the institution that is charged with determining the size of
the monetary base and with regulating the banking system is the: a. Treasury Department. b. Commerce Department. c. U.S. Senate Banking Committee. *d. Federal Reserve.
3. The Federal Reserve System is the _______ for the United States. *a. central bank b. government-owned bank c. U.S. Treasury bank d. social insurance system
4. The Federal Reserve Bank of the United States is: a. a purely private central bank. b. a purely public central bank. c. part of the U.S. government. *d. not exactly part of the U.S. government but not really a private institution either.
5. The Federal Reserve System was created in: *a. 1913. b. 1971. c. 1857. d. 1873.
6. The seven members of the Federal Reserve Board of Governors are:
a. elected by governors of the individual states of the United States. b. elected by stockholders of banks. *c. appointed by the U.S. president and must be approved by Congress. d. appointed by the U.S. Secretary of the Treasury.
7. The seven members of the Federal Reserve Board of Governors serve terms of
_____ years. a. 4 b. 8 c. 10 *d. 14
8. How many regional Federal Reserve banks are there? a. 8 *b. 12 c. 16 d. 25
9. Decisions about monetary policy are made by: a. presidents of all the regional Federal Reserve Banks. b. the U.S. president and the chairman of the Federal Reserve. *c. the Federal Open Market Committee. d. members of the Senate Banking Committee.
10. The U.S. Federal Reserve, the Bank of England, the Bank of Japan, and the
ECB are all: *a. central banks. b. large commercial banks. c. investment banks. d. a combination of savings and loans and credit unions.
11. How many members are on the Board of Governors? a. 3 *b. 7 c. 100 d. 435
12. William McChesney Martin, Alan Greenspan, and Ben Bernanke were all: a. speakers of the U.S. House of Representatives. b. candidates for vice president of the United States *c. chairs of the Federal Reserve. d. U.S. senators during the Great Depression.
13. Open market operations are carried out by the Federal Reserve Bank of: a. San Francisco. b. Kansas City. c. Philadelphia. *d. New York.
14. In the United States, financial crises have often resulted in: *a. increased calls for legislation for greater financial regulation. b. more competition in the financial industry. c. no changes in the financial industry, since such crises are rare. d. less financial regulation.
15. The banking crisis of 1907 that preceded the Great Depression and the recent
one in 2008 were both caused by: a. short-run business cycle fluctuations. b. lack of investment spending and high unemployment. *c. risky speculation in real estate and in the stock market. d. low labor productivity in the United States combined with a huge trade deficit.
16. The Panic of 1907 was caused by: a. national banks issuing too much currency. b. trusts' memberships in the New York Clearinghouse. *c. trusts' losses due to their unsuccessful stock market speculation. d. excessive investment in collateralized debt obligations.
17. The Panic of 1907 came to an end when: *a. J. P. Morgan, John D. Rockefeller, and the Secretary of the Treasury increased bank reserves. b. the Social Security Act was passed. c. the Federal Reserve was established. d. Franklin Delano Roosevelt declared a bank holiday.
18. The main problem with the banking system from 1864 to 1913 was that: a. the Federal Reserve's monetary policy was too restrictive. b. government budget deficits destabilized the system. *c. the money supply was not sufficiently responsive to local economic changes.
d. the currency was not uniform because each bank issued its own notes.
19. Trusts differed from national banks because trusts: a. were more closely regulated than national banks. *b. had lower reserve requirements than national banks. c. had higher reserve requirements than national banks. d. kept more reserves than national banks.
20. The Panic of 1907 began when: *a. the Knickerbocker Trust failed. b. Teddy Roosevelt signed the Sherman Antitrust Act. c. the Federal Reserve was created. d. national banks were allowed to issue their own bank notes.
21. Which statement is FALSE? a. The Panic of 1907 began with the failure of the Knickerbocker Trust, a large New York City trust. b. The banker J.P. Morgan intervened to stop the spreading financial panic in 1907. c. The aftermath of the Panic of 1907 was a four-year recession and an increase in unemployment. *d. The Panic of 1907 began on the west coast of the United States in response to speculation about gold.
22. Between 1864 and 1913, American banking was dominated by: *a. a federally regulated system of national banks. b. an unregulated system of state banks, each issuing its own currency. c. the Federal Reserve System in Washington D.C. d. European banks that supplied coins and paper money for the U.S. economy.
23. Before 1864 American banking was dominated by: a. a federally regulated system of national banks. *b. an unregulated system of state banks, each issuing its own currency, with little regulation. c. the Federal Reserve System in Washington D.C. d. European banks that supplied coins and paper money for the U.S. economy.
24. The purpose of the local clearinghouses created by banks in the early 1900s
was to: a. merge failing banks with healthy ones. b. facilitate the transfer of electronic funds between member banks. *c. pool the resources of several local banks so that the clearinghouse could guarantee the repayment of a member's deposits in case of a bank run. d. help people who were unemployed find jobs.
25. Before the Panic of 1907, trusts: a. issued their own currency. b. formed the New York Clearinghouse. c. had become very unprofitable. *d. refused to join the New York Clearinghouse because it would have required the trusts to hold higher cash reserves, which would have decreased their profits.
26. The Federal Reserve: a. was created by Franklin Delano Roosevelt to disburse funds for the Works Progress Administration. *b. was created in 1913 in response to the Panic of 1907. c. conducts fiscal policy for state governments. d. was established by Ronald Reagan during the recession of 1982.
27. Which was not one of the powers granted to the Federal Reserve when it was
created in 1913? a. power to require banks to hold reserves b. power to inspect banks *c. power to prepare the federal budget d. power to issue currency
28. The Reconstruction Finance Corporation: a. was created to extract war reparations from the South after the Civil War. b. supervised the government assistance to AIG and Lehman Brothers. *c. was established in the 1930s to make loans to banks and to buy their preferred stock. d. supervised the rebuilding of Iraq.
29. The purpose of the bank holiday declared by Franklin Roosevelt in 1933 was to:
*a. close all banks until regulators could determine how to solve the banking crisis. b. give overworked bank employees a rest. c. exempt banks from taxes until the Depression was over. d. encourage people to use cash instead of checks.
30. The Glass-Steagall Act of 1933: a. created the Reconstruction Finance Corporation. b. limited interest rates that savings and loans could charge on mortgages. c. created the Federal Reserve. *d. separated banks into two categories, commercial banks and investment banks.
31. According to the Glass-Steagall Act of 1933: a. investment banks could accept deposits, which were covered by deposit insurance. b. commercial banks could create and trade financial assets, such as stocks and bonds. *c. investment banks could create and trade financial assets, such as stocks and bonds, but commercial banks could not trade stocks and bonds. d. there was no difference between commercial banks and investment banks.
32. The purpose of regulation Q was to: a. prevent commercial banks from trading stocks and bonds. b. require investment banks to purchase deposit insurance. c. prevent unhealthy competition between banks by limiting the number of customers each bank could serve. *d. prevent banks from paying interest on checking accounts.
33. Which statement is FALSE? a. Bank runs occurred in the Midwest in the early 1930s as prices fell for agricultural commodities. b. At its creation, the Federal Reserve was given the sole right to issue currency. c. Federal deposit insurance was created by the Glass-Steagall Act of 1933. *d. Economic historians uniformly agree that the banking crises of the early 1930s did not contribute to the severity of the Great Depression.
34. Which statement is FALSE?
a. The Glass-Steagall Act of 1933 created a separation between commercial banks and investment banks. b. Under Regulation Q, commercial banks were prevented from paying interest on checking accounts. *c. The adoption of federal deposit insurance did not lessen the frequency of bank runs. d. Regulation Q was eliminated in 1980.
35. Which power was granted to the Federal Reserve when it was established in
1913? I. authority to require all depository institutions to hold reserves II. power to inspect all deposit-taking institutions III. power to issue currency
a. I only b. II only c. III only *d. I, II, and III
36. The bank runs experienced in the early 1930s were caused primarily by: *a. sharp decreases in farm commodity prices. b. excessive speculation in real estate. c. high energy prices. d. failure of the Knickerbocker Trust
37. By 1933, banks were able to borrow from:
I. the Reconstruction Finance Corporation II. the Federal Reserve System A. I only. B. II only. C. I and II. D. Neither I nor II. a. I only. b. II only. *c. I and II. d. Neither I nor II.
38. The original purpose of savings and loans was to: a. help businesses issue stocks and bonds. b. invest in money market mutual funds. *c. accept deposits from state and local governments and loan them to businesses in need of short-term loans. d. accept savings and loan them to home buyers for long-term mortgages.
39. Savings and loans' difficulties began in the 1970s when inflation _____ and
interest rates _____ . *a. increased; increased b. increased; decreased c. decreased; increased d. decreased; decreased
40. Many S&Ls failed in the 1980s primarily because: a. foreign governments defaulted on their bonds that the thrifts were holding. *b. many of their risky real estate loans went bad. c. Congress gave the home mortgage business to two government agencies, Fannie Mae and Freddie Mac. d. the Glass-Steagall Act was passed.
41. High interest rates in the 1970s: a. helped S&Ls because it increased their return on investment. b. helped S&Ls because higher interest rates on their mortgages increased their profitability. *c. hurt S&Ls because they lost savings deposits to investments that paid higher interest rates. d. hurt S&Ls because paying higher interest rates on their deposits decreased their profits.
42. As a result of the S&L crisis, in 1989 Congress: a. decreased regulation of thrifts. b. merged all remaining S&Ls with financially sound commercial banks. c. passed legislation prohibiting any financial institution other than S&Ls to make mortgages. *d. empowered two government agencies, Fannie Mae and Freddie Mac, to take over much of the mortgage lending previously done by thrifts.
43. When financial institutions assemble pools of loans and sell shares in the
income from these pools, this process is known as: a. loan origination. *b. securitization. c. risk aversion. d. adverse selection.
44. In 2008, when the U.S. financial system collapsed, it led to: a. a very high inflation, and the Federal Reserve followed a strict contractionary monetary policy to bring prices down. b. the Federal Reserve lowering the interest rate, and the economy revived as businesses and individuals secured lowinterest loans. *c. a severe cycle of deleveraging and a credit crunch for the economy as a whole. d. the Federal Reserve increasing the interest rate, which further destabilized the economy.
45. A firm uses financial leverage when it: a. replaces labor with capital. *b. borrows money from a bank to enlarge a factory. c. raises the price of a product when demand is inelastic. d. gets a volume discount from a supplier.
46. The Panic of 1907, the savings and loan crisis, and the financial crisis of 2008
were similar in that they all: a. were caused by restrictive monetary policy. *b. involved financial institutions that were not as strictly regulated as deposit-taking banks. c. were caused by large budget deficits. d. were caused by excessive regulation by the Federal Reserve.
47. The balance sheet effect is the: a. increase in a firm's net worth from increasing asset prices. *b. decrease in a firm's net worth from decreasing asset prices. c. change in financial statements when firms borrow money. d. change in financial statements when firms buy their own stock.
48. A vicious cycle of deleveraging occurs when:
*a. asset sales to cover losses produce negative balance sheet effects and force creditors to call in loans, forcing more sales of assets at decreasing prices. b. bank regulators take over a bank. c. deposit insurance is paid out. d. top executives at failing companies are forced to return bonuses.
49. The financial crisis of 2008 in the United States required: a. the Fed to solve the problem independent of government assistance. *b. greater government involvement and funding for troubled industries. c. greater supervision by the Federal Reserve Bank of New York. d. the Treasury to independently solve the problems, since the Fed was unwilling to help.
50. What name is given to the process of assembling several different loans into a
pool and then selling shares in the pool? a. leverage *b. securitization c. diversification d. centralization
51. A private investment partnership open to only wealthy individuals and
institutions is a(n): *a. hedge fund. b. investment bank. c. savings and loan. d. quasi-government agency.
52. Long-Term Capital Management was a(n): a. investment bank. *b. hedge fund. c. government agency that the Federal Reserve used to hold deposits of its member banks. d. mortgage company.
53. Most of Long-Term Capital Management's funds were: a. savings of middle class families. b. deposits of state and local governments. *c. borrowed. d. subject to reserve requirements.
54. Long-Term Capital Management made rates of return as high as 40 percent by: a. buying oil from Canada and selling it to China. b. managing professional sports teams and being paid with a share of their profit. c. mining diamonds in Africa. *d. using computer models to take advantage of small differences in asset prices in global financial markets.
55. The reduction in a firm's net worth that results from falling asset prices is called: *a. the balance sheet effect. b. the income statement effect. c. leverage. d. securitization.
56. Long-Term Capital Management's collapse in the late 1990s was caused
primarily by: a. too much government regulation. *b. financial crises in Asia and Russia. c. the fraud and corruption of LTCM's management. d. competition from investment banks, which were not regulated as strictly as hedge funds.
57. Interest rates were low in the United States in 2003 because: a. the Federal Reserve had decreased the money supply. b. of capital outflows from the United States. to China. *c. of capital inflows into the United States and monetary policy. d. increases in tax rates.
58. Subprime loans are loans: a. on houses that are below average value. b. with interest rates that are below the prime rate. c. with very short maturities. *d. made to buyers who don't meet the usual criteria for getting a mortgage.
59. Assembling a pool of loans and selling shares of the pool to investors is called: *a. securitization. b. deleveraging.
c. derivation. d. investment banking.
60. The TED rate is the: a. interest rate charged on subprime loans. *b. difference between the interest rate at which banks lend to each other and the interest rate on U.S. government debt. c. rate of return on securitization. d. difference between interest rates in the United States and interest rates in China.
61. In the financial crisis of 2008, which firm failed? a. Bear Stearns, an investment bank b. AIG, an insurance company *c. Lehman Brothers, an investment bank d. Bank of America, a commercial bank
62. In return for “injecting” capital into banks during the financial crisis of 2008, the
U.S. government received: a. deposits at the bank. b. loans at an interest rate below the prime rate. c. bonds issued by the bank. *d. shares of stock in the bank.
63. The law intended to reform the financial system after the crisis of 2008 was
called the: *a. Wall Street Reform and Consumer Protection Act. b. Glass-Steagall Act. c. Camp David Accords. d. Financial Modernization Act.
64. The Wall Street Reform and Consumer Protection Act, also known as
Dodd‒Frank, a. decreased regulation of commercial banks and investment banks. *b. subjected “systemically important” institutions to high capital requirements and limited the risks they can take. c. required all banks to become members of the Federal Reserve. d. made securitization illegal.
65. A central bank is an institution that oversees and regulates the banking system and controls the monetary base.
*a. True b. False
66. The two parts of the U.S. Federal Reserve are the Board of Governors and 50 regional banks. a. True *b. False
67. The members of the Board of Governors of the Fed serve 14 year terms. *a. True b. False
68. The chair of the Fed can serve only one four-year term. a. True *b. False
69. One of the functions of the 12 regional banks is to audit the books of private-sector banks in their region to be sure that they are financially sound. *a. True b. False
70. Changing the reserve requirement is the main monetary policy tool used by the Federal Reserve. a. True *b. False
71. The Federal Open Market Committee, composed of the Board of Governors and five of the regional bank presidents, makes decisions about monetary policy. *a. True b. False
72. Between 1864 and 1913, U.S. banking was dominated by an unregulated system of state banks, each issuing its own currency. a. True *b. False
73. Before 1864, U.S. banking was dominated by an unregulated system of state banks, each issuing its own currency, with little regulatory oversight. *a. True b. False
74. The main problem with the national banking system in the U.S. between 1864 and 1913 was that the money supply was not responsive enough to changes in local economic conditions. *a. True b. False
75. To protect against bank runs, in some areas local banks pooled resources to form clearinghouses that would guarantee the deposits of its members. *a. True b. False
76. Before the Panic of 1907, trusts became unprofitable because they significantly depleted much of their capital to form their own clearinghouses. a. True *b. False
77. Originally trusts were formed to manage inheritances and estates of wealthy clients and were supposed to avoid risky financial practices. *a. True b. False
78. When the Knickerbocker Trust failed, the New York Clearinghouse stepped in and guaranteed its liabilities, avoiding a major financial crisis. a. True *b. False
79. While the Panic of 1907 lasted only a little longer than a week, a four-year recession followed during which output fell and unemployment rose. *a. True b. False
80. The Panic of 1907 came to an end when the Federal Reserve began to regulate trusts. a. True *b. False
81. After the creation of the Federal Reserve in 1913, there were no more bank runs in the United States. a. True *b. False
82. When it was created in 1913, the Federal Reserve was given the authority to require all banks to hold adequate reserves for their deposits and to inspect their accounts. *a. True b. False
83. Upon its creation in 1919, the Federal Reserve has had the power to make loans to commercial banks. a. True *b. False
84. One of the functions of the Reconstruction Finance Corporation, created in 1932, was to make loans to commercial banks. *a. True b. False
85. The Glass-Steagall Act of 1933 gave the Reconstruction Finance Corporation the power to make loans to commercial banks, but prohibited the Federal Reserve from making loans to commercial banks. a. True *b. False
86. The banking crises of the 1930s resulted in a very large increase in the money supply, which increased the severity of the Great Depression. a. True *b. False
87. Under the Glass-Steagall Act, commercial banks, which accept deposits and are covered by deposit insurance, were not allowed to trade in financial assets, such as stocks and bonds. *a. True b. False
88. Under the Glass-Steagall Act, investment banks were allowed to accept deposits which were not covered by deposit insurance, as well as to trade in financial assets, such as stocks and bonds. a. True *b. False
89. The purpose of Regulation Q, which prevented banks from paying interest on checking accounts, was to prevent unhealthy competition between banks. *a. True b. False
90. Although many of the regulations established in the 1930s have disappeared, Regulation Q and the prohibition of commercial banks from trading financial assets, such as stocks and bonds, remain in place today. a. True *b. False
91. Savings and loans are financial institutions that accept savings and use them to fund long-term mortgages for home buyers. *a. True b. False
92. Savings and loans accept long-term savings deposits and use them to fund short-term loans to businesses. a. True *b. False
93. The savings and loan crisis began in the early 1970s when interest rates increased sharply and depositors at S&Ls withdrew their money from their low-interest savings accounts and invested in money market accounts that paid higher interest rates. *a. True b. False
94. Savings and loans were very profitable in the 1970s because investors withdrew their funds from low-interest-paying money market accounts and invested them in high-interest-paying accounts at thrifts. a. True *b. False
95. One reason why high inflation rates in the 1970s were harmful to S&Ls is because they decreased the value of the thrifts' long-term mortgages. *a. True b. False
96. One reason why high inflation rates in the 1970s were helpful to S&Ls is because the price of the fees that S&Ls charged increased faster than their costs, so that the profitability of S&Ls increased. a. True *b. False
97. To make it easier for S&Ls to compete with banks in the late 1970s, Congress allowed the thrifts to undertake riskier investments in addition to home mortgages. *a. True b. False
98. Many S&Ls failed in the late 1970s and early 1980s when they lost most of their depositors to Fannie Mae and Freddie Mac. a. True *b. False
99. In 1989 Congress increased oversight of S&Ls and allowed two government agencies, Fannie Mae and Freddie Mac, to take over much of the home mortgage lending previously done by the thrifts. *a. True b. False
100. Fannie Mae and Freddie Mac are the government agencies that insure deposits at financial institutions. a. True *b. False
101. Fannie Mae and Freddie Mac are quasi-government agencies created during the Great Depression to make home ownership more affordable for low- and moderate-income households. *a. True b. False
102. The losses to S&L depositors were paid entirely from the assets of the failed thrifts and funds of the owners. a. True *b. False
103. A hedge fund is a relatively unregulated private investment partnership open only to wealthy individuals and institutions. *a. True b. False
104. The balance sheet effect is the increase in a firm's net worth caused by falling asset prices. a. True *b. False
105. A vicious cycle of deleveraging occurs when assets sales to cover losses produce negative balance sheet effects on other firms, causing creditors to call in their loans, which forces further sales of assets and further decreases in prices. *a. True b. False
106. The U.S. economy recovered from the 2001 recession primarily because low interest rates caused a boom in the housing market. *a. True b. False
107. Subprime lending is lending at interest rates that are less than the prime rate. a. True *b. False
108. In the process of securitization a pool of loans is assembled and shares of that pool are sold to investors. *a. True b. False
109. Investments in securitized subprime mortgages proved to be very safe investments since large numbers of home owners did not default on their mortgages at the same time. a. True *b. False
110. In the housing book from 2003‒2006, most of the subprime loans were made by “loan originators,” who sold the loans to other investors for securitization. *a. True b. False
111. The TED spread is the interest rate that banks pay when they borrow reserves from the Fed or another bank. a. True *b. False
112. When the government “injected” capital into banks during the 2008 financial crisis, they were buying bonds issued by the troubled banks. a. True *b. False
113. During the financial crisis of 2008, the Treasury Department prevented the failure of Bear Stearns investment bank and AIG insurance company because they were considered too important to the economy to fail. *a. True b. False
114. The Wall Street Reform and Consumer Protection Act, also called Dodd-Frank, was passed in the 1930s to correct the problems that led to the Great Depression. a. True *b. False
115. The purpose of the Bureau of Consumer Financial Protection is to protect borrowers from being exploited through complicated financial deals that were made to appear attractive to them. *a. True b. False
116. The Wall Street Reform and Consumer Protection Act created a government committee with the right to regulate “systemically important” non-bank financial institutions as if they were banks. *a. True b. False
117. How is the Federal Reserve accountable to the voters, but at the same time, insulated from short-term political pressures? Correct Answer:
Because the members of the Board of Governors are appointed by the president and approved by the U.S. Senate, all of whom are elected by the voters, they are ultimately accountable to the voting public. However, the members serve long, 14year terms, which helps to insulate them from short-term political pressure. 118. How did the banking crises of the early 1930s exacerbate the severity of the Great Depression? Correct Answer:
Runs on banks, their subsequent failures, and the resulting losses to their depositors greatly diminished the public's confidence in the banking system. Depositors withdrew their cash which left banks unable to make loans needed by businesses to continue to operations. The cash withdrawals decreased the money supply, which further decreased spending, output, and employment. 119. What caused the savings and loan crisis of the 1980s? Correct Answer:
The original function of savings and loans institutions, also called thrifts, was to accept savings deposits and loan them out for long-term mortgages. When high inflation and high interest rates in the 1970s caused depositors to withdraw their money from low-interest thrift savings accounts and invest them in higher-interest paying investments, liquidity problems arose for the thrifts. In order to improve their profitability, regulations were eased and thrifts were allowed to invest in riskier financial assets in addition to mortgages for home buyers. When many of the risky real estate loans made by thrifts went into default, many failed. Since they were insured by federal deposit insurance, the taxpayers ultimately had to pay depositors over $124 billion.
120. How was the financial crisis of 2008 similar to the Panic of 1907 and the S&L crisis? Correct Answer:
The financial crisis of 2008, the Panic of 1907, and the S&L crisis all involved excessive speculation and financial institutions that were not as strictly regulated as banks. Additionally, in each crisis, the U.S. government was slow to take action to correct the problems. 121. Explain the role of the housing market in the 2008 financial crisis. Correct Answer:
Low interest rates in the early 2000s helped to create a boom in the housing market. Many financial institutions and “loan originators” made many subprime loans, which are loans to people who did not meet the traditional requirements for a mortgage. Then the loan originators securitized the loans and sold shares of the pools to other investors, including banks and other nonbank financial institutions that were not as strictly regulated as banks. When the housing market collapsed in late 2006, many of the subprime borrowers defaulted on their loans, which caused home prices to fall and resulted in more defaults, huge losses for investors, and a financial crisis in 2008. 122. Explain how the Wall Street Reform and Consumer Protection Act of 2010 addressed the problems that led to the 2008 financial crisis. Correct Answer:
The Wall Street Reform and Consumer Protection Act of 2010, also called DoddFrank, created the Bureau of Consumer Financial Protection to protect borrowers from being exploited by lenders who offered deceptively attractive loans to uninformed consumers who actually could not afford the loans. The law also created the Financial Stability Oversight Council which has the power to regulate nonbank “systemically important” financial institutions as if they were banks, by requiring more capital and limiting the risks that they can take. The government's “resolution authority” was also extended to many nonbank financial institutions, and gives the government the power to take them over if they are likely to fail. The law also requires that derivatives, such as securitized subprime mortgages, be traded on exchanges so that everyone can observe their prices and volume of transactions.
1. In 2014, Ben Bernanke was succeeded as Chair of the Board of Governors of the
Federal Reserve by: *a. Janet Yellen. b. Paul Ryan. c. Joe Biden. d. Nancy Pelosi.
2. The Chair of the Board of Governors during the 2008 financial crisis was: a. Barack Obama. *b. Ben Bernanke. c. J.P. Morgan. d. John McCain.
3. The Federal Reserve is able to have an impact on financial crises because it: a. determines tax rates. b. determines government spending. *c. conducts monetary policy. d. is responsive to the people who elected its members to office.
4. The central bank of the United States is called the: a. Congressional Budget Office. b. Internal Revenue Service. *c. Federal Reserve System. d. Federal Deposit Insurance Corporation.
5. In the structure of the Federal Reserve, which is not privately owned, but is part
of the government? I. Board of Governors II. 12 regional Federal Reserve Banks *a. I only b. II only c. I and II d. neither I nor II
6. In the structure of the Federal Reserve, which is not part of the government, but
is privately owned? I. Board of Governors II. 12 regional Federal Reserve Banks
a. I only *b. II only c. I and II d. neither I nor II
7. Which are functions of the Federal Reserve System?
I. collecting corporate income tax II. setting personal income tax rates III. holding bank reserves a. I only b. II only *c. III only d. I, II, and III
8. Which are functions of the Federal Reserve System?
I. conducting fiscal policy II. examining and supervising commercial banks in the Fed regions III. evaluating corporate mergers a. I only *b. II only c. III only d. I, II, and III
9. Which are functions of the Federal Reserve System?
I. conducting monetary policy II. examining and supervising commercial banks in the Fed regions III. providing liquidity to financial institutions a. I only b. II only c. III only *d. I, II, and III
10. Which financial services does the Fed provide for commercial banks?
I. holding reserves II. clearing checks III. providing coins and currency a. I only b. II only
c. III only *d. I, II, and III
11. The major tools of monetary policy available to the Federal Reserve System
include: a. reserve requirements, margin regulations, and moral suasion. *b. reserve requirements, open-market operations, and the discount rate. c. open-market operations, margin regulations, and moral suasion. d. discount rate, margin regulations, and moral suasion.
12. The tools of conducting monetary policy include: *a. changes in the required reserve requirement. b. changes in the prime rate. c. open market purchases of corporate stock. d. changing tax rates.
13. The three main monetary policy tools are: a. interest rates, taxes, and government purchases. b. currency, near-moneys, and reserve ratio. c. deposit insurance, discount rate, and money multiplier. *d. reserve requirements, the discount rate, and open-market purchases.
14. Which are tools of monetary policy used by the Federal Reserve?
I. reserve requirements II. discount rate a. I only b. II only *c. I and II d. neither I nor II
15. Which are tools of monetary policy used by the Federal Reserve?
I. open market operations II. government purchases for goods and services *a. I only b. II only c. I and II d. neither I nor II
16. Which are tools of monetary policy used by the Federal Reserve?
I. tax rates II. government purchases of goods and services a. I only b. II only c. I and II *d. Neither I nor II
17. If it looks like a bank won't meet the Federal Reserve Bank's reserve
requirement, normally it will first turn to the: *a. other member banks and borrow money at the federal funds rate. b. Federal Reserve and borrow money at the discount rate. c. open market and borrow money there. d. Congress to borrow funds.
18. Federal funds are: a. government tax receipts. *b. loans between banks. c. government expenditures. d. bank deposits at the Federal Reserve.
19. When banks borrow and lend reserves from each other, they are participating in
the ______ market. a. subprime mortgage b. long-term capital c. money *d. federal funds
20. The federal funds rate is the interest rate at which: a. banks borrow funds directly from the Federal Reserve. *b. banks borrow from other banks with excess reserves. c. the influential companies borrow from banks. d. households' savings are invested in the Federal Reserve.
21. The Fed's minimum required reserve ratio for checkable bank deposits is _____
percent. a. 0 b. 3
*c. 10 d. 50
22. Loans of reserves from one bank to another are primarily made in the
_________ market. a. commodity b. foreign exchange *c. stock d. federal funds
23. When the Fed decreases the reserve requirement, banks lend ______ of their
deposits, which leads to a(n) _______ in the money supply. a. less; decrease b. less; increase c. more; decrease *d. more; increase
24. When the Fed increases the reserve requirement, banks lend ______ of their
deposits, which leads to a(n) _______ in the money supply. *a. less; decrease b. less; increase c. more; decrease d. more; increase
25. If the Fed decreases the reserve requirement from 10 percent to 5 percent, the
money multiplier will ________ and the money supply will most likely _______. a. decrease; decrease b. decrease; increase c. increase; decrease *d. increase; increase
26. If the Federal Reserve increases the discount rate, the: *a. money supply is likely to decrease. b. money supply is likely to increase. c. money supply is not likely to change. d. federal funds rate must decrease.
27. The discount rate is the interest rate the Federal Reserve charges on loans to: a. consumers. b. the federal government.
c. state governments. *d. banks.
28. When banks borrow from the Fed in order to satisfy their reserve requirements,
the rate of interest charged is known as the: a. prime rate. *b. discount rate. c. federal funds rate. d. reserve rate.
29. Normally the discount rate is _______ the federal funds rate. *a. above b. below c. equal to d. triple
30. For a given federal funds rate, when the Fed decreases the discount rate, the
spread between the discount rate and the fed funds rate ________ and the cost of being short of reserves _______. a. increases; increases b. increases; decreases c. decreases; increases *d. decreases; decreases
31. When the Fed decreases the discount rate, banks are likely to _______ their
lending, thus the money supply ________. *a. increase; increases b. increase; decreases c. decrease; increases d. decrease; decreases
32. The tool of monetary policy with which the Federal Reserve buys and sells
government bonds is called: a. moral suasion. b. reserve requirements. c. the discount rate. *d. open-market operations.
33. Which is a tool used by the Federal Reserve in the conduct of monetary policy? a. changes in the prime rate
b. issuing new government bonds and retiring old ones c. buying and selling corporate bonds *d. buying and selling federal government bonds
34. The Federal Reserve's main assets are: a. currency in circulation and bank reserves. b. the facilities of the twelve district banks. c. corporate stocks and bonds. *d. U.S. Treasury bills.
35. The Federal Reserve's main liabilities are: *a. currency and bank reserves. b. the facilities of the 12 district banks. c. corporate stocks and bonds. d. U.S. Treasury bills.
36. U.S. Treasury bills are a(n): *a. liability of the U.S. government but an asset to the Federal Reserve. b. asset of the U.S. government but a liability to the Federal Reserve. c. part of the net worth of the U.S. government. d. liability to both the U.S. government and the Federal Reserve.
37. Which explains why the Federal Reserve never buys U.S. Treasury bills directly
from the federal government? a. It could make the budget deficit worse. *b. It could be a route to disastrous inflation. c. It could lead to a recession. d. It could reduce the power of the Fed.
38. To change the money supply, the Federal Reserve most frequently uses: a. changes in the required reserve ratios. b. changes in the discount rate. *c. open-market operations. d. changes in the inflation rate.
39. Open-market operations occur when the Federal Reserve: a. buys U.S. Treasury bills from the federal government. b. buys or sells foreign currency.
*c. buys or sells existing U.S. Treasury bills. d. sells U.S. Treasury bills to the federal government.
40. If the Federal Reserve conducts an open-market purchase, bank reserves: a. decrease and the money supply decreases. *b. increase and the money supply increases. c. decrease and the money supply increases. d. increase and the money supply decreases.
41. Suppose the Federal Reserve were to engage in open-market operations by
buying $100 million of U.S. Treasury bills. Which would be the end result of such an action? a. The money supply would stay the same. b. The money supply would decrease by $100 million. c. The money supply would increase by $100 million. *d. The money supply would increase by more than $100 million.
42. When the Federal Reserve decreases bank reserves through an open-market
operation: a. deposits increase, currency in circulation increases, and the monetary base remains the same. b. the monetary base decreases, the money multiplier decreases, and the money supply increases. c. loans increase, the federal funds rate rises, and the discount rate rises. *d. the monetary base decreases, loans decrease, and the money supply decreases.
43. When the Federal Reserve buys and sells U.S. Treasury bills, they are
conducting a. commercial policy. b. multiplier policy. c. discount policy. *d. open-market operations.
44. Which statement is TRUE? *a. When the Federal Reserve buys U.S. Treasury bills from banks, bank reserves increase, leading to an eventual increase in the money supply. b. When the Federal Reserve sells U.S. Treasury bills to banks, bank reserves increase, leading to an eventual increase in the money supply.
c. When the Federal Reserve buys U.S. Treasury bills from banks, it does so by printing new currency to place into circulation. d. The Federal Reserve can affect interest rates, but it has no influence on the size of the monetary base.
45. Short-term U.S. government bonds that mature in less than a year are called: a. commercial paper. *b. U.S. Treasury bills. c. federal funds. d. U.S. reserves.
46. If the Fed conducts an open-market sale of T-bills, commercial bank reserves
________ and the money supply is likely to _______. a. increase; increase b. increase; decrease c. decrease; increase *d. decrease; decrease
47. Most of the Fed's income comes from: a. interest on its loans to commercial banks. b. payments from the U.S. government in return for the Fed serving as its fiscal agent. *c. interest on the U.S. Treasury bills that it owns. d. fees that it charges commercial banks for clearing checks and electronic funds transfers.
48. Most of the interest on the Fed's assets is: a. used to maintain the buildings and grounds of the 12 regional banks. b. used to purchase currency in the foreign exchange market. *c. returned to the U.S. taxpayers. d. shared with banks that are members of the Federal Reserve System.
49. All are responsibilities of the Federal Reserve EXCEPT to: a. control the monetary base. *b. mint bills and coins. c. oversee and regulate the banking system. d. set the discount rate.
50. Which action would allow banks to lend out more money?
a. increase in the required reserve ratio *b. decrease in the discount rate c. increase in the federal funds rate d. increase in the required reserve ratio coupled with an increase in the federal funds rate
51. The Federal Reserve controls the: a. discount rate. b. monetary base. c. reserve ratio. *d. discount rate, the monetary base, and the reserve ratio.
52. To _______ the money supply, the Federal Reserve could ________. *a. increase; lower the reserve requirements b. decrease; lower the discount rate c. increase; raise the federal funds rate d. decrease; conduct open-market purchases
53. To _______ the money supply, the Federal Reserve could ________. a. decrease; lower the reserve requirements *b. increase; lower the discount rate c. increase; conduct open-market sales d. decrease; lower the federal funds rate
54. To _______ the money supply, the Federal Reserve could ________. a. increase; decrease the money multiplier b. decrease; lower the reserve requirements *c. increase; conduct open-market purchases d. decrease; lower the discount rate
55. To increase the money supply, the central bank could: a. lower the discount rate. b. make open-market purchases. c. lower reserve requirements. *d. lower the discount rate, make open-market purchases, or lower reserve requirements.
56. To decrease the money supply, the central bank could: a. lower the discount rate.
*b. make open-market sales. c. decrease the discount rate. d. lower the federal funds rate spread.
57. If the Federal Reserve wants to discourage banks from borrowing directly from
the Federal Reserve and thus decrease the monetary base, it would likely: *a. increase the discount rate. b. increase the federal funds rate. c. increase the reserve requirement. d. sell U.S. Treasury bills in an open market operation.
58. If the Federal Reserve wants to increase the monetary base, it might: *a. engage in an open market purchase of Treasury bills. b. increase the discount rate. c. increase the reserve ratio. d. decrease personal income taxes.
59. If the Federal Reserve wants to increase the money supply, it will: a. sell U.S. Treasury bills. b. cut taxes across the board. *c. lower the reserve requirement. d. increase the discount rate.
60. Scenario: First National Bank
First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds. Reference: Ref 36-1
(Scenario: First National Bank) Refer to the information for First National Bank provided in the Scenario: First National Bank. The bank has liabilities of: a. $105 million. b. $95 million. *c. $80 million. d. $100 million.
61. Scenario: First National Bank
First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds. Reference: Ref 36-1
(Scenario: First National Bank) Refer to the information for First National Bank
provided in the Scenario: First National Bank. If the minimum reserve ratio is 20 percent, how much is the bank required to keep in reserves? a. $20 million *b. $16 million c. $25 million d. $10 million
62. Scenario: First National Bank
First National Bank has $80 million in checkable deposits, $15 million in deposits with the Federal Reserve, $5 million cash in the bank vault, and $5 million in government bonds. Reference: Ref 36-1
(Scenario: First National Bank) Refer to the information for First National Bank provided in the Scenario: First National Bank. Given the bank's minimum reserve ratio, how much can the bank issue in loans? a. $76 million b. $8 million c. $6 million *d. $4 million
63. If the Federal Reserve conducts a $10 million open-market sale and the reserve
requirement is 20 percent, the monetary base will: a. increase by $10 million. b. increase by $8 million. *c. decrease by $10 million. d. decrease by $50 million.
64. If the Federal Reserve conducts a $10 million open-market sale and the reserve
requirement is 20 percent, the maximum change in the money supply is a(n): a. increase of $10 million. b. decrease of $10 million. c. decrease of $8 million. *d. decrease of $50 million.
65.
Reference: Ref 36-2
(Scenario: Assets and Liabilities of the Banking System) According to the Scenario: Assets and Liabilities of the Banking System, suppose that the reserve ratio is 10 percent when the Fed buys $25,000 worth of U.S. Treasury bills from the banking
system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply. a. $666,667 b. $111,111 *c. $250,000 d. $1 million
66.
Reference: Ref 36-2
(Scenario: Assets and Liabilities of the Banking System) According to the Scenario: Assets and Liabilities of the Banking System, suppose that the reserve ratio is 10 percent when the Fed buys $100,000 worth of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply. a. $666,667 b. $111,111 c. $250,000 *d. $1 million
67.
Reference: Ref 36-2
(Scenario: Assets and Liabilities of the Banking System) According to the Scenario: Assets and Liabilities of the Banking System, suppose that the reserve ratio is 10 percent when the Federal Reserve buys $11,000 worth of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply. a. $666,667 *b. $110,000 c. $250,000 d. $1 million
68.
Reference: Ref 36-2
(Scenario: Assets and Liabilities of the Banking System) According to the Scenario: Assets and Liabilities of the Banking System, suppose that the reserve ratio is 10 percent when the Federal Reserve sells $11,000 worth of U.S. Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be _______ the money supply. a. $110,000; added to *b. $110,000; subtracted from c. $250,000; subtracted from d. $250,000; added to
69.
Reference: Ref 36-2
(Scenario: Assets and Liabilities of the Banking System) According to the Scenario: Assets and Liabilities of the Banking System, suppose that the reserve ratio is 10
percent when the Federal Reserve sells $25,000 worth of U.S. Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be _______ the money supply. a. $110,000; added to b. $110,000; subtracted from *c. $250,000; subtracted from d. $250,000; added to
70.
Reference: Ref 36-2
(Scenario: Assets and Liabilities of the Banking System) According to the Scenario: Assets and Liabilities of the Banking System, suppose that the reserve ratio is 10 percent when the Federal Reserve sells $66,700 worth of U.S. Treasury bills to the banking system. If the banking system does NOT want to hold any excess reserves, _______ will be _______ the money supply. *a. $667,000; subtracted from b. $667,000; added to c. $250,000; subtracted from d. $250,000; added to
71. Suppose the Federal Reserve buys $50 million in Treasury bills from
commercial banks. If the reserve ratio is 10 percent, the monetary supply might eventually ______ by _______. *a. increase; $500 million b. increase; $450 million c. decrease; $450 million d. decrease; $500 million
72. If the reserve ratio is 25 percent and the money supply increases by $100,000,
then the initial reserve injection by Federal Reserve was: a. $2500. b. $10,000. c. $4000. *d. $25,000.
73. Suppose that the money supply increases by $150 million after the Federal
Reserve has engaged in an open market purchase of $50 million. Then the reserve ratio is: a. 0.1. b. 0.5. *c. 0.33. d. 0.2.
74. If the Federal Reserve buys $250 million worth of U.S. Treasury bills in the open
market and the reserve ratio is 10 percent, then the money supply will: *a. potentially increase by $2500 million. b. remain unchanged. c. increase by only $250 million. d. increase by only $25 million.
75. Suppose that the Federal Reserve sells $500 in U.S. Treasury bills, and as a
result the money supply falls by $5000. The reserve ratio can be as low as: a. 100. b. 10. *c. 0.1. d. 0.5.
76. Which statement is FALSE? *a. If the Fed reduces reserve requirements, banks will lend a smaller percentage of their deposits, leading to fewer loans and a decrease in the money supply via the money multiplier. b. Banks typically borrow in the federal funds market when they have insufficient reserves to meet the reserve requirement of the Federal Reserve. c. When a bank borrows reserves from the Fed itself, it is said to be borrowing at the discount window. d. A change in reserve requirements or a change in the discount rate will have an effect on the money supply.
77. During the financial crisis of 2008, the Fed tripled the money supply. a. True *b. False
78. When the Fed changes tax rates, interest rates change, and this changes real GDP. a. True *b. False
79. Janet Yellen is the current Chair of the Board of Governors of the Federal Reserve. *a. True b. False
80. The Office of Management and Budget serves as the central bank of the United States. a. True *b. False
81. The two parts of the Federal Reserve are the Board of Governors, which is owned by the federal government, and the 12 regional Federal Reserve Banks, which are privately owned. *a. True b. False
82. When the federal government writes a check, it is written on an account at the U.S. Treasury Department. a. True *b. False
83. The Federal Reserve is called the “banker's bank” because it holds reserves, clears checks, provides cash, and transfers funds for commercial banks. *a. True b. False
84. The U.S. Treasury Department is the fiscal agent of the federal government. a. True *b. False
85. The Federal Reserve regional banks and the Board of Governors supervise, examine, and regulate commercial banks. *a. True b. False
86. It is the responsibility of the U.S. Department of Commerce to maintain stability in the financial system by providing liquidity to commercial banks. a. True *b. False
87. One of the functions of the Fed is to use monetary policy, which involves changes in the money supply and changes in interest rates to lessen the impact of economic fluctuations on the economy. *a. True b. False
88. The monetary policy tools used by the Federal Reserve to adjust the money supply include changes in tax rates and government purchases of goods and services. a. True *b. False
89. The monetary policy tools used by the Federal Reserve to adjust the money supply are reserve requirements, the discount rate, and openmarket operations. *a. True b. False
90. If a bank falls short of its reserve requirement, it might borrow reserves from banks with excess reserves in the federal funds market. *a. True b. False
91. In the federal funds market, governments of different countries lends and borrow funds from each other. a. True *b. False
92. At the end of each business day, the Federal Reserve requires banks to hold reserves equal to 10 percent of their checkable deposits. a. True *b. False
93. The federal funds rate is determined by the demand and supply for bank reserves, both of which are strongly influenced by the Federal Reserve. *a. True b. False
94. Changes in the reserve requirement are the monetary policy tool used most often by the Fed. a. True *b. False
95. If the Federal Reserve increases reserve requirements, the fed funds rate will likely increase, banks will make fewer loans and the money supply will likely decrease. *a. True b. False
96. The discount rate is the interest rate that the Federal Reserve charges on loans to banks. *a. True b. False
97. In general, the discount rate is set above the federal funds rate to discourage banks from borrowing from the Fed. *a. True b. False
98. The discount rate is usually equal to the federal funds rate. a. True *b. False
99. Normally the discount rate is below the federal funds rate to encourage banks to borrow from the Fed rather than from other banks. a. True *b. False
100. For a given federal funds rate, when the Fed increases the discount rate, the spread between the discount rate and the fed funds rate increases and the cost of being short of reserves increases. *a. True b. False
101. When the Fed increases the spread between the discount rate and the federal funds rate, banks are likely to increase their lending and the money supply increases.
a. True *b. False
102. To increase the money supply, the central bank could make openmarket purchases. *a. True b. False
103. Treasury bills purchased from commercial banks by the Fed are assets for the Federal Reserve. *a. True b. False
104. U.S. Treasury bills held by the Fed are assets for the U.S. government. a. True *b. False
105. The Fed's primary liabilities are the monetary base, which is equal to currency in circulation plus bank reserves. *a. True b. False
106. When the Fed buys $250 million of Treasury bills from commercial banks, the banks' reserves increase by less than $250 million. a. True *b. False
107. When the Fed sells $250 million of Treasury bills to commercial banks, the banks use with their reserves to make the purchase. *a. True b. False
108. When the U.S. government issues Treasury bills, it sells them directly to the Federal Reserve. a. True *b. False
109. When the Fed buys $100 billion of Treasury bills from commercial banks, the monetary base increases by $100 billion. *a. True b. False
110. Suppose the Federal Reserve wants to increase the supply of money. How could the Federal Reserve's tools of monetary policy achieve this goal? Correct Answer:
The Federal Reserve could lower the reserve requirement. This policy would allow banks to lend a larger fraction of total checkable deposits and the money supply would multiply. The Federal Reserve could lower the spread between the discount rate and the federal funds rate. This would make borrowing from the Federal Reserve less expensive for commercial banks, so banks would increase lending to customers and the money supply would increase. The Federal Reserve could buy Treasury bills from commercial banks. These open market operations would inject money into the banks' reserves, and the banks would proceed to lend these reserves to customers, thus increasing the money supply. 111. The Federal Reserve has just purchased $100 million in Treasury bills from commercial banks. a. How will this affect the T-accounts for the commercial banks? b. If the public holds a fixed amount of currency (so that all loans create an equal amount of deposits in the banking system), the minimum reserve ratio is 5 percent, and banks hold no excess reserves, by how much will deposits in the commercial banks change? c. By how much will the money supply change? Describe the final changes to the T-account for commercial banks when the money supply changes by this amount. Correct Answer:
a. The asset side of the commercial banks will show a decrease of $100 million because the banks have sold T-bills and no longer have them on the books. However, the banks have received $100 million cash, so this is seen as an addition to the assets. b. The banks now have $100 million in excess reserves and will lend these reserves. Deposits will increase by $100 million / 0.05 = $2 billion. c. The money supply will also increase by $2 billion because the initial $100 million was also new money, having come from the Fed. The banks will show an increase of $2 billion in loans and an increase of $2 billion in checkable deposits.
112. Holding everything else constant, if the required reserve ratio falls, then: *a. the money multiplier increases. b. a $1 loan can lead to a smaller change in the money supply than before the change in the required reserve ratio. c. the amount of excess reserves falls also.
d. the money multiplier decreases.
113. When a bank borrows from the Federal Reserve, it pays the: a. required reserve ratio. *b. discount rate. c. federal funds rate. d. prime rate.
114. The federal funds rate is the rate: a. a private borrower would pay a bank for a loan. *b. one bank would pay another bank for a loan. c. a bank would pay the Federal Reserve for a loan. d. the Federal Reserve would pay to borrow money from government.
115. Suppose the required reserve ratio was 10 percent and then it increased to 20
percent. This would: *a. result in a drop in the money multiplier from 10 to 5. b. increase the amount of excess reserves available. c. result in an increase in the money multiplier from 5 to 10. d. have no impact on the money multiplier.
116. If the Federal Reserve wanted to increase the money supply, it could: a. decrease the required reserve ratio, increase the federal funds rate, and sell bonds on the open market. *b. decrease the required reserve ratio, decrease the discount rate, and buy bonds on the open market. c. increase the required reserve ratio, increase the personal tax rate, and sell bonds on the open market. d. increase the personal tax rate, decrease the required reserve ratio, and buy bonds on the open market.
117. If the required reserve ratio is 10 percent, and the Fed conducts an open
market purchase of $100, what is the maximum possible change in the money supply resulting from this purchase? a. $100 *b. $1000 c. $10,000 d. $10
118. Suppose an economy uses a checkable deposits only monetary system and it
has a required reserve ratio of 20 percent. If the central bank in this economy conducts an open market purchase of $5 million Treasury bills, this will potentially: *a. increase the money supply by $25 million. b. decrease the money supply by $25 million. c. increase the money supply by $10 million. d. decrease the money supply by $10 million.
1. Generally, the more liquid an asset is, the: a. lower its purchasing power. *b. lower its rate of return. c. higher its capacity to store value over time. d. higher its rate of return.
2. The short-term interest rate is the interest rate on financial assets that mature
within: *a. less than a year. b. a year or more. c. two years. d. five years.
3. If during 2007 the interest rate on 1-month Treasury bills was 2.5 percent and
during 2008 the interest rate on 1-month Treasury bills was 2 percent, one would conclude that the opportunity cost of holding money: *a. decreased. b. became negative. c. increased. d. did not change.
4. If a checking account has an interest rate of 1 percent and a Treasury bill has an
interest rate of 3 percent, the opportunity cost of holding cash in a checking account is: a. zero. b. 0.02 percent. c. 1 percent. *d. 2 percent.
5. People forgo interest and hold money: a. because they are required to. *b. to reduce their transactions costs. c. because there are no substitutes for money. d. because banks are too risky.
6. If a checking account has an interest rate of 1 percent and a Treasury bill has an
interest rate of 2 percent, the opportunity cost of holding the checking account as money is: a. zero. b. 0.02 percent. *c. 1 percent.
d. 2 percent.
7. The opportunity cost of holding money is: a. zero. b. the interest rate when someone uses a credit card. *c. the difference between interest rates on monetary assets and on nonmonetary assets. d. the discount rate.
8. We hold money to: a. earn interest. *b. reduce transaction costs. c. increase transaction costs d. protect our purchasing power.
9. Short-term interest rates refer to rates on financial assets due within: a. 24 hours. b. 3 months or less. c. 6 months or less. *d. 1 year or less.
10. The interest earnings one gives up in order to hold more liquid assets are a(n): *a. opportunity cost. b. transaction cost. c. asset of the company. d. liability of the company.
11. When an individual decides to hold money instead of other assets, that
individual: *a. is giving up the interest that could have been earned by holding other types of assets. b. becomes more likely to suffer from money illusion. c. is not affected by unanticipated inflation. d. is able to maintain a higher standard of living.
12. The opportunity cost of holding money is: a. higher when interest rates are lower. *b. higher when interest rates are higher. c. unchanged over time. d. zero.
13. Short-term interest rates are rates on financial assets that: a. are held by large institutional investors. b. do not have a specific maturity. *c. mature in less than a year. d. mature in less than five years.
14. When short-term interest rates fell between 2007 and 2008 *a. the opportunity cost of holding money decreased. b. the opportunity cost of holding money increased. c. people were less willing to hold money in place of making deposits in an interest-earning account. d. the interest rate for holding money.
15. When the short-term interest rate _____, the opportunity cost of holding money
falls, and the quantity of money individuals want to hold _____. a. falls; falls *b. falls; rises c. rises; falls d. rises; rises
16. In a graph of a money demand curve, which variable is plotted on the vertical
axis? *a. interest rate on liquid assets, like short-term CDs b. interest rate on 30-year Treasury bills c. rate of price inflation d. rate of return in the stock market
17. The money demand curve shows the relationship between the: a. money supply and the quantity of money demanded. b. aggregate price level and the nominal quantity of money demanded. *c. interest rate and the nominal quantity of money demanded. d. real GDP and the nominal quantity of money demanded.
18. The money demand curve is: a. downward-sloping because the opportunity cost of holding money is inversely related to the interest rate. *b. downward-sloping because the opportunity cost of holding money rises as the interest rate rises.
c. downward-sloping because the opportunity cost of holding money rises as the interest rate falls. d. upward-sloping because the opportunity cost of holding money rises with the interest rate.
19. The amount of money that people demand is: a. positively related to the interest rate. b. independent of the interest rate. *c. negatively related to the interest rate. d. positively related or negatively related to the interest rate depending on the state of the economy.
20. The money demand curve is _________ because a lower interest rate ______. a. upward-sloping; increases the opportunity cost of holding money b. downward-sloping; increases the opportunity cost of holding money c. upward-sloping; decreases the opportunity cost of holding money *d. downward-sloping; decreases the opportunity cost of holding money
21. The slope of the demand curve for money is: a. vertical. b. horizontal. c. positive. *d. negative.
22. What is measured on the vertical axis when we draw a money demand curve? a. inflation rate b. quantity of money demanded by the public c. aggregate price level *d. interest rate
23. What is measured on the horizontal axis when we draw a money demand
curve? a. inflation rate *b. quantity of money demanded by the public c. aggregate price level d. interest rate
24. The money demand curve shows the relationship between: a. the aggregate price level and the inflation rate. b. the aggregate price level and the interest rate. *c. the interest rate and the quantity of money demanded by the public. d. the inflation rate and the quantity of money demanded by the public.
25. The downward slope of the money demand curve shows that people hold more
money when: a. the aggregate price level is higher. b. inflation rates are higher. c. interest rates are higher. *d. interest rates are lower.
26. A decrease in the demand for money would result from: a. an increase in income. *b. a decrease in real GDP. c. an increase in the price level. d. an increase in nominal GDP.
27. A decrease in the demand for money would result from a(n): a. increase in income. b. increase in real GDP. *c. decrease in the price level. d. increase in nominal GDP.
28. An increase in the demand for money would result from a(n): a. decrease in nominal GDP. b. decrease in real GDP. c. decrease in the price level. *d. increase in the price level.
29. An increase in the aggregate price level: *a. increases the demand for money. b. decreases the demand for money. c. does not affect the demand for money. d. shifts the demand for money to the left.
30. A 20 percent increase in the aggregate price level will increase the quantity of
money demanded by: *a. 20 percent. b. the money multiplier. c. 10 percent. d. half the money multiplier.
31. An increase in interest rates causes the demand for money to: a. increase. b. decrease. *c. stay the same. d. shift to the right.
32. U.S. banks did not offer interest on checking accounts until the beginning of the
1980s. As a result, before the early 1980s: a. the opportunity costs of keeping funds in checking accounts was zero. b. the opportunity costs of keeping funds in checking accounts was lower. *c. the opportunity costs of keeping funds in checking accounts was higher. d. people stopped using banking services and started keeping money under their mattresses.
33. If inflation increases from 2 percent to 5 percent, the money demand curve will: a. remain constant. b. remain constant, but the quantity of money demanded will decrease. c. shift to the left. *d. shift to the right.
34. If Congress places a $5 tax on each ATM transaction, the demand for money
will likely: *a. increase. b. decrease. c. fluctuate randomly. d. be unaffected.
35. If Congress places a $5 tax on each ATM transaction, there will likely be a: a. movement up a stationary money demand curve. b. movement down a stationary money demand curve.
c. shift to the left of the money demand curve. *d. shift to the right of the money demand curve.
36. A 30 percent increase in the aggregate price level will: *a. increase money demand by 30 percent. b. increase money demand by the money multiplier. c. decrease money demand by 30 percent. d. not affect the demand for money.
37. An increase in real aggregate spending will shift the money: *a. demand curve rightward. b. demand curve leftward. c. supply curve rightward. d. supply curve leftward.
38. Improvements in information technology have: a. shifted the demand for cash to the right. *b. decreased the demand for money. c. not affected the demand for money d. increased the demand for money.
39. The fact that many stores in the United States have found it economical to
accept credit cards has: a. increased the demand for money. *b. decreased the demand for money. c. increased the demand for credit card transactions but has had no impact on the demand for money. d. decreased the demand for credit card transactions but has had no impact on the demand for money.
40. The introduction of ATMs: a. increased the demand for cash because it made cash easier to get. *b. decreased the demand for cash because it reduced the cost of moving from other assets into cash. c. did not change the demand for cash because it is proportional to the price level. d. did not change the demand for cash, as ATMs do not affect public spending habits.
41. Which event will NOT decrease the demand for money?
*a. increase in the aggregate price level b. advent of ATMs c. ability of the stores to process credit cards d. fall in real GDP
42. Now that fast food places are accepting credit card payments, the: a. demand for money has increased. *b. demand for money has decreased. c. demand for money has not been affected because credit cards are not considered to be money. d. supply of money has increased, as there is unused cash.
43. U.S. banks did not offer interest on checking accounts until the beginning of the
1980s. Then banking regulations changed, allowing banks to pay interest on checking account funds. As a result, the: a. supply of money fell and shifted the money demand curve to the left. b. demand for money fell and shifted the money demand curve to the left. *c. demand for money rose and shifted the money demand curve to the right. d. supply of money rose and shifted the money demand curve to the right.
44. If the aggregate price level doubles: a. the money supply will also double. b. neither the money demand nor money supply will rise. c. both the money demand and the money supply will rise proportionally. *d. the money demand at any given interest rate will also double.
45. Suppose the economy experiences price inflation such that a typical basket of
goods is now more expensive than it used to be. All else equal, we would expect: a. the demand for money to shift inward. b. a downward movement along a fixed money demand curve. *c. the demand for money to shift outward. d. an upward movement along a fixed money demand curve.
46. Suppose that the economy enters a recession and real GDP falls. All else
equal, we would expect: *a. the money demand curve to shift inward.
b. the money demand curve to shift outward. c. a downward movement along a fixed money demand curve. d. an upward movement along a fixed money demand curve.
47. Every year more and more purchases are made with credit cards on the
Internet. Given this trend, all else equal, we would expect: a. the money demand curve to shift outward. *b. the money demand curve to shift inward. c. a downward movement along a fixed money demand curve. d. an upward movement along a fixed money demand curve.
48. An increase in the demand for money corresponds to a: a. lower interest rate. b. decrease in the aggregate price level. *c. rightward shift of the money demand curve. d. leftward shift of the money demand curve.
49. An increase in the aggregate price level: *a. will cause an increase in the demand for money. b. will cause a decrease in the demand for money. c. will have no effect on the demand for money. d. is shown by moving from one point to another along the same money demand curve.
50. Which would shift the money demand curve to the left? a. increase in the interest rate b. decrease in the interest rate *c. decrease in real GDP d. increase in real GDP
51. The advent of ATM machines has: a. not affected the demand for money. *b. shifted the demand for money to the left. c. shifted the demand for money to the right. d. caused people to hold higher average money balances.
52. When Regulation Q was eliminated and banks became able to pay interest on
checking account deposits: *a. the demand for money increased. b. the demand for money decreased.
c. the opportunity cost of holding money increased. d. people held lower balances in their checking accounts.
53. The demand for money is higher in Japan than in the United States because: a. Japanese banks pay interest on checking accounts. *b. most stores in Japan do not accept credit cards. c. the ATMs are open all night. d. the average price level is lower in Japan.
54. The demand for money is higher in Japan than in the United States because: a. telecommunications and information technology is more advanced in the United States than in Japan. b. Japanese consumers use credit cards more than people in the United States. c. Japanese interest rates are very high in comparison to interest rates in the United States. *d. Japanese interest rates are very low in comparison to interest rates in the United States.
55. Which is NOT one of the reasons that the Japanese tend to keep large amounts
of cash? *a. Banks have invested heavily in credit card technology. b. Japan has a low crime rate. c. Interest rates in Japan have been below 1 percent since the 1990s. d. Japan's retail sector is dominated by small mom-and-pop stores that don't use credit card technology.
56. A high demand for money (as in Japan) would result from: a. a decrease in nominal GDP and a high crime rate. b. a decrease in real GDP and a preference from businesses to accept only debit cards. c. a decrease in the price level. *d. low crime rates and inability of businesses to accept noncash payments.
57. The federal funds rate is the interest rate on ______, and it is controlled by the
_________. a. loans from the Federal Reserve to banks; Federal Open Market Committee *b. reserves that banks lend to each other; Federal Open Market Committee
c. loans from the Federal Reserve to banks; president and Congress d. reserves that banks lend to each other; president and Congress
58. The Federal Open Market Committee meets _____times per year. a. 4 *b. 8 c. 12 d. 52
59. The Federal Reserve achieves the target for the federal funds rate by: a. dictating the interest rates that banks can charge for loans. b. printing or destroying dollar bills. *c. buying and selling U.S. Treasury bills. d. changing the demand for money.
60. If the equilibrium interest rate in the money market is 5 percent, then at an
interest rate of 2 percent: a. money demanded is less than money supplied. *b. money demanded is greater than money supplied. c. money demanded is equal to money supplied. d. it is impossible to predict which is greater, money demanded or money supplied.
61. In the liquidity preference model, the money supply is represented by a(n): *a. vertical line. b. upward-sloping curve with a slope of 1 / V. c. horizontal line. d. downward-sloping curve with a slope of 1 / k.
62. According to the liquidity preference model, if the interest rate rises above its
equilibrium value, the quantity demanded of nonmonetary interest-bearing financial assets ________ leading to a ________ in the interest rate. a. decreases; rise *b. increases; fall c. decreases; fall d. increases; rise
63. If at the current interest rate the demand for money is $100 billion and the
supply of money is $200 billion, then the interest rate will:
*a. fall. b. rise. c. remain unchanged. d. be in equilibrium.
64. If at the current interest rate the demand for money is $300 billion and the
supply of money is $200 billion, then the interest rate will: a. fall. *b. rise. c. remain unchanged. d. be in equilibrium.
65. The liquidity preference model: a. determines the demand for money. b. uses the demand for and supply of money to determine the price level. *c. uses the demand for and supply of money to determine the interest rate. d. uses the demand for and supply of money to determine nominal output.
66. At interest rates below equilibrium rate, people will want to: a. shift their wealth into Treasury bills. *b. shift their wealth into money. c. buy more shares of stock. d. make no changes to their assets.
67. If the equilibrium interest rate in the money market is 5 percent, then at an
interest rate of 2 percent: *a. the quantity of nonmonetary interest-bearing financial assets demanded is less than the quantity supplied. b. the quantity of nonmonetary interest-bearing financial assets demanded is greater than the quantity supplied. c. the quantity of nonmonetary interest-bearing financial assets demanded is equal to the quantity supplied. d. it is impossible to predict which is greater, the quantity demanded or quantity supplied of nonmonetary interest-bearing financial assets.
68. If the equilibrium interest rate in the money market is 5 percent, then at an
interest rate of 2 percent: *a. sellers of interest-bearing financial assets must offer higher interest rates to find willing buyers.
b. sellers of interest-bearing financial assets must offer lower interest rates to find willing buyers. c. sellers of interest-bearing financial assets can offer 2 percent interest and still find willing buyers. d. sales of financial assets do not depend on the rate offered.
69. According to the liquidity preference model, the equilibrium interest rate is
determined by the: a. supply of and demand for funds. *b. supply of and demand for money. c. government. d. United Nations.
70. If the interest rate is below the equilibrium rate, the: *a. supply of nonmonetary financial assets is greater than the demand for them. b. demand for nonmonetary financial assets is greater than the supply. c. demand and supply of money can still be in balance. d. supply of money is greater than the demand.
71. Figure: Equilibrium in the Money Market
Reference: Ref 37-1
(Figure: Equilibrium in the Money Market) Refer to the information in the Figure: Equilibrium in the Money Market. Equilibrium in this money market will occur at interest rate _______ and quantity of money _______. a. r2; Q0 b. r0; Q2 *c. r1; Q1 d. r1; Q2
72. Figure: Equilibrium in the Money Market
Reference: Ref 37-1
(Figure: Equilibrium in the Money Market) Refer to the information in the Figure: Equilibrium in the Money Market. If the interest rate is above the equilibrium rate, there will be an excess _______ money and the interest rate will _______.
a. demand for; rise *b. supply of; fall c. demand for; fall d. supply of; rise
73. Figure: Equilibrium in the Money Market
Reference: Ref 37-1
(Figure: Equilibrium in the Money Market) Refer to the information in the Figure: Equilibrium in the Money Market. If the rate of interest is below the equilibrium rate, there will be an excess _______ money and the interest rate will _______. *a. demand for; rise b. supply of; fall c. demand for; fall d. supply of; rise
74. An increase in the demand for money with no change in the supply of money
will lead to _______ in the equilibrium quantity of money and _______ in the equilibrium interest rate. *a. no change; a rise b. no change; a fall c. a decrease; a rise d. an increase; a fall
75. The theory of money that the interest rate is determined by the supply and
demand for money is known as the: *a. liquidity preference model of the interest rate. b. quantity theory of money. c. monetarist theory. d. loanable funds theory.
76. Assuming that money supply does not respond to changes in the interest rate,
the money supply curve is: a. downward sloping. *b. vertical. c. upward rising. d. horizontal.
77. The liquidity preference model of the interest rate asserts that:
a. there is no opportunity cost of holding money. b. the demand for money is vertical. c. the amount of money people are willing to hold is independent of the short-term interest rate. *d. the short-term interest rate is established by the interaction of the supply and demand for money.
78. The loanable funds model focuses on the: a. demand for money. b. supply of funds from lenders. c. supply of funds from borrowers and the demand by lenders. *d. supply of funds from lenders and the demand from borrowers.
79. If the interest rate on CDs rises from 5 percent to 10 percent, the opportunity
cost of holding money will ______ and the quantity demanded of money will ______. *a. increase; decrease b. increase; increase c. decrease; increase d. decrease; decrease
80. The quantity demanded of money is negatively related to _______, and the
demand for money is positively related to _______. *a. the interest rate; real GDP b. the interest rate; unemployment c. real GDP; the interest rate d. real GDP; the money supply
81. Which does NOT cause the money demand curve to shift? *a. change in the interest rate b. change in the price level c. change in banking technology d. change in real GDP
82. The demand curve for money will NOT shift as a result of a change in: a. real GDP. b. the price level. c. banking technology. *d. the interest rate.
83. The demand curve for money will shift to the right because of a:
a. fall in the interest rate. *b. rise in real GDP. c. rise in the interest rate. d. fall in real GDP.
84. Among the factors that could cause money demand to shift are all EXCEPT: a. real aggregate spending. b. institutional constraints in the banking system. c. technology of transactions. *d. interest rates.
85. All factors will shift the money demand curve EXCEPT changes in: a. inflation. b. the real GDP. c. the aggregate price level. *d. the interest rate.
86. Figure: A Money Market
Reference: Ref 37-2
(Figure: A Money Market) The accompanying Figure: Equilibrium in the Money Market shows in this market, the equilibrium interest rate is: a. r1. *b. r2. c. r3. d. M0.
87. Figure: A Money Market
Reference: Ref 37-2
(Figure: A Money Market) The accompanying Figure: Equilibrium in the Money Market shows in this market, if the interest rate is r3, we would expect to see the interest rate _____ because there is a ______ of money in the market. *a. fall; surplus b. fall; shortage c. rise; surplus
d. rise; shortage
88. Figure: A Money Market
Reference: Ref 37-2
(Figure: A Money Market) The accompanying Figure: Equilibrium in the Money Market h shows in this market, if the current interest rate is r1, we would expect to see the interest rate _____ because there is a ______ of money in the market. a. fall; surplus b. fall; shortage c. rise; surplus *d. rise; shortage
89. Figure: A Money Market
Reference: Ref 37-2
(Figure: A Money Market) The accompanying Figure: Equilibrium in the Money Market shows the money market in equilibrium at an interest rate of r2. Holding the money supply constant, which of the following might cause the interest rate in the market to decrease to r1? a. The inflation rate falls to historically low levels. b. Higher payroll taxes cause employers to pay workers cash under the table. *c. A recession decreases real GDP. d. There is a significant increase in the stock market.
90. Scenario: Money and Interest Rates
Banks decide to do away with fees charged to noncustomers when they use another bank's ATM. Reference: Ref 37-3
(Scenario: Money and Interest Rates) According to the Scenario: Money and Interest Rates, the demand for money will _____, and the supply of money will _____. a. increase; not change b. increase; decrease *c. decrease; not change d. decrease; increase
91. Scenario: Money and Interest Rates
Banks decide to do away with fees charged to noncustomers when they use another bank's ATM. Reference: Ref 37-3
(Scenario: Money and Interest Rates) According to the Scenario: Money and Interest Rates, if the money supply remains constant, interest rates will likely: *a. decrease. b. increase. c. remain the same. d. increase or decrease, depending upon what maximizes profits for the largest commercial banks.
92. Scenario: Money and Interest Rates
Banks decide to do away with fees charged to noncustomers when they use another bank's ATM. Reference: Ref 37-3
(Scenario: Money and Interest Rates) According to the Scenario: Money and Interest Rates, if the Federal Reserve wants to maintain the same federal funds rate, it should: a. increase taxes. b. decrease government spending. *c. sell Treasury bills. d. buy Treasury bills.
93. People pay a cost for holding wealth in the form of money as opposed to nonmonetary assets such as Treasury bills. *a. True b. False
94. The higher the short-term interest rate, the lower the opportunity cost of holding money. a. True *b. False
95. Long-term interest rates are interest rates on financial assets that mature a number of years into the future. *a. True b. False
96. Long-term interest rates affect the demand for money more than short-term interest rates.
a. True *b. False
97. As the opportunity cost of holding money falls, the quantity of money demanded increases. *a. True b. False
98. If the opportunity cost of holding money rises, then the money demand curve shifts to the left. a. True *b. False
99. If the inflation rate is 3 percent this year, the demand for money will increase by 6 percent this year. a. True *b. False
100. If the economy is in a recession and real GDP decreases, the demand for money will shift to the left. *a. True b. False
101. If credit card requirements are altered so that fewer people qualify for credit cards, the demand for money will decrease. a. True *b. False
102. If banks were suddenly prohibited from paying interest on checking accounts, the demand for money would likely decrease. *a. True b. False
103. The demand for money in Japan is much lower than the demand for money in the United States. a. True *b. False
104. Congress sets the target federal funds rate, but it is the Fed's responsibility to achieve the target rate through purchases and sales of reserves. a. True *b. False
105. Other things equal, if there is an excess demand for money in the money market, then the interest rate may rise. *a. True b. False
106. Other things equal, if the amount of money demanded is greater than the amount of money supplied, then the interest rate may fall. a. True *b. False
107. According to the liquidity preference model, the supply and demand for money determine the interest rate. *a. True b. False
108. If the interest rate is below the equilibrium interest rate, then the quantity of money demanded is more than the quantity of money supplied, and the quantity of interest-bearing financial assets demanded is also more than the quantity supplied of said assets. a. True *b. False
109. If the interest rate is below the equilibrium interest rate, then the quantity demanded of interest-bearing financial assets is less than the quantity supplied. So, people selling interest-bearing financial assets have to offer higher interest rates in order to get people to buy them, thus increasing interest rates back to the equilibrium level. *a. True b. False
110. The loanable funds model focuses on interest rates in the short run. a. True *b. False
111. The liquidity preference model focuses on interest rates in the short run. *a. True b. False
112. What is the opportunity cost of holding money? Correct Answer: The interest you could have earned if that money had been in the bank.
113. The money demand curve is shown in a graph with the interest rate on short-term assets on the vertical axis. Why use this short-term interest on the vertical axis and not the rate of return on other financial assets? Correct Answer:
An individual primarily holds money to make transactions. If he has money invested in an asset, he might want that asset to be easily converted to money so that he could make necessary purchases. Holding money has a cost, the interest rate that could be earned if the money were invested in an asset, but the asset that is most liquid is the one that is most easily converted to cash. Therefore, it is this short-term interest rate that most appropriately measures the price of holding money. 114. Explain why a recession would, all else equal, decrease the demand for money. Correct Answer:
Households hold money to make purchases. A recession is going to decrease real GDP and the number of purchases made by most households, thus shifting the money demand curve to the left. 115. If the interest rate on short-term certificates of deposit (CDs) were to fall significantly, how would this affect the money demand curve? Correct Answer:
This would not shift the demand for money. A lower interest rate on short-term CDs would be a decrease in the opportunity cost of money, and so more money would be held by households. It would be seen as a downward movement along a fixed money demand curve.
116. Firms and businesses hold some of their assets in the form of money because: *a. it allows them to make purchases directly. b. it is a form of M2.
c. bonds are more liquid. d. interest rates tend to be lower than other types of assets.
117. The difference between the interest rate on assets that are not money and the
interest rate on assets that are money is: *a. the opportunity cost of holding money. b. the rate of return of holding money. c. short-term interest rates. d. long-term interest rates.
118. The higher the short-term interest rate, the: a. lower the opportunity cost of holding money. *b. higher the opportunity cost of holding money. c. more quantity demanded of money the public will be willing to hold. d. higher the long-term interest rate.
119. Short-term interest rates: a. fluctuate widely depending on their terms. *b. tend to move together. c. move in the same direction as long-term interest rates. d. are always less than long-term interest rates.
120. If the price level doubled and someone wanted to maintain the same level of
purchasing power, the nominal quantity of money demanded: *a. also must double. b. must increase by 50 percent. c. must stay the same. d. must decrease.
121. If aggregate output decreases in an economy whose central bank is not
changing its monetary policy, one would expect the: *a. demand for money to fall. b. interest rate in the economy to rise. c. demand for money to rise. d. demand for money to be unchanged.
122. Suppose a new regulation lowers the interest rates banks can offer on
checking account funds. This will result in a shift: *a. leftward of the money demand curve.
b. rightward of the money demand curve. c. rightward in the money supply curve. d. leftward in the money supply curve.
123. When the quantity of money demanded is less than the quantity of money
supplied: *a. interest rates will fall. b. people want to decrease their money holdings. c. people will begin to sell their nonmonetary assets. d. interest rates will remain unchanged.
124. Since the Federal Reserve has the power to determine the supply of money,
the money supply curve in the liquidity preference model is a(n): a. horizontal line. *b. vertical line. c. upward-sloping line. d. upward-sloping then vertical line when Congressional rules change the Federal Reserve's powers.
125. When the demand for money is greater than the supply of money: *a. people offering to sell nonmonetary financial assets must increase the interest rate these assets pay in order to sell them. b. interest rates will fall. c. the opportunity cost of holding money will fall. d. more people will hold money.
126. If the interest rate is too low, it is possible that: *a. the quantity of money demanded is greater than the quantity of money supplied. b. money supply is equal to money demand. c. money supply is vertical. d. money demand is vertical.
127. Interest rates can be determined in models of: a. money demand and supply. b. M1 markets only. c. the demand and supply of loanable funds. *d. money demand and supply and in the demand and supply of loanable funds.
1. An increase in the supply of money with no change in demand for money will
lead to a(n) _______ in the equilibrium quantity of money and a _______ in the equilibrium interest rate. a. increase; rise *b. increase; fall c. decrease; rise d. decrease; fall
2. A decrease in the supply of money with no change in demand for money will lead
to a(n) _______ in the equilibrium quantity of money and a_______ in the equilibrium interest rate. a. increase; rise b. increase; fall *c. decrease; rise d. decrease; fall
3. A sale of bonds by the Federal Reserve: a. raises interest rates and increases the money supply. *b. raises interest rates and reduces the money supply. c. lowers interest rates and reduces the money supply. d. lowers interest rates and increases the money supply.
4. Suppose the Federal Reserve buys bonds. We can expect this transaction to: a. reduce the money supply, increase bond prices, and lower interest rates. b. increase the money supply, lower bond prices, and lower interest rates. *c. increase the money supply, raise bond prices, and lower interest rates. d. reduce the money supply, reduce bond prices, and raise interest rates.
5. Suppose the Federal Reserve sells bonds. We can expect this transaction to: a. reduce the money supply, increase bond prices, and lower interest rates. b. increase the money supply, lower bond prices, and lower interest rates. c. increase the money supply, raise bond prices, and lower interest rates. *d. reduce the money supply, reduce bond prices, and raise interest rates.
6. Figure: Changes in the Money Supply
Reference: Ref 38-1
(Figure: Changes in the Money Supply) Refer to the information in the Figure: Changes in the Money Supply. If the supply of money shifts from S1 to S2, the Federal Reserve must have _______ bonds in the open market. a. sold *b. bought c. issued new d. borrowed
7. Figure: Changes in the Money Supply
Reference: Ref 38-1
(Figure: Changes in the Money Supply) Refer to the information in the Figure: Changes in the Money Supply. Federal Reserve policy to increase the supply of money and hence to lower the interest rate from 6 percent to 4 percent, is accomplished by action that _______ the _______ government bonds. a. lowers; price of b. increases; interest rate on *c. increases; demand for d. increases; supply of
8. Which statement is TRUE? *a. An increase in the money supply lowers the equilibrium rate of interest. b. A decrease in the money supply lowers the equilibrium rate of interest. c. The money supply curve is a horizontal line. d. The demand for money curve is a vertical line.
9. If the Federal Reserve wants to lower the interest rate, it will: a. decrease the money supply. *b. increase the money supply. c. keep the money supply unchanged. d. mandate a lower interest rate.
10. The Federal Open Market Committee does NOT control the: a. discount rate. b. reserve ratio. *c. prime rate. d. federal funds rate.
11. If the target rate of interest is higher than the current equilibrium interest rate,
the Federal Reserve will: a. sell Treasury bills in the open market, increase the supply of money, and lower the interest rate to the target rate. b. buy Treasury bills in the open market, increase the supply of money, and lower the interest rate to the target rate. *c. sell Treasury bills in the open market, decrease the supply of money, and raise the interest rate to the target rate. d. buy Treasury bills in the open market, decrease the supply of money, and raise the interest rate to the target rate.
12. Suppose the Federal Reserve has set a target for the federal funds rate. If
initially the equilibrium interest rate happens to be higher than the target interest rate, then the Federal Reserve should: a. sell Treasury bills in the open market, decrease money supply, shift the supply of money curve to the left, and raise the interest rate to the target rate. b. purchase Treasury bills in the open market, decrease money supply, shift the supply of money curve to the left, and lower the interest rate to the target rate. *c. purchase Treasury bills in the open market, increase money supply, shift the supply of money curve to the right, and lower the interest rate to the target rate. d. sell Treasury bills in the open market, increase money supply, shift the supply of money curve to the left, and raise the interest rate to the target rate.
13. The federal funds rate is: *a. determined in the money market by the supply of and demand for money. b. set by Congress. c. determined in the real market by the aggregate supply and aggregate demand curves. d. the interest rate that banks pay when they borrow directly from the Fed.
14. If the Federal Reserve wants to lower interest rates, it can: a. decrease the money supply by selling Treasury bills.
b. decrease the money supply by buying Treasury bills. c. increase the money supply by selling Treasury bills. *d. increase the money supply by buying Treasury bills.
15. To expand the money supply, the Federal Reserve would have to:. *a. engage in an open purchase of Treasury bills b. engage in an open sale of Treasury bills c. raise interest rates d. get approval from Congress
16. A _________ in the money supply shifts the money supply curve to the
_________ and increases the equilibrium interest rate. a. decrease; right b. increase; left *c. decrease; left d. increase; right
17. The Federal Reserve affects interest rates by: a. setting them with regulations. b. open market operations that shift the money demand curve. *c. open market operations that shift the money supply curve. d. changing tax rates.
18. The Federal Open Market Committee sets the target interest rate for the next: a. 3 months. b. 6 months. c. 3 weeks. *d. 6 weeks.
19. To lower the short-term interest rate, the Federal Reserve can: *a. buy bonds. b. sell bonds. c. tell the banks to make more loans. d. tell the banks to make fewer loans.
20. When the Federal Reserve buys Treasury bills, this leads to a(n): a. decrease in the money supply. *b. increase in the money supply. c. increase in short-term interest rates. d. increase in the Federal Reserve funds rate.
21. Assume the money market is in equilibrium. The Federal Reserve Bank has
decided to purchase Treasury bills in an open market operation. The result of this action will be a _____ in the interest rate as the money _____ shifts _____. *a. fall; supply curve; outward b. fall; supply curve; inward c. fall; demand curve; inward d. rise; demand curve; outward
22. The Federal Reserve's Open Market Committee has decided that the federal
funds rate should be 2 percent rather than the current rate of 1.5 percent. The appropriate open market action is to _____ Treasury bills to _____ money _____. a. sell; decrease; demand *b. sell; decrease; supply c. buy; decrease; supply d. buy; increase; demand
23. The Federal Reserve's Open Market Committee has decided that the federal
funds rate should be 0.5 percent rather than the current rate of 1.25 percent. The appropriate open market action is to _____ Treasury bills to _____ money _____. a. buy; decrease; demand b. buy; decrease; supply c. sell; decrease; demand *d. buy; increase; supply
24. Figure: Money Market I
Reference: Ref 38-2
(Figure: Money Market I) Refer to the information in the Figure: Money Market I. If the money market is initially in equilibrium at point E and the central bank sells bonds, then the interest rate will: *a. move toward point H. b. move toward point L. c. remain at point E. d. shift rightward.
25. Figure: Money Market I
Reference: Ref 38-2
(Figure: Money Market I) Refer to the information in the Figure: Money Market I. If the money market is initially in equilibrium at point E and the central bank buys bonds, then the interest rate will: a. move toward point H. *b. move toward point L. c. remain at point E. d. shift leftward.
26. Figure: Money Market I
Reference: Ref 38-2
(Figure: Money Market I) Refer to the information in the Figure: Money Market I. If the interest rate is at rL and the central bank neither buys nor sells bonds, then the interest rate will: a. move toward point H. b. move toward point L. *c. move toward point E. d. not change.
27. According to the liquidity preference model, if the Federal Reserve increases
the money supply, the equilibrium interest rate ________, and this leads to _________ in the quantity demanded of nonmonetary interest-bearing financial assets. a. rises; an increase *b. falls; a decrease c. rises; a decrease d. falls; an increase
28. When the Federal Reserve undertakes actions to increase the money supply,
the money supply curve shifts to the _____, and the equilibrium interest rate: a. left; increases b. right; increases c. left; decreases *d. right; decreases
29. When the Federal Reserve undertakes actions to decrease the money supply,
the money supply curve shifts to the _____, and the equilibrium interest rate: *a. left; increases b. right; increases c. left; decreases d. right; decreases
30. The target federal funds rate is established by the: a. U.S. Congress. b. Bureau of the Mint. c. U.S. Treasury. *d. Federal Open Market Committee.
31. If the current interest rate is below the target rate, the Federal Reserve should: a. purchase U.S. Treasury bills. *b. sell U.S. Treasury bills. c. increase the money supply. d. change the target to meet the actual rate.
32. When long-term interest rates are higher than short-term rates, as they were in
2010, it: a. implies that short-term interest rates are expected to fall. b. has no implication for short-term interest rates. c. implies that inflation will fall. *d. implies that short-term interest rates are expected to rise.
33. If long-term interest rates are 8 percent and short-term interest rates are 3
percent, the market expects that: a. short-term rates will fall in the future. *b. short-term rates will rise in the future. c. short-term rates will remain the same in the future. d. there is no relationship between long-term and short-term rates.
34. Which is true concerning long-term interest rates and short-term interest rates? a. They usually move in lockstep with one another. b. They always move closely together. *c. They don't always move closely together. d. They are independent of one another.
35. Long-term interest rates are higher than short-term rates. This reflects a belief
that: a. short-term rates are expected to fall. *b. short-term rates are expected to rise. c. short-term rates are expected to remain the same. d. the Federal Reserve is undergoing a change in policy.
36. When long-term interest rates are higher than short-term rates, the market is
signaling that: a. the current interest rate is below its equilibrium level. b. the current interest rate is above its equilibrium level. c. it expects short-term rates to fall in the future. *d. it expects short-term rates to rise in the future.
37. How did the Federal Reserve reverse its course in September 2007? a. The Federal Reserve began a series of interest rate rises, reversing its previous policy of lowering interest rates in order to fight the financial crisis. b. The Federal Reserve began a series of interest rate rises in order to combat inflation. c. The Federal Reserve began a series of cuts in the reserve requirements, reversing its previous policy of increasing the reserve requirement in order to stop bank failures. *d. The Federal Reserve began a series of cuts to lower the interest rate, reversing its previous policy of raising interest rates in order to fight the financial crisis.
38. What is currently used by the Federal Reserve as a determinant of monetary
policy? a. liquidity preferences b. unemployment targeting *c. a loosely defined Taylor rule d. inflation targeting
39. What is currently used by the Federal Reserve as a determinant of monetary
policy? a. Liquidity preferences b. Unemployment targeting c. A loosely defined Taylor rule *d. Inflation targeting
40. Other things equal, rising interest rates lead to a:
*a. fall in investment and consumer spending. b. rise in investment and consumer spending. c. fall in investment spending and a rise in consumer spending. d. fall in consumer spending and a rise in investment spending.
41. Expansionary monetary policy: a. increases the money supply, interest rates, consumption, and investment. b. decreases the money supply, interest rates, consumption, and investment. *c. increases the money supply, decreases interest rates, and increases consumption and investment. d. decreases the money supply, increases interest rates, and decreases consumption and investment.
42. Monetary policy that lowers the interest rate is called ________ because it
________. a. contractionary; aims to head off inflation b. expansionary; increases short-run aggregate supply c. contractionary; reduces saving and increases consumption *d. expansionary; increases aggregate demand
43. The main objective of contractionary monetary policy is to: *a. decrease aggregate demand. b. close a recessionary gap. c. increase investment. d. raise the level of potential output.
44. Monetary policy affects GDP and the price level by changing: a. aggregate supply. *b. aggregate demand. c. the aggregate amount of labor supplied. d. taxes and government spending.
45. Monetary policy affects aggregate demand through changes in: a. government spending. *b. consumer and investment spending. c. tax receipts. d. interest rates.
46. Expansionary monetary policy increases all EXCEPT: a. aggregate demand. b. GDP and the price level. c. consumption spending. *d. interest rates.
47. If interest rates rise there will be a(n): *a. decrease in aggregate demand. b. increase in aggregate demand. c. increase in aggregate supply. d. increase in the money supply.
48. Expansionary monetary policy leads to: *a. lower interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. b. lower interest rates, a decrease in planned investment spending, and an increase in equilibrium GDP. c. higher interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. d. higher interest rates, a decrease in planned investment spending, and a decrease in equilibrium GDP.
49. Contractionary monetary policy leads to: a. lower interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. b. lower interest rates, a decrease in planned investment spending, and a decrease in equilibrium GDP. c. higher interest rates, an increase in planned investment spending, and an increase in equilibrium GDP. *d. higher interest rates, a decrease in planned investment spending, and a decrease in equilibrium GDP.
50. Contractionary monetary policy involves: a. increasing the money supply, interest rates, and aggregate demand. b. increasing the money supply and decreasing interest rates and aggregate demand. c. decreasing the money supply, interest rates, and aggregate demand. *d. decreasing the money supply, increasing interest rates, and decreasing aggregate demand.
51. Contractionary monetary policy:
a. increases aggregate demand. b. increases aggregate supply. *c. works by discouraging investment spending. d. decreases interest rates.
52. An increase in the money supply which will decrease interest rates causes a
shift the: a. aggregate demand curve to the left. *b. aggregate demand curve to the right. c. short-run aggregate supply curve to the left. d. short-run aggregate supply curve to the right.
53. A rise in interest rates due to a decrease in the money supply will _______
aggregate demand. *a. reduce b. not change c. increase d. decrease aggregate supply in the short run but increase immediately the level of
54. An increase in the supply of money will lead to a(n) _______ in equilibrium real
GDP and a(n) _______ in equilibrium price level. *a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease
55. An increase in the supply of money will lead to a(n) _______ in equilibrium real
GDP and a _______ equilibrium interest rate. a. increase; higher *b. increase; lower c. decrease; higher d. decrease; lower
56. A decrease in the supply of money will lead to a(n) _______ in equilibrium real
GDP and a(n) _______ in equilibrium price level. a. increase; increase b. increase; decrease c. decrease; increase *d. decrease; decrease
57. A decrease in the supply of money will lead to a(n) _______ in equilibrium real
GDP and a _______ equilibrium interest rate. a. increase; higher b. increase; lower *c. decrease; higher d. decrease; lower
58. Monetary policy that increases the demand for goods and services is known as
_____ monetary policy. *a. expansionary b. contractionary c. inflationary d. quantitative
59. Contractionary monetary policy: a. is appropriate during a recessionary gap. *b. decreases aggregate demand. c. increases aggregate demand. d. helps solve the problem of unemployment.
60. If the economy is in an inflationary gap, the Federal Reserve should conduct
______ monetary policy to ______ aggregate demand. *a. contractionary; decrease b. contractionary; increase c. expansionary; decrease d. expansionary; increase
61. The Federal Reserve is most likely to engage in expansionary monetary policy
when *a. actual real GDP is below potential output. b. actual real GDP is above potential output. c. the economy is experiencing an inflationary gap. d. it seeks to increase the interest rate.
62. Scenario: Taylor Rule
Suppose the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account when setting the federal funds rate. Also suppose that the inflation rate in the economy is equal to 3 percent and the output gap is 5 percent.
Reference: Ref 38-3
(Scenario: Taylor Rule) Consider the information provided in the Scenario: Taylor Rule. The economy has a(n): a. inflationary gap, since the inflation rate is high. b. recessionary gap, since the economy is not producing potential GDP. *c. inflationary gap, since actual real GDP exceeds potential real GDP. d. recessionary gap, since potential real GDP exceeds actual real GDP.
63. Scenario: Taylor Rule
Suppose the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account when setting the federal funds rate. Also suppose that the inflation rate in the economy is equal to 3 percent and the output gap is 5 percent. Reference: Ref 38-3
(Scenario: Taylor Rule) Consider the information provided in the Scenario: Taylor Rule. In this case, the Federal Reserve will set the federal funds rate to be equal to: *a. 16 percent. b. 6.25 percent. c. 5.75 percent. d. 4.75 percent.
64. The Taylor rule for monetary policy is a rule for setting: a. inflation rates. *b. interest rates. c. unemployment rates. d. the demand for money.
65. If the Federal Reserve sets the federal funds rate on the basis of inflation and
the output gap, then the Federal Reserve is following: a. inflation targeting. *b. the Taylor rule. c. money illusion. d. the quantity theory.
66. When the central bank announces the inflation rate that it is trying to achieve
and sets policy to reach that rate, it is using: a. monetary neutrality policy.
b. the Taylor rule for monetary policy. *c. inflation targeting. d. fiscal policy.
67. Inflation targeting is based on: a. a forecast of future unemployment. b. the historical pattern of unemployment. c. the historical pattern of inflation. *d. a forecast of future inflation.
68. According to the Taylor rule, the unemployment rate and inflation rate in 2010
indicated that the: *a. current interest rate should be negative. b. current federal funds rate target was too low. c. long-term interest rate should be the same as the short-term rate. d. Federal Reserve should follow a contractionary monetary policy.
69. The zero lower bound for interest rates is: *a. the fact that interest rates can't go below zero. b. a theory that says that interest rates should have no bounds or limits. c. a law that prohibits credit unions from paying interest on checkable deposits. d. only a theory that never actually occurs in the real world.
70. If interest rates are at the zero lower bound: *a. the effectiveness of monetary policy increases. b. monetary policy is not very effective. c. automatic stabilizers don't work. d. monetary policy is more effective than fiscal policy.
71. When the Fed uses quantitative easing, it is: a. buying three-month Treasury bills. b. selling three-month Treasury bills. *c. buying longer-term government debt. d. selling longer-term government debt.
72. If the economy is in a recessionary gap, the Federal Reserve should conduct
_______ monetary policy by _________ the money supply.
a. expansionary; decreasing *b. expansionary; increasing c. contractionary; decreasing d. contractionary; increasing
73. To close a recessionary gap using monetary policy, the Federal Reserve should
________ the money supply to ________ investment and consumer spending and shift the aggregate demand curve to the ________. a. increase; increase; left b. decrease; decrease; left *c. increase; increase; right d. decrease; decrease; right
74. To close an inflationary gap using monetary policy, the Federal Reserve should
________ the money supply to ________ investment and consumer spending and shift the aggregate demand curve to the ________. a. increase; increase; left *b. decrease; decrease; left c. increase; increase; right d. decrease; decrease; right
75. Given an inflationary gap, the Federal Reserve will use monetary policy to
_______ real GDP and _______ the price level. a. increase; increase b. increase; decrease c. decrease; increase *d. decrease; decrease
76. Given an inflationary gap, the Federal Reserve will use monetary policy to
_______ interest rates and _______ aggregate demand. a. increase; increase *b. increase; decrease c. decrease; increase d. decrease; decrease
77. Given a recessionary gap, the Federal Reserve will use monetary policy to
_______ interest rates and _______ aggregate demand. a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease
78. Given a recessionary gap, the Federal Reserve will use monetary policy to
_______ real GDP and _______ aggregate demand. *a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease
79. Figure: The Money Supply and Aggregate Demand
Reference: Ref 38-4
(Figure: The Money Supply and Aggregate Demand) Refer to the Figure: The Money Supply and Aggregate Demand. Panel (a) illustrates what happens when the Federal Reserve decides to _______ the money supply and _______ interest rates. a. decrease; lower b. increase; raise *c. increase; lower d. decrease; raise
80. Figure: The Money Supply and Aggregate Demand
Reference: Ref 38-4
(Figure: The Money Supply and Aggregate Demand) Refer to the Figure:The Money Supply and Aggregate Demand. Panel (b) illustrates what happens when the Federal Reserve decides to _______ the money supply and _______ interest rates. a. decrease; lower b. increase; raise c. increase; lower *d. decrease; raise
81. Figure: The Money Supply and Aggregate Demand
Reference: Ref 38-4
(Figure: The Money Supply and Aggregate Demand) Refer to the Figure: The Money Supply and Aggregate Demand. Panel _______ illustrates what happens when the Fed decides to _______ government bonds and _______ the money supply. a. (a); sell; increase b. (b); buy; increase *c. (b); sell; decrease d. (a); buy; decrease
82. Figure: The Money Supply and Aggregate Demand
Reference: Ref 38-4
(Figure: The Money Supply and Aggregate Demand) Refer to the Figure: The Money Supply and Aggregate Demand. If the economy is in a recessionary gap, the Federal Reserve will _______ government bonds, which will _______ the money supply and _______ interest rates. This is shown in panel _______. a. sell; decrease; raise; (b) b. buy; decrease; lower; (a) *c. buy; increase; lower; (a) d. sell; increase; lower; (a)
83. Figure: The Money Supply and Aggregate Demand
Reference: Ref 38-4
(Figure: The Money Supply and Aggregate Demand) Refer to the Figure: The Money Supply and Aggregate Demand. If the economy is in an inflationary gap, the Federal Reserve will _______ government bonds, which will _______ the money supply and _______ interest rates. This is shown in panel _______. a. buy; increase; lower; (a) *b. sell; decrease; raise; (b) c. buy; decrease; raise; (b) d. sell; increase; raise; (b)
84. Figure: The Money Supply and Aggregate Demand
Reference: Ref 38-4
(Figure: The Money Supply and Aggregate Demand) Refer to the Figure: The Money Supply and Aggregate Demand. If the Federal Reserve intended to encourage investment and expand the economy, it would _______ government
bonds, _______ the money supply, and _______ interest rates. This is shown in panel _______. *a. buy; increase; lower; (a) b. sell; increase; lower; (b) c. buy; decrease; lower; (a) d. buy; increase; raise; (a)
85. Suppose the Federal Reserve is conducting an expansionary monetary policy. It
will: a. buy Treasury bills on the open market, so that the money supply will decrease, interest rates will fall, planned investment will fall, and the AD curve will shift to the left. b. sell Treasury bills on the open market, so that the money supply will decrease, interest rates will rise, planned investment will fall, and the AD curve will shift to the left. *c. buy Treasury bills on the open market, so that the money supply will increase, interest rates will fall, planned investment will rise, and the AD curve will shift to the right. d. sell Treasury bills on the open market, so that the money supply will increase, interest rates will rise, planned investment will rise, and the AD curve will shift to the left.
86. If the Federal Reserve wants to close an inflationary gap, it will: a. increase the money supply and raise the interest rate, thus increasing investment spending and GDP. The AD curve will shift to the right. b. increase the money supply and lower the interest rate, thus lowering investment spending and increasing GDP. The SRAS curve will shift to the left. *c. decrease the money supply and raise the interest rate, thus lowering investment spending and GDP. The AD curve will shift to the left. d. decrease the money supply and lower the interest rate, thus lowering investment spending and increasing GDP. The SRAS curve will shift to the right.
87. To fight inflation, the Federal Reserve should conduct _____ monetary policy to
______ interest rates, which will shift the aggregate demand curve to the _____. *a. contractionary; raise; left b. contractionary; raise; right c. expansionary; lower; right d. expansionary; raise; left
88. To fight a recession, the Federal Reserve should conduct _____ monetary
policy to ______ interest rates, which will shift the aggregate demand curve to the _____. a. expansionary; lower; left b. contractionary; raise; left c. contractionary; lower; right *d. expansionary; lower; right
89. Which statement is FALSE? a. The Taylor rule sets the federal funds rate on the basis of both inflation rate and output gap, whereas inflation targeting constructs monetary policy based on a target inflation rate. b. The Taylor rule sets the federal funds rate on the basis of past inflation rates, whereas inflation targeting constructs monetary policy based on a forecast of future inflation rate. c. The Taylor rule can be more flexible, whereas inflation targeting provides more transparency and accountability. *d. The Taylor rule sets the federal funds rate on the basis of only past inflation rates, whereas inflation targeting constructs monetary policy based on a target interest rate and business cycles.
90. Which describes the difference between the Taylor rule and inflation targeting? a. The Federal Reserve uses inflation targeting, and the Bank of England uses the Taylor rule. *b. The Taylor rule responds to past inflation, and inflation targeting is based on a forecast of inflation. c. Inflation targeting responds to past inflation, and the Taylor rule is based on a forecast of inflation. d. Inflation targeting is a strategy used in conducting fiscal policy, while the Taylor rule is used in monetary policy.
91. In order to decrease the interest rate, the Fed should increase the money supply. *a. True b. False
92. In order to decrease the interest rate, the Fed should make an open-market sale of Treasury bills. a. True *b. False
93. If the actual interest rate is below the target rate, the Fed should decrease the money supply.
*a. True b. False
94. If the actual interest rate is 6 percent and the target rate is 4 percent, the Fed should decrease the money supply. a. True *b. False
95. If the actual interest rate is below the target rate, the Fed should conduct open-market sales of Treasury bills. *a. True b. False
96. If the actual interest rate is 6 percent and the target rate is 4 percent, the Fed should conduct open-market sales of Treasury bills. a. True *b. False
97. When long-term rates are lower than short-term rates, the market is signaling that it expects short-term rates to fall in the future. *a. True b. False
98. Short-term interest rates are, on average, higher than long-term rates to compensate short-term bond purchasers for higher risk in the short term. a. True *b. False
99. Between 2004 and 2006, the Fed raised its target federal funds rate to prevent rising inflation. *a. True b. False
100. In 2007, the Fed raised its target federal funds rate to prevent rising unemployment and a recession. a. True *b. False
101. Expansionary monetary policy decreases interest rates and increases aggregate demand. *a. True b. False
102. Expansionary monetary policy works by decreasing consumption, allowing other sectors of the economy to spend more. a. True *b. False
103. Expansionary monetary policy may increase consumer spending. *a. True b. False
104. Expansionary monetary policy may decrease investment spending. a. True *b. False
105. To close a recessionary gap, the central bank could adopt an expansionary economic policy. *a. True b. False
106. When real GDP is above potential GDP, the Fed typically uses contractionary monetary policy. *a. True b. False
107. When the economy is developing an inflationary gap, the Fed should increase the money supply to decrease interest rates. a. True *b. False
108. Usually there is an inverse relationship between the Federal Reserve funds rate and the output gap. a. True *b. False
109. According to the Taylor rule, the target federal funds rate should be positively related to the inflation rate and inversely related to the unemployment rate. *a. True b. False
110. Inflation targeting occurs when the central bank sets an explicit target for the inflation rate and uses monetary policy to hit that target. *a. True b. False
111. Inflation targeting is different from the Taylor rule because the Taylor rule is based on a forecast of future inflation, but inflation targeting adjusts monetary policy to past inflation. a. True *b. False
112. One advantage of inflation targeting over the Taylor rule is reduced uncertainty since the public knows the inflation target in advance. *a. True b. False
113. One advantage of inflation targeting over the Taylor rule is that the central bank's policy can be better evaluated by seeing how close actual inflation rates are to the target. *a. True b. False
114. The zero lower bound for interest rates is the target that the Taylor rule sets for interest rates. a. True *b. False
115. Quantitative easing occurs when the Fed buys long-term and shortterm government debt instead of purchasing only short-term government debt. *a. True b. False
116. What is the goal of expansionary monetary policy, and how does it work in the short run? Correct Answer:
Expansionary monetary policy is designed to stimulate the economy when real GDP is below potential GDP and unemployment is a problem. An expansion of the money supply shifts the money supply curve to the right, lowering the interest rate in the money market. A lower interest rate increases both planned investment and consumption, increasing the aggregate demand curve and real GDP while lowering unemployment. 117. What is the goal of contractionary monetary policy, and how does it work in the short run? Correct Answer:
Contractionary monetary policy is designed to rein in the economy when real GDP is above potential GDP and inflation is a major problem. A contraction of the money supply shifts the money supply curve to the left, raising the interest rate in the money market. A higher interest rate decreases both planned investment and consumption, decreasing the aggregate demand curve, the price level, and real GDP. 118. Suppose that the inflation rate is 2.5 percent. The unemployment gap is 2 percent. Use the Taylor rule to estimate the target Federal funds rate. Correct Answer:
The Taylor rule says that: Fed funds rate = 2.07 + (1.28 × inflation rate) – (1.95 × unemployment gap) Fed funds rate = 2.07 percent + 3.2 percent – 3.9 percent = 1.37 percent 119. Suppose the annual inflation rate is at 2 percent, and 8.5 percent of the labor force is unemployed. If you were on the Federal Reserve's Open Market Committee, what action would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate? Correct Answer:
Inflation is low and unemployment is high. These are the classic signs of weak aggregate demand, or a recession. The Federal Reserve should buy Treasury bills in an open market operation. This injects money into the banks, shifts the money supply curve to the right, and lowers the interest rate in the money market. A lower interest rate increases both planned investment and consumption, increasing the aggregate demand curve and real GDP. This action should lower the unemployment rate, with perhaps a modest bit of inflation. 120. Suppose the annual inflation rate is at 7 percent and 3 percent of the labor force is unemployed. If you were on the Federal Reserve's
Open Market Committee, what action would you prescribe? How would this affect the economy, the inflation rate, and the unemployment rate? Correct Answer:
Inflation is high and unemployment is low. These are the classic signs of a very strong aggregate demand. The Federal Reserve should sell Treasury bills in an open market operation. This withdraws money from the banks, shifts the money supply curve to the left, and raises the interest rate in the money market. A higher interest rate decreases both planned investment and consumption, decreasing the aggregate demand curve. This should reduce the inflation but possibly increase the unemployment rate.
121. If the Federal Open Market Committee decides to decrease the federal funds
target rate, it will: *a. perform an open market purchase. b. perform an open market sale. c. increase the demand for money. d. offer tax breaks to specific businesses.
122. If the Federal Open Market Committee conducts an open market purchase,
one can expect that: *a. interest rates in the money market will fall. b. interest rates in the money market will remain unchanged. c. interest rates in the money market will rise. d. the money supply will decrease.
123. If the Federal Open Market Committee engages in an open market purchase, it
will shift the money: *a. supply curve to the right. b. supply curve to the left. c. demand curve to the left. d. demand curve to the right.
124. When Federal Reserve officials say they are targeting federal funds rate, how
are they doing this? *a. via open market operations b. via changes in the discount rate c. via changes in deposit insurance maximums d. via government spending
125. Contractionary monetary policy will, holding everything else constant:
a. increase the interest rate and cause the AD curve to shift to the right. *b. increase the interest rate and cause the AD curve to shift to the left. c. decrease the interest rate and cause the AD curve to shift to the left. d. decrease the interest rate and cause the AD curve to shift to the right.
126. The Taylor rule for monetary policy: *a. provides guidance for setting a federal funds rate target. b. says that interest rates often should be negative. c. provides guidance on timing of monetary policy with fiscal policy. d. refers to the monetary rule.
127. If a central bank announces an inflation target, it: *a. may have to sacrifice some control over interest rates. b. is in effect also announcing an interest rate target. c. will achieve this goal only by allowing price levels to vary. d. must do so in coordination with fiscal policy makers.
128. If an economy is operating at an aggregate output level which is greater than
its potential output level, the Federal Reserve may: *a. conduct an open market sale. b. conduct an open market purchase. c. lower the federal funds rate target. d. decrease government spending.
1. In the short run, the interest rate is determined in the __________ market. a. stock *b. money c. loanable funds d. commodity
2. In the long run, the interest rate is determined in the __________ market. a. stock b. money *c. loanable funds d. commodity
3. If actual output is equal to potential output and the Fed increases the money
supply, in the short-run interest rates will likely: a. increase. *b. decrease. c. remain constant. d. fluctuate randomly.
4. If actual output is equal to potential output and the Fed increases the money
supply, in the short run the likely result will be a(n) ________ in investment and a(n) _______ in consumption. *a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease
5. If actual output is equal to potential output and the Fed increases the money
supply, in the short run the aggregate demand will likely: a. shift to the left. b. remain the same. *c. increase. d. decrease.
6. If actual output is equal to potential output and the Fed increases the money
supply, in the short run the price level will likely: a. fluctuate randomly. b. remain the same. c. decrease. *d. increase.
7. If actual output is equal to potential output and the Fed increases the money
supply, in the short run real GDP will likely: a. fluctuate randomly. b. remain the same. c. decrease. *d. increase.
8. If actual output is equal to potential output and the Fed increases the money
supply so that actual output exceeds potential output, eventually nominal wages will: *a. increase. b. decrease. c. remain the same. d. fluctuate randomly.
9. When nominal wages increase, the short-run aggregate supply curve: a. shifts to the right. *b. shifts to the left. c. remains constant. d. disappears.
10. If actual output is equal to potential output and the Fed increases the money
supply, in the long run the price level will likely: a. fluctuate randomly. b. remain the same. c. decrease. *d. increase.
11. If actual output is equal to potential output and the Fed increases the money
supply, in the long run real GDP will likely: a. fluctuate randomly. *b. remain the same. c. decrease. d. increase.
12. If actual output is equal to potential output and the Fed increases the money
supply, in the short run interest rates will likely: a. increase. *b. decrease. c. remain constant. d. fluctuate randomly.
13. If actual output is equal to potential output and the Fed decreases the money
supply, in the short run the likely result will be a(n) ________ in investment and a(n) _______ in consumption. a. increase; increase b. increase; decrease c. decrease; increase *d. decrease; decrease
14. If actual output is equal to potential output and the Fed decreases the money
supply, in the short run aggregate demand will likely: a. shift to the right. b. remain the same. c. increase. *d. decrease.
15. If actual output is equal to potential output and the Fed decreases the money
supply, in the short run the price level will likely_______ and real GDP will likely_______. a. increase; increase b. increase; decrease c. decrease; increase *d. decrease; decrease
16. If actual output is equal to potential output and the Fed decreases the money
supply so that actual output falls below potential output, eventually nominal wages will_______ and short-run aggregate supply will _______ . a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease
17. If actual output is equal to potential output and the Fed decreases the money
supply, in the long run the price level will likely: a. fluctuate randomly. b. remain the same. *c. decrease. d. increase.
18. If actual output is equal to potential output and the Fed decreases the money
supply, in the long run real GDP will likely: a. fluctuate randomly. *b. remain the same. c. decrease. d. increase.
19. When actual output is above potential output over time: a. nominal wages will increase, and the short-run supply curve will shift to the right. *b. nominal wages will increase, and the short-run supply curve will shift to the left. c. the aggregate demand curve will shift to the right. d. the short-run aggregate supply curve will shift to the right.
20. An increase in the money supply causes ______ in output in the short run and
_______ in output in the long run. *a. an increase; no change b. an increase; an increase c. no change; an increase d. no change; no change
21. Contractionary monetary policy causes _______ in the price level in the short
run and _______ in the price level in the long run. a. no change; a decrease *b. a decrease; a decrease c. a decrease; no change d. no change; no change
22. The short-run aggregate supply curve is _____, and the long-run aggregate
supply curve is ______. a. vertical; upward sloping *b. upward sloping; vertical c. downward sloping; vertical d. vertical; horizontal
23. Suppose that the economy is operating at potential output and there is an
increase in the money supply. Which best describes the adjustment process that will follow? *a. Aggregate output will rise above potential output, nominal wages will rise, and the SRAS will shift leftward.
b. Aggregate output will fall below potential output, nominal wages will rise, and the SRAS will shift leftward. c. Aggregate output will rise above potential output, nominal wages will fall, and the SRAS will shift leftward. d. Aggregate output will rise above potential output, nominal wages will rise, and the SRAS will shift rightward.
24. Over time, contractionary monetary policy ________ nominal wages and
causes the short-run aggregate supply curve to shift ________. a. lowers; leftward b. raises; rightward *c. lowers; rightward d. raises; leftward
25. Figure: Short-Run and Long-Run Effects of Monetary Policy
Reference: Ref 39-1
(Figure: Short-Run and Long-Run Effects of Monetary Policy) Refer to the information in the Figure: Short-Run and Long-Run Effects of Monetary Policy. If the economy is initially at E2 and the central bank makes no change in its monetary policy: a. AD2 will shift to the right, increasing the existing inflationary gap. b. AD2 will shift to the left, closing the inflationary gap. *c. SRAS1 will eventually shift to the left, closing the existing inflationary gap but raising the aggregate price level. d. SRAS2 will immediately shift to the right, increasing the existing inflationary gap.
26. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD–SRAS Model) According to the Figure:
Monetary Policy and the AD–SRAS Model, an increase in the money supply is most likely to cause a shift from: a. SRAS to SRAS'. *b. AD to AD'. c. SRAS' to SRAS. d. AD' to AD.
27. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the Figure: Monetary Policy and the AD–SRAS Model. The economy may move from point i to point h as a result of: *a. an increase in the money supply. b. raising the discount rate. c. a decrease in the money supply. d. selling government securities in the open market.
28. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the Figure: Monetary Policy and the AD–SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of: a. a decrease in the money supply. b. raising the discount rate. *c. an increase in the money supply. d. selling government securities in the open market.
29. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the Figure: Monetary Policy and the AD–SRAS Model. The economy could move from point g to point f as a result of: a. an increase in the money supply. b. lowering the discount rate. *c. a decrease in the money supply. d. buying government securities in the open market.
30. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the Figure: Monetary Policy and the AD–SRAS Model. If the economy is in a recessionary gap at point f, it could move to point g as a result of: a. a decrease in government spending. b. raising the discount rate. c. a decrease in the money supply. *d. buying government securities in the open market.
31. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD–SRAS Model) Refer to the information in the Figure: Monetary Policy and the AD–SRAS Model. If the economy is in an inflationary gap at point h, it can move to point i as a result of: a. an increase in the money supply. b. lowering the discount rate. *c. a decrease in the money supply. d. buying government securities in the open market.
32. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD-SRAS Model) Refer to the information in the Figure: Monetary Policy and the AD–SRAS Model. If the economy is at point h because of an open market purchase by the Federal Reserve and no further monetary policy is implemented, in the long run nominal wages will: *a. increase, shift SRAS to SRAS', decrease real GDP, and increase the price level. b. increase, shift SRAS to SRAS', increase real GDP, and decrease the price level. c. decrease, shift SRAS further to the right, decrease real GDP, and increase the price level. d. decrease, shift SRAS to SRAS', increase real GDP, and decrease the price level.
33. Figure: Monetary Policy and the AD–SRAS Model
Reference: Ref 39-2
(Figure: Monetary Policy and the AD-SRAS Model) Refer to the information in the Figure: Monetary Policy and the AD–SRAS Model. If the economy is at point f because of an open market sale by the Federal Reserve and no further monetary policy is implemented, in the long run nominal wages will: a. increase, shift SRAS to SRAS', decrease real GDP, and increase the price level. b. increase, shift SRAS to SRAS', increase real GDP, and decrease the price level. *c. decrease, shift SRAS' to SRAS, increase real GDP, and decrease the price level. d. decrease, shift SRAS' to SRAS, decrease real GDP, and decrease the price level.
34. Consider an economy that is facing a recessionary gap. The Federal Reserve
decides to use expansionary monetary policy to close that gap. As a result of this policy, in the short run the money supply will: a. decrease, the interest rate will fall, investment and consumption spending will decrease, and GDP will increase. b. increase, the interest rate will increase, investment and consumption spending will decrease, and GDP will decrease. c. decrease, the interest rate will increase, investment and consumption spending will decrease, and GDP will decrease. *d. increase, the interest rate will fall, investment and consumption spending will increase, and GDP will increase.
35. Figure: Output Gap
Reference: Ref 39-3
(Figure: Output Gap) Refer to the information in the Figure: Output Gap. If the economy is producing at Y1, then it has a(n): *a. inflationary gap, as actual real GDP exceeds potential real GDP, and the Federal Reserve should use contractionary monetary policy. b. recessionary gap, as potential real GDP exceeds actual real GDP, and the Federal Reserve should use expansionary monetary policy.
c. inflationary gap, as potential real GDP exceeds actual real GDP, and the Federal Reserve should use contractionary fiscal policy. d. recessionary gap, as actual real GDP exceeds potential real GDP, and the Federal Reserve should use expansionary fiscal policy.
36. Figure: Output Gap
Reference: Ref 39-3
(Figure: Output Gap) Refer to the information in the Figure: Output Gap. If the economy is producing at Y2, then it has a(n): a. recessionary gap, as actual real GDP exceeds potential real GDP, and the Federal Reserve should use expansionary fiscal policy. *b. recessionary gap, as potential real GDP exceeds actual real GDP, and the Federal Reserve should use expansionary monetary policy. c. inflationary gap, as actual real GDP exceeds potential real GDP, and the Federal Reserve should use contractionary monetary policy. d. inflationary gap, as potential real GDP exceeds actual real GDP, and the Federal Reserve should use contractionary fiscal policy.
37. Figure: Output Gap
Reference: Ref 39-3
(Figure: Output Gap) Refer to the information in the Figure: Output Gap. If the economy is at Y1 as a result of expansionary monetary policy and no further policy is implemented, in the long run nominal wages will: *a. increase and shift the short-run aggregate supply curve to the left, decreasing real output. b. ncrease and shift the short-run aggregate supply curve to the right, increasing real output. c. decrease and shift the short-run aggregate supply curve to the left, decreasing real output. d. decrease and shift the short-run aggregate supply curve to the right, increasing real output.
38. Figure: Output Gap
Reference: Ref 39-3
(Figure: Output Gap) Refer to the information in the Figure: Output Gap. If the economy is at Y2 due to contractionary monetary policy and no further policy is implemented, in the long run nominal wages will: a. increase and shift the short-run aggregate supply curve to the left, decreasing real output. b. increase and shift the short-run aggregate supply curve to the right, increasing real output. c. decrease and shift the short-run aggregate supply curve to the left, decreasing real output. *d. decrease and shift the short-run aggregate supply curve to the right, increasing real output.
39. Which is the short-run effect of an increase in the money supply? a. Interest rates will increase, leading to an increase in aggregate demand. *b. Interest rates will decrease, leading to an increase in aggregate demand. c. Interest rates will increase, leading to a decrease in aggregate demand. d. Interest rates will decrease, leading to a decrease in aggregate demand.
40. An increase in the money supply shifts aggregate demand to the _____, thereby
causing a _____ level of real output in the short run. a. right; lower *b. right; higher c. left; lower d. left; higher
41. A decrease in the money supply shifts aggregate demand to the _____, thereby
resulting in a _____ level of real output in the short run. a. right; lower b. right; higher *c. left; lower d. left; higher
42. The short-run effect of an increase in the money supply is that the aggregate
price level: *a. increases, and real output also increases. b. increases, and real output decreases. c. decreases, and real output also decreases. d. decreases, and real output increases.
43. The short-run effect of a decrease in the money supply is that the aggregate
price level: a. increases, and real output also increases. b. increases, and real output decreases. *c. decreases, and real output also decreases. d. decreases, and real output increases.
44. An increase in the money supply will lead to a short-run _____ in investment
spending, due to the resulting _____ interest rate. a. decrease; lower b. decrease; higher c. increase; higher *d. increase; lower
45. A decrease in the money supply will lead to a short-run _____in investment
spending, due to the resulting _____interest rate. a. decrease; lower *b. decrease; higher c. increase; higher d. increase; lower
46. If actual output is equal to potential output and the Fed increases the money
supply, in the short-run the price level will likely: a. fluctuate randomly. b. remain the same. c. decrease. *d. increase.
47. If the Federal Reserve uses expansionary monetary policy there is a: a. negative short-run effect on real GDP, but prices remain unchanged in the long run. *b. positive short-run effect on real GDP, but GDP remains equal to potential GDP in the long run. c. positive long-run effect on real GDP, but GDP remains unchanged at its potential level in the short run. d. positive short-run effect on the price level, but the aggregate price level remains unchanged in the long run.
48. Suppose the economy is in long-run equilibrium at full employment levels of real
GDP. In the long run, if the money supply increases, we would expect _____ in the price level and _____ in real GDP. *a. an increase; no change b. an increase; an increase c. a decrease; no change d. no change; an increase
49. In the long run, changes in the money supply: a. affect both the aggregate price level and aggregate output. *b. affect only the price level; they do not change aggregate output. c. affect aggregate output but not the aggregate price level. d. have no impact on either the aggregate price level or aggregate output.
50. Assume the money supply doubles, followed by a doubling of the wage rate and
the price level. Under these circumstances, we can safely conclude: a. real aggregate output will double. b. real aggregate output will fall in half. c. nominal output will double, but real output will fall. *d. nominal output will double, but real output will remain unchanged.
51. Economists argue that money is neutral in: a. both the short and long run. b. the short run only. *c. the long run, but money does have an impact on the price level. d. the long run, but money has no impact on the price level.
52. Monetary neutrality implies that in the long run: *a. monetary policy does not affect the level of economic activity. b. aggregate supply is independent of monetary policy. c. changing the money supply does not have any effect on the aggregate price level. d. aggregate demand is independent from monetary policy.
53. Which statement is false? In the long run, monetary policy: a. affects only the aggregate price level.
b. does not affect aggregate output. c. is neutral. *d. increases potential output.
54. If the money supply increases by 10 percent, in the long run: a. unemployment drops by 10 percent. *b. the price level increases by 10 percent. c. real GDP increases by 10 percent. d. unemployment drops by 20 percent.
55. If the money supply decreases by 5 percent, in the long run: a. interest rates rise by 5 percent. b. the unemployment rate rises by 10 percent. *c. the price level drops by 5 percent. d. real GDP drops by 5 percent.
56. In the long run, an increase in the quantity of money: a. increases real output. *b. increases prices but not long-run output. c. increases real interest rates. d. has no impact on the economy.
57. The concept of monetary neutrality describes a situation in the long run when: *a. increases in the money supply have no effect on real variables such as GDP but only raise the price level. b. increases in the money supply have no effect on the price level but only raise real GDP. c. decreases in the money supply lower real GDP and the price level. d. increases in the money supply raise real GDP and the price level.
58. In the long run, a monetary expansion a. increases real GDP but has no effect on the aggregate price level. b. decreases real GDP but has no effect on the aggregate price level. *c. increases the aggregate price level but has no effect on real GDP. d. decreases the aggregate price level but has no effect on real GDP.
59. In the long run, a monetary contraction: a. increases real GDP but has no effect on the aggregate price level. b. decreases real GDP but has no effect on the aggregate price level. c. increases the aggregate price level but has no effect on real GDP. *d. decreases the aggregate price level but has no effect on real GDP.
60. If the economy starts out in long-run macroeconomic equilibrium, the long-run
effect of an increase in the money supply is to a. increase real GDP. b. decrease real GDP. *c. leave real GDP unchanged. d. leave the aggregate price level unchanged.
61. According to the concept of monetary neutrality, the only long-run effect of an
increase in the money supply is to: *a. increase the aggregate price level by the same percentage. b. decrease the aggregate price level by the same percentage. c. increase real GDP by the same percentage. d. decrease real GDP by the same percentage.
62. Expansionary monetary policy causes _______ in interest rates in the short run
and ______ in interest rates in the long run. *a. a fall; no change b. a fall; a fall c. no change; a fall d. no change; no change
63. Since the short-run increase in the aggregate price level that follows a monetary
expansion is smaller than the ensuing long-run increase, it follows that: a. money is neutral in the short run. b. in the short run, the interest rate remains constant. c. in the long run, the real money supply increases. *d. in the short run, the real money supply increases.
64. An increase in the money supply: *a. lowers the interest rate in the short run but does not affect the interest rate in the long run.
b. raises the interest rate in the short run but lowers the interest rate in the long run. c. does not affect the interest rate in the short run but raises the interest rate in the long run. d. does not affect the interest rate in the short run but lowers the interest rate in the long run.
65. In the long run, changes in the money supply: *a. don't affect the interest rate. b. lower the interest rate. c. raise the interest rate. d. have a small but indeterminate impact on the interest rate.
66. Contractionary monetary policy causes a(n) ________ in interest rates in the
short run and ________ in interest rates in the long run. a. increase; an increase *b. increase; no change c. decrease; no change d. decrease; a decrease
67. An increase in the money supply will decrease interest rates in the short run but
will have no effect on interest rates in the long run because an increase in the money supply will eventually ______ prices and _______ money demand. a. decrease; decrease b. decrease; increase c. increase; decrease *d. increase; increase
68. Available international evidence for the period 1970–2010 shows that the: *a. increases in the quantity of money led to a proportionate increase in the aggregate price level. b. relationship between money and the aggregate price level changes over time and across countries. c. concept of monetary neutrality applies only to developing countries. d. increases in the money supply led, in the long run, to equal percent rises in the aggregate price level.
69. Between 1970 and 2010, research comparing similar wealthy countries found
that increases in the money supply: *a. and increases in the price level were roughly proportional.
b. had little effect on prices. c. caused large increases in real GDP. d. caused large decreases in real GDP.
70. Monetary policy is similar among wealthy countries because the central banks
of most countries: *a. try to keep inflation between 2 percent and 3 percent per year. b. try to keep inflation between 5 percent and 6 percent per year. c. try to keep inflation between 0 percent and 2percent per year. d. are trying to establish a single global currency.
71. In the long run, the only effect of monetary policy is on the: a. long-run aggregate supply. b. interest rate. c. aggregate output level. *d. aggregate price level.
72. Figure: Economic Adjustments
Reference: Ref 39-4
(Figure: Economic Adjustments) Refer to the information in the Figure: Economic Adjustments. Assume that the economy is at point c. An increase in the money supply is represented by a shift of the: a. SRAS1 curve to SRAS2. b. SRAS2 curve to SRAS1. *c. AD1 curve to AD2. d. AD2 curve to AD1.
73. Figure: Economic Adjustments
Reference: Ref 39-4
(Figure: Economic Adjustments) Refer to the information in the Figure: Economic Adjustments. Assume that the economy is at point b. A decrease in the money supply is represented by a shift of the:
a. SRAS1 curve to SRAS2. b. SRAS2 curve to SRAS1. c. AD1 curve to AD2. *d. AD2 curve to AD1.
74. Figure: Monetary Policy I
Reference: Ref 39-5
(Figure: Monetary Policy I) Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E1 and the central bank chooses to sell bonds, then: a. AD2 will shift to the right, creating an inflationary gap. b. AD2 may shift to AD1, creating a recessionary gap. c. AD1 may shift to AD2, closing an existing recessionary gap. *d. AD1 will shift to the left, increasing an existing recessionary gap.
75. Figure: Monetary Policy I
Reference: Ref 39-5
(Figure: Monetary Policy I) Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E1 and the central bank chooses to buy bonds: a. AD2 will shift to the right, creating an inflationary gap. b. AD2 may shift to AD1, creating a recessionary gap. *c. AD1 may shift to AD2, closing an existing recessionary gap. d. AD1 will shift to the left, increasing an existing recessionary gap.
76. Figure: Monetary Policy I
Reference: Ref 39-5
(Figure: Monetary Policy I) Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E2 and the central bank chooses to buy bonds:
*a. AD2 will shift to the right, creating an inflationary gap. b. AD2 may shift to AD1, creating a recessionary gap. c. AD1 may shift to AD2, closing an existing recessionary gap. d. AD1 will shift to the left, increasing an existing recessionary gap.
77. Figure: Monetary Policy I
Reference: Ref 39-5
(Figure: Monetary Policy I) Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E2 and the central bank chooses to sell bonds: a. AD2 will shift to the right, creating an inflationary gap. *b. AD2 may shift to AD1, creating a recessionary gap. c. AD1 may shift to AD2, closing an existing recessionary gap. d. AD1 will shift to the left, increasing an existing recessionary gap.
78. Figure: Monetary Policy I
Reference: Ref 39-5
(Figure: Monetary Policy I) Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E1 and the central bank chooses to buy bonds: *a. AD1 may shift to AD2, closing an existing recessionary gap. b. AD1 will shift to the left, increasing an existing recessionary gap. c. SRAS1 will shift immediately to the left, closing an existing inflationary gap. d. SRAS2 will shift immediately to the right, increasing an existing inflationary gap.
79. Figure: Monetary Policy I
Reference: Ref 39-5
(Figure: Monetary Policy I) Refer to the information in the Figure: Monetary Policy I. If the money market is initially at E2 and the central bank chooses to sell bonds: a. AD2 will shift to the right, creating an inflationary gap. *b. AD2 may shift to AD1, creating a recessionary gap.
c. SRAS1 will shift immediately to the left, closing an existing inflationary gap. d. SRAS2 will shift immediately to the right, increasing an existing inflationary gap.
80. Figure: Monetary Policy II
Reference: Ref 39-6
(Figure: Monetary Policy II) Refer to the information in the Figure: Monetary Policy II. To eliminate the inflationary gap from the short-run equilibrium at Y2, monetary policy should be: a. expansionary. *b. contractionary. c. neutral. d. balanced.
81. Figure: Monetary Policy II
Reference: Ref 39-6
(Figure: Monetary Policy II) Refer to the information in the Figure: Monetary Policy II. If the short-run equilibrium is at Y2, sound central bank policy would be: *a. contractionary. b. expansionary. c. neutral. d. balanced.
82. Figure: Monetary Policy III
Reference: Ref 39-7
(Figure: Monetary Policy III) Refer to the information in the Figure: Monetary Policy III. The central bank should adopt policies to move the economy to:
a. Y1. b. Y2. c. Y3. *d. Y4.
83. Figure: Monetary Policy III
Reference: Ref 39-7
(Figure: Monetary Policy III) Refer to the information in the Figure: Monetary Policy III. Expansionary economic policy will lead to an equilibrium GDP of: a. Y1. b. Y2. c. Y3. *d. Y4.
84. Figure: Monetary Policy III
Reference: Ref 39-7
(Figure: Monetary Policy III) Refer to the information in the Figure: Monetary Policy III. Expansionary monetary policy will lead to an equilibrium price level of: a. P1. b. P2. c. P3. *d. P4.
85. The appropriate monetary policy to stabilize the economy during a recessionary gap is expansionary policy. *a. True b. False
86. A contractionary monetary policy is the appropriate policy during an expansion. *a. True b. False
87. In the short run the interest rate is determined in the loanable funds market.
a. True *b. False
88. In the short run the interest rate is determined in the money market. *a. True b. False
89. The Fed prints money only when it is conducting monetary policy. a. True *b. False
90. A central bank may print money not only when it is conducting monetary policy, but also when it is paying bills as the fiscal agent for the federal government. *a. True b. False
91. In the long-run changes in the money supply will change prices, real GDP, and interest rates. a. True *b. False
92. In the long-run changes in the money supply will change prices, but not real GDP or interest rates. *a. True b. False
93. Monetary policy affects both the aggregate price level and output in the long run. a. True *b. False
94. If actual output is equal to potential output and the Fed increases the money supply, in the short run interest rates will likely increase. a. True *b. False
95. If actual output is equal to potential output and the Fed decreases the money supply, in the short run the likely result will be a decrease in investment and a decrease in consumption. *a. True b. False
96. If actual output is equal to potential output and the Fed increases the money supply, in the short run aggregate demand will likely decrease. a. True *b. False
97. If actual output is equal to potential output and the Fed decreases the money supply, in the short run the price level will likely decrease. *a. True b. False
98. If actual output is equal to potential output and the Fed increases the money supply, in the short run real GDP will likely remain the same. a. True *b. False
99. If actual output is equal to potential output and the Fed decreases the money supply so that actual output falls below potential output, eventually nominal wages will decrease. *a. True b. False
100. When nominal wages decrease, the short-run aggregate supply curve shifts to the left. a. True *b. False
101. If actual output is equal to potential output and the Fed increases the money supply, in the long run the price level will likely increase. *a. True b. False
102. If actual output is equal to potential output and the Fed decreases the money supply, in the long run real GDP will likely decrease. a. True *b. False
103. The concept of monetary neutrality means that changes in the money supply have no real effects in the long run. *a. True b. False
104. If the money supply decreases by 10 percent, the aggregate price level will remain constant in the long run. a. True *b. False
105. The theory of monetary neutrality implies that monetary policy is effective in the short run, but not in the long run. *a. True b. False
106. The theory of monetary neutrality means that monetary policy is completely irrelevant. a. True *b. False
107. In the long run, if the money supply rises by 10 percent, then the price level may rise by more than 10 percent. a. True *b. False
108. In the short run changes in the money supply change the interest rate, but in the long run changes in the money supply have no effect on interest rates. *a. True b. False
109. In the short run changes in the money supply will change interest rates, but not real output and prices.
a. True *b. False
110. In the long run changes in the money supply will change prices, but not real output and interest rates. *a. True b. False
111. Changes in the money supply have no long-run effects on the interest rate because when the price level changes, the resulting change in the demand for money exactly offsets the short-run changes in the money supply. *a. True b. False
112. From 1970–2010 international data shows that monetary neutrality occurs only in wealthy countries. a. True *b. False
113. Between 1970 and 2010, in general, the money supply grew more rapidly in poorer countries than in wealthy ones. *a. True b. False
114. In the long run, a change in monetary policy will affect only the aggregate price level. *a. True b. False
115. If actual output is equal to potential output, explain the shortrun and long-run impact on prices and real output of a contractionary monetary policy. Correct Answer:
If the Fed decreases the money supply, in the short run interest rates will increase. The increase in interest rates will cause a decrease in investment spending and consumption. This decrease in aggregate demand will decrease prices and decrease real output to a level below potential output in the short run, thus creating a recessionary gap with higher unemployment. In the long run, workers will be willing to accept lower nominal wages in the face of high unemployment. As nominal wages decrease, the short-run aggregate supply curve will shift to the right until the
economy returns to a long-run macroeconomic equilibrium with actual output equal to potential output, but at a lower price level then before the contractionary monetary policy. 116. Explain what is meant by money neutrality. Use an example of expansionary monetary policy, both in the short run and the long run, to demonstrate money neutrality. Correct Answer:
Many economists believe that monetary policy can have a short-term effect by either expanding or contracting the economy, but in the long run, changes in the money supply will have no real effect on real GDP and will only affect the price level. For example, suppose the economy is in short-run and long-run equilibrium at full employment and the money supply is increased. This will cause a short-term increase in AD, which will increase real GDP above full employment, and the price level will also increase. With enough time, nominal wages will increase and the SRAS curve will shift to the left until equilibrium is reached at full employment again. This decrease in SRAS also increases the price level. So the long-run impact of the expansionary monetary policy is no increase in real GDP, but a large increase in price level. 117. If actual output is equal to potential output, explain the shortrun and long-run effects of an increase in the money supply on interest rates. Correct Answer:
In the short run, an increase in the money supply will decrease interest rates, which then leads to increased investment spending, consumption, and aggregate demand. The increase in aggregate demand will cause an increase in real output and prices in the short run. This increase in prices, however, will increase the demand for money, pushing the interest rate up and eventually back to its original level.
118. If an economy is in long-run equilibrium at its potential output level, this also
means: *a. the money market is in equilibrium. b. money demand is greater than money supply. c. money supply is greater than money demand. d. there is excess money in the money market.
119. If the Federal Reserve conducts an open market purchase, holding everything
else constant there will be: *a. an increase in the aggregate price level in the long run. b. an increase in the aggregate output level in the long run. c. a decrease in unemployment in the long run.
d. no effects on output, unemployment, or the price level in the long run.
120. If the AD curve shifts to the right, in the short run there will be a(n): *a. increase in aggregate output and an increase in the price level. b. increase in aggregate output and a decrease in the price level. c. decrease in aggregate output and a decrease in the price level. d. decrease in aggregate output and an increase in the price level.
121. If an economy is operating at an output level below its potential output level,
holding everything else constant, one would expect: a. nominal wages to rise. b. nominal wages to stay the same. *c. nominal wages to fall. d. price levels to increase.
122. Money is neutral in: a. the short run, since it cannot alter the real aggregate output. b. both the short and long run, since it cannot alter price levels. *c. the long run, since it cannot alter the real aggregate output. d. the short run, since it cannot alter the price levels.
1. What distinction did Zimbabwe achieve in June 2008? a. It was the first African nation to become a democracy. b. It ended apartheid. *c. It had the world's highest inflation rate. d. It had the world's highest unemployment rate.
2. During hyperinflation in Germany in 1922–1923, prices rose at ____ per day. a. 0.1 percent *b. 16 percent c. 50 percent d. 100 percent
3. Workers in country A have cost-of-living adjustments (COLAs), which adjust
wages to offset the effect of inflation, in their wage contracts, and workers in country B do NOT. When the central banks of countries A and B increase the money supply: *a. prices in country A increase faster than prices in country B. b. prices in country B increase faster than prices in country A. c. prices in countries A and B will change at the same rate. d. COLAs have no effect on the speed of price changes.
4. Inflation doesn't reduce purchasing power if: a. prices of essential products, such as food and gasoline, don't increase too much. *b. nominal wages rise at the same rate as prices. c. it remains under 10 percent per year. d. the Federal Reserve increases the money supply enough to offset it.
5. In the classical model, it is thought that the long-run: a. and short-run aggregate supply curves are both upward sloping. b. aggregate supply curve is vertical and the short-run aggregate supply curve is upward sloping. *c. and short-run aggregate supply curves are both vertical. d. aggregate supply curve is upward sloping and the short-run aggregate supply curve is vertical.
6. The notion that the real quantity of money is always at its long-run equilibrium
level is associated with the _______ of the price level. *a. classical model b. Keynesian model c. monetarist model
d. the modern view
7. Figure: AD AS Model
Reference: Ref 40-1
(Figure: AD AS Model) Refer to the information in the Figure: AD AS Model. Suppose the economy is at YE with a price level of P1. Which would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase in the money supply? a. YE and P2 b. YE and P1 c. Y1 and P2 *d. YE and P3
8. Which is the BEST explanation for an upward-sloping short-run aggregate supply
curve? a. Prices are perfectly flexible. b. Wages are perfectly flexible. *c. Wages and prices of some goods are sticky in the short run. d. Wages and prices of some goods are flexible in the short run but sticky in the long run.
9. Assume that workers and businesses are sensitized to inflation and are quick to
raise wages and prices in response to changes in the money supply. This implies that if inflation is _______ and there are ______ adjustments of wages and prices of intermediate goods. *a. high; quick b. low; quick c. high; slow d. low; slow
10. The classical model of the price level is most likely to be a good approximation
of reality during periods of: a. recession. b. expansion. c. low inflation. *d. high inflation.
11. The classical model of the price level is associated with: a. John Maynard Keynes. b. economists who followed Keynes's work. c. economists who came before Adam Smith. *d. economists who came after Adam Smith but before Keynes.
12. In the short run in periods of low inflation, an increase in aggregate demand
from a position of full employment leads to: a. higher prices and higher unemployment. *b. higher prices and higher output. c. lower prices and higher output. d. lower prices and higher unemployment.
13. In the long run, an increase in aggregate demand from a position of full
employment leads to higher: a. prices and higher output. *b. prices and the same output. c. output and lower prices. d. output and higher unemployment.
14. Figure: Classical Model of the Price Level
Reference: Ref 40-2
(Figure: Classical Model of the Price Level) Refer to the information in the Figure: Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, real GDP would: *a. not change. b. increase from YE to Y1. c. increase from Y1 to YE. d. establish a new potential output.
15. Figure: Classical Model of the Price Level
Reference: Ref 40-2
(Figure: Classical Model of the Price Level) Refer to the information in the Figure: Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the price level will: a. not change. b. increase from P1 to P2. *c. increase from P1 to P3. d. decrease from P1 to P2.
16. Figure: Classical Model of the Price Level
Reference: Ref 40-2
(Figure: Classical Model of the Price Level) Refer to the information in the Figure: Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the SRAS would: a. not change, since in the classical model the SRAS and LRAS are both vertical at potential output. *b. decrease from SRAS1 to SRAS2. c. increase from SRAS2 to SRAS1. d. increase from SRAS1 to SRAS2.
17. Figure: Classical Model of the Price Level
Reference: Ref 40-2
(Figure: Classical Model of the Price Level) Refer to the information in the Figure: Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2, according to this classical model, the equilibrium point would: a. not change. b. immediately move from E1 to E2. c. immediately move from E2 to E1. *d. immediately move from E1 to E3.
18. During periods of low inflation, the short-run aggregate supply curve is: a. vertical. b. horizontal. *c. upward sloping.
d. downward sloping.
19. During periods of high inflation, the short-run aggregate supply curve is: *a. vertical. b. horizontal. c. upward sloping. d. downward sloping.
20. In the long run, any given percentage increase in the money supply: a. decreases real GDP. *b. leads to an equal percentage increase in the overall price level. c. increases real GDP. d. leads to an equal percentage decrease in the unemployment rate.
21. If the monetary authorities decide to increase the nominal money supply by 10
percent when the economy is at its full-employment level of output, in the long run the aggregate price level increases by ________ and real GDP ________. a. 10 percent; increases by 10 percent b. 5 percent; increases by 5 percent, according to Okun's law *c. 10 percent; returns to the potential level of output d. 5 percent; increases by 20 percent, given a marginal propensity to consume of 0.5
22. The main difference between the classical model of the price level and the
modern understanding of the relationship between the money supply, the price level, and real GDP is that according to: a. classical economists, money is neutral in the long run, while economists today do not consider money to be neutral in the long run. b. economists today, the adjustment of prices to changes in the money supply is instantaneous, while classical economists argued that this adjustment process took some time. c. economists today, money is neutral in the long run, while classical economists did not consider money to be neutral in the long run. *d. classical economists, the adjustment of prices to changes in the money supply is instantaneous, while economists today argue that this adjustment process takes some time.
23. Historical evidence has led economists to conclude that during periods of high
inflation, the ________ model of the price level is a good approximation of reality
because nominal wages and prices adjust more ________ than during periods of low inflation. *a. classical; quickly b. modern; slowly c. classical; slowly d. modern; quickly
24. As people get used to inflation: a. the short-run aggregate demand curve adjusts more rapidly. b. wages adjust faster, and the short-run aggregate supply shifts quickly to the right. *c. wages adjust faster, and the short-run aggregate supply shifts quickly to the left. d. the long-run aggregate demand adjusts more slowly.
25. In economies with persistently high inflation, an increase in the money supply
will: *a. translate into a proportional increase in the aggregate price level much faster than usual. b. translate into a proportional increase in the aggregate price level only in the long run. c. not affect either the aggregate price level or the aggregate output. d. translate into a proportional increase in the aggregate output much faster than usual.
26. In economies with persistently high inflation, an increase in the money supply
will have: a. a positive effect on the real quantity of money in the long run. b. a negative effect on the real quantity of money, as aggregate price level increases by more than the money supply. c. a positive effect on the aggregate real output in the long run. *d. no effect on the real quantity of money, making money neutral in the long run.
27. Figure: AD–AS
Reference: Ref 40-3
(Figure: AD–AS) Refer to the Figure: AD–AS. Suppose the economy is initially at E1, where AD1 intersects SRAS1 and LRAS. Now, suppose that the AD1 shifts to AD2. That shift could be due to a(n): a. increase in the aggregate price level. b. decrease in government expenditure. c. increase in tax rates. *d. increase in money supply.
28. Figure: AD–AS
Reference: Ref 40-3
(Figure: AD–AS) Refer to the Figure: AD–AS. Suppose the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. Now, suppose that the SRAS1 will shift to SRAS2, because: a. real wages rise in the long run. *b. nominal wages rise in the long run. c. the real money supply rises in the long run. d. aggregate real output rises in the long run.
29. Figure: AD–AS
Reference: Ref 40-3
(Figure: AD–AS) Refer to the Figure: AD–AS. Suppose the economy starts at E1 and moves to E2, where AD2 intersects SRAS1. Finally the economy moves to E3. The classical model of price level assumes that the economy moves from: *a. E1 to E3 and ignores E2; thus, inflation increases but real GDP remains the same. b. E2 to E3 and ignores E1; thus, real GDP increases but inflation remains the same. c. E2 to E3; thus, inflation decreases but real GDP remains the same. d. E1 to E2 and ignores E3; thus, both inflation and real GDP remain the same.
30. Figure: AD–AS
Reference: Ref 40-3
(Figure: AD–AS) Refer to the Figure: AD–AS. If our economy has low-level inflation and the Fed uses expansionary monetary policy, the initial effect is that: *a. AD1 will shift to AD2 and the economy will move from E1 to E2. b. SRAS1 will shift to SRAS2 and the economy will move from E2 to E3. c. SRAS2 will shift to SRAS1 and the economy will move from E3 to E2. d. AD2 will shift to AD1 and the economy will move from E2 to E1.
31. Figure: AD–AS
Reference: Ref 40-3
(Figure: AD–AS) Refer to the Figure: AD–AS. If our economy is at equilibrium and the Fed uses expansionary monetary policy: a. AD2 will shift to AD1 and the economy will move from E2 to E1. Then very quickly nominal wages will rise, SRAS1 will shift to SRAS2, and the economy will move from E2 to E3. b. SRAS1 will shift to SRAS2 and the economy will move from E2 to E3. Then AD2 will shift to AD1 and the economy will move from E2 to E1. c. SRAS2 will shift to SRAS1 and the economy will move from E3 to E2. Then AD2 will shift to AD1 and the economy will move from E2 to E1. *d. AD1 will shift to AD2 and the economy will move from E1 to E2. Then very quickly nominal wages will rise, SRAS1 will shift to SRAS2, and the economy will move from E2 to E3.
32. According to the classical model of the price level, an increase in the money
supply will create: *a. inflation with no long-run increase in real GDP. b. inflation and a long-run increase in real GDP. c. no inflation and a long-run increase in real GDP. d. deflation with no long-run increase in real GDP.
33. In the classical model of the price level: a. the price level is unaffected by changes in the money supply. *b. the real quantity of money is always at its long-run equilibrium level.
c. an increase in the money supply will increase real GDP. d. an increase in the money supply will decrease real GDP.
34. In countries with extremely high inflation, increases in the money supply: *a. are quickly translated into changes in the inflation rate. b. do not affect the price level. c. will increase real GDP. d. will decrease real GDP.
35. What is the effect of an expansionary monetary policy in the AD–AS model? a. This will shift aggregate demand to the left, thereby decreasing the price level. b. This will shift aggregate demand to the left, thereby increasing the price level. c. This will shift aggregate demand to the right, thereby decreasing the price level. *d. This will shift aggregate demand to the right, thereby increasing the price level.
36. In the AD–AS model, the short-run aggregate supply curve a. is vertical. b. is horizontal. c. will shift to the right when there is an increase in nominal wages. *d. will shift to the left when there is an increase in nominal wages.
37. Which statement is TRUE? *a. Under conditions of high inflation, prices of intermediate goods adjust more rapidly than under conditions of low inflation. b. Under conditions of low inflation, prices of intermediate goods adjust more rapidly than under conditions of high inflation. c. The classical model of the price level is a realistic representation of the effect of changes in the money supply during periods of low inflation. d. Prices and wages are more likely to be sticky during periods of high inflation than during periods of low inflation.
38. When the Treasury Department borrows from the public to finance the
government's purchases of goods and services and the Fed buys the debt back from the public in the form of Treasury bills, it is known as: a. moral suasion.
b. money illusion. c. structuring the deficit. *d. monetizing the debt.
39. The inflation tax is the: a. higher tax paid by individuals whose incomes are indexed to inflation. b. taxes paid during periods of inflation. *c. reduction in the value of money that is held by the public caused by inflation. d. higher prices consumers pay due to inflation.
40. If the Fed increases the monetary base by $40 billion through open-market
operations: a. GDP will increase by $40 billion. b. the price level will increase by $40 billion. *c. the U.S. government debt held by the public has been reduced by $40 billion. d. government spending has increased by $40 billion.
41. The inflation tax is: a. the increase in the real value of money held by the public caused by inflation. *b. the decrease in the real value of money held by the public caused by inflation. c. the result of the indexing wages to inflation. d. cost of living adjustments, or COLAs.
42. The inflation tax is equal to: *a. inflation multiplied by the demand for money. b. inflation multiplied by the nominal money supply. c. the money supply divided by the price level. d. the nominal money supply divided by inflation.
43. Government debt is monetized when the: a. commercial banks buy newly issued Treasury bills. *b. Fed conducts open-market purchases. c. Fed transfers part of its financial reserves to the Treasury, which in turn buys Treasury bills back. d. Fed sells Treasury bills in the bond market.
44. Fiat money is: a. money backed by gold. b. money that only the government will accept to pay taxes. *c. paper money with no intrinsic value. d. used only in the United States as a medium of exchange.
45. The Fed monetizes the debt when it: *a. prints money and buys government debt from the public. b. sells bonds. c. decreases the money supply. d. targets interest rates.
46. The inflation tax is likely to be larger when: a. there is a budget surplus. *b. the government relies on seigniorage to finance large portions of a budget deficit. c. the Fed decreases the money supply. d. corporate and personal income tax rates are increased.
47. If the money supply is $3 billion and inflation is 6 percent, the inflation tax is: a. $3.18 billion. b. $50 billion. *c. $180 million. d. $1.8 billion.
48. Economists refer to the revenue generated by the government's right to print
money as: *a. seigniorage. b. monetary policy. c. fiscal policy. d. reserve policy.
49. Seigniorage is the: a. government's cost of printing and coining money. *b. revenue generated by the government's right to print money. c. money financial institutions make selling government bonds to the Fed when the Fed creates money. d. revenue the government generates in tax receipts.
50. Historically, governments have turned to seigniorage to pay their bills when the:
a. economy is growing. *b. government lacks the will to reduce the budget deficit by raising taxes or reducing spending. c. inflation rate is low. d. unemployment rate is low.
51. An inflation tax is: *a. the reduction in purchasing power due to inflation. b. a tax on businesses for raising prices. c. a tax on people with inflated incomes. d. an excise tax on new automobile tires.
52. If the public holds $300 billion in monetary purchasing power and the inflation
rate is 5 percent, then the inflation tax that year is: a. $5 billion. *b. $15 billion. c. $60 billion. d. $1500 billion.
53. Seigniorage refers to the: a. problems faced by Social Security as the population ages. *b. government's right to print money. c. problems senior citizens face in retirement. d. problems created when the government prints too much money.
54. The inflation tax refers to: a. moving into higher tax brackets. b. the reduction in the real value of money when inflation falls. *c. the reduction in the real value of money when inflation rises. d. the tax placed on inflation by the government.
55. The inflation tax refers to the: a. increase in taxes when inflation rises. b. inflation rate when aggregate demand increases. c. inflation rate multiplied by the tax rate. *d. inflation rate multiplied by the money supply.
56. When a central bank prints money to pay government debts, causing rising
prices that erode the purchasing power of money held by the public, it is called a(n):
a. payroll tax. *b. inflation tax. c. currency tax. d. budget tax.
57. Seignorage is: a. the practice of monetizing the debt. b. the practice of engaging in open market operations. *c. revenue generated by the government's right to print money. d. the process of paying off a government debt.
58. Governments are most likely to print money as a way of paying expenses when: a. they are concerned about inflation. b. there have been large discoveries of gold. *c. a large budget deficit has been incurred and further borrowing is not a workable option. d. the central bank is completely independent of political influence.
59. The reduction in the purchasing power of money caused by inflation is known
as: a. deflation. b. indexing. c. seignorage. *d. the inflation tax.
60. Real seigniorage is calculated by which of the following equations: a. real interest rate × money supply. *b. rate of growth of money supply × real money supply. c. real interest rate – inflation rate. d. rate of growth of money supply ÷ price index.
61. If a high inflation rate leads people to ______ their money holdings, this may
lead to a further increase in the money supply and ______ inflation. a. reduce; lower b. increase; lower *c. reduce; higher d. increase; higher
62. As people try to avoid the inflation tax, the government must:
a. lower the inflation rate to avoid a budget deficit. b. lower the inflation rate to raise the same revenue from inflation. *c. increase the inflation rate to raise the same revenue from inflation. d. increase the inflation rate to avoid a budget surplus, which will harm employment.
63. A large inflation tax causes people to do all EXCEPT: a. substitute real goods for money. b. substitute interest-bearing assets for money. c. reduce their real money holdings. *d. sell gold.
64. If the money supply grows by 4 percent and the real money supply is $100
billion, real seigniorage is: *a. $4 billion. b. $25 billion. c. $400 billion. d. $2.5 trillion.
65. If the real money supply is $500 billion and the money supply grows by 2
percent, then real seigniorage is: a. $25 trillion. b. $1 trillion. *c. $10 billion. d. $1 billion.
66. What is the eventual outcome when a government prints money in an attempt to
raise revenue through seignorage? a. The expansion of the money supply will increase real GDP. b. The expansion of the money supply will allow the government to effectively pay off its debts. *c. The amount of seignorage collected from each unit of currency will continually diminish as the price level rises. d. Members of the public will be willing to hold more currency, as they realize that purchasing power is increasing.
67. Hyperinflation is the direct result of: *a. governments printing money as a means of generating revenue. b. high unemployment.
c. low interest rates. d. a leftward shift of aggregate demand.
68. From 2000 to 2008 Zimbabwe's prices: a. decreased by 50 percent. b. increased by 50 percent. c. increased by 100 percent. *d. increased by 80 trillion percent.
69. Zimbabwe's economic instability was caused primarily by: a. its joining the Coalition of the Willing in the Iraq war. b. its attempts to join the European Union. *c. the government's seizure of the country's farms, which disrupted production. d. its high tariffs on imported goods.
70. Politicians have an incentive to push the unemployment rate below the natural
rate of unemployment right before their reelection because: a. the expansionary monetary policy is used to finance the political campaigns. *b. the political benefits are immediate and the economic costs are delayed. c. the Phillips curve is horizontal in the long run. d. the opportunistic seigniorage gains are very large.
71. If an administration pursues expansionary policy before an election to bring
down unemployment, it can: a. produce inflation only if the real interest rate is zero to begin with. b. lower people's expectations about inflation through a sense of false complacency. *c. produce inflation if the targeted rate of unemployment is too low. d. produce disinflation if the expansionary monetary policy is unanticipated.
72. Politicians may accept moderate inflation in an election year, since the: a. increase in aggregate supply serves to increase output. b. decrease in aggregate supply serves to decrease employment. c. decrease in aggregate demand serves to decrease output. *d. increase in aggregate demand serves to increase output.
73. Politicians may accept moderate inflation in an election year, since the: a. increase in aggregate supply serves to decrease employment. b. decrease in aggregate supply serves to increase employment. c. decrease in aggregate demand serves to increase output. *d. increase in aggregate demand serves to increase employment.
74. When the economy is experiencing an inflationary gap: *a. the unemployment rate is below its natural rate. b. the unemployment rate is above its natural rate. c. actual output is below potential output. d. potentially productive resources are left idle.
75. Which is likely to be TRUE if actual output is equal to potential output? *a. The actual unemployment rate is equal to the natural rate of unemployment. b. The actual unemployment rate is above the natural rate of unemployment. c. There will be zero percent unemployment. d. The natural rate of unemployment will be above the actual unemployment rate.
76. When the output gap is _________, reflecting an inflationary gap, the
unemployment rate is _________ the natural rate of unemployment. a. positive; above b. negative; below *c. positive; below d. negative; above
77. When the actual unemployment rate is equal to the natural rate of
unemployment: a. the unemployment rate is zero. b. potential output exceeds actual output. *c. the output gap is zero. d. actual output exceeds potential output.
78. If potential output growth is higher than actual output growth, then the: a. unemployment rate will fall. *b. unemployment rate will rise. c. inflation rate will rise. d. unemployment rate will remain constant.
79. When the output gap is positive, the unemployment rate is: a. positive. b. above the natural rate. *c. below the natural rate. d. negative.
80. Figure: Actual and Natural Rates of Unemployment
Reference: Ref 40-4
(Figure: Actual and Natural Rates of Unemployment) Refer to the information in the Figure: Actual and Natural Rates of Unemployment. In 1982, the actual unemployment rate was approximately: a. zero. b. 4 percent. c. 6 percent. *d. 10 percent.
81. Figure: Actual and Natural Rates of Unemployment
Reference: Ref 40-4
(Figure: Actual and Natural Rates of Unemployment) Refer to the information in the Figure: Actual and Natural Rates of Unemployment. In 1982, the cyclical unemployment rate was approximately:
a. zero. *b. 4 percent. c. 6 percent. d. 10 percent.
82. Figure: Actual and Natural Rates of Unemployment
Reference: Ref 40-4
(Figure: Actual and Natural Rates of Unemployment) Refer to the information in the Figure: Actual and Natural Rates of Unemployment. In 1982, the natural unemployment rate (structural plus frictional) was approximately: a. zero. b. 4 percent. *c. 6 percent. d. 10 percent.
83. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in
the Figure: Actual and Natural Rates of Unemployment. In 2011, the actual unemployment rate was approximately: a. zero. b. 3 percent. c. 5 percent. *d. 9 percent.
84. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in
the Figure: Actual and Natural Rates of Unemployment. In 2011, the natural unemployment rate was approximately: a. zero. b. 3 percent. *c. 5 percent. d. 9 percent.
85. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in
the Figure: Actual and Natural Rates of Unemployment. In 2011, the amount of cyclical unemployment was approximately: a. 2 percent. *b. 4 percent. c. 9 percent. d. 14 percent.
86. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in
the Figure: Actual and Natural Rates of Unemployment. In 2011 the output gap was: a. positive. *b. negative. c. zero. d. impossible to determine without more information.
87. (Figure: Actual and Natural Rates of Unemployment) Refer to the information in
the Figure: Actual and Natural Rates of Unemployment. In 2000 the output gap was: *a. positive. b. negative. c. zero. d. impossible to determine without more information.
88. The relationship between the output gap and the unemployment rate can be
summarized thus: a. When the output gap is negative, the unemployment rate is below the natural rate. b. When the output gap is zero, the unemployment rate is also zero. c. When there is an inflationary gap, the unemployment rate is above the natural rate. *d. When the output gap is positive, the unemployment rate is below the natural rate.
89. Suppose actual aggregate output is equal to the potential output; the actual
unemployment rate is: *a. equal to the natural rate of unemployment. b. higher than the natural rate of unemployment. c. zero. d. equal to the cyclical rate of unemployment.
90. The difference between real GDP and potential GDP is known as the: a. price gap. b. unemployment gap. *c. output gap. d. budget deficit.
91. The actual rate of unemployment will be equal to the natural rate of
unemployment when:
a. actual aggregate output is below potential output. b. actual aggregate output is above potential output. *c. actual aggregate output is equal to potential output. d. the actual inflation rate equals the actual unemployment rate.
92. In the classical model of the price level, there is NO distinction between the short run and the long run. *a. True b. False
93. It is impossible for the U.S. government to raise revenue by printing more money because the Federal Reserve, not the Treasury, issues most of the U.S. money supply. a. True *b. False
94. People can avoid the inflation tax by reducing their real money balances. *a. True b. False
95. A high inflation rate leads people to increase their money holdings, leading to more money printing and higher inflation. a. True *b. False
96. Hyperinflation is often a result of a government trying to pay for its spending by using the inflation tax. *a. True b. False
97. When real output growth is above potential output growth, the output gap is positive and the unemployment rate is below the natural rate. *a. True b. False
98. The difference between the growth rate of actual and potential GDP is the output gap.
*a. True b. False
99. If potential GDP is growing at 3 percent and actual GDP is growing at 2 percent, then the unemployment rate is below the natural rate. a. True *b. False
100. Explain why the classical model of the price level is more accurate in periods of high inflation than in periods of low inflation. Correct Answer:
The classical model of the price level predicts that any increase in the nominal money supply will have no effect on real GDP and will result only in a proportionate increase in the price level. During periods of high inflation, wages and prices do increase very quickly to an increase in the money supply because workers and businesses are accustomed to inflation. In periods of low inflation, however, wages and prices are slower to adjust, which produces a positively sloped short-run aggregate supply curve. This means that the increase in the money supply will at least initially increase real GDP before all wages and prices adjust in the long run. 101. The central bank of a government can print more money to pay for government deficits. Why do some refer to this practice as creating an inflation tax? Correct Answer:
Creating new money to pay for budget deficits creates price inflation. This reduces the value of the money held by the public by reducing the purchasing power. Because the public has lost purchasing power, in effect the government action has indirectly, by creating inflation, taxed the public. 102. Explain the political asymmetry associated with policies that can cause or cure inflation. Correct Answer:
Contractionary policies, like decreasing the money supply and government spending, policies that bring down inflation, and increasing taxes, tend to depress the economy and may possibly even cause a recession, which is politically very unpopular. Expansionary policies, like increasing the money supply and government spending and, especially, decreasing taxes are politically very popular, but can cause problems of inflation in the economy. 103. Explain how output gap, unemployment rate, and natural unemployment rate are related. Correct Answer:
When actual real GDP is equal to potential output, the actual unemployment rate is equal to the natural unemployment rate. When the output gap is positive, actual real GDP is above potential output, and there is an inflationary gap. In an inflationary gap, the actual unemployment rate is below the natural unemployment rate. When the output gap is negative, actual real GDP is below potential output, and there is a recessionary gap. In a recessionary gap, the actual unemployment rate is above the natural unemployment rate.
104. In 2008: *a. Zimbabwe had the world's highest inflation rate, equal to the rate Germany experienced in 1922–1923. b. Zimbabwe had the world's highest inflation rate, which was even higher than the rate Germany experienced in 1922–1923. c. the Republic of Congo had the world's highest inflation rate, which was equal to the rate Germany experienced in 1922–1923. d. the Republic of Congo had the world's highest inflation rate, which was less than the rate Germany experienced in 1922–1923.
105. In the long run, an increase in the money supply: a. will increase real GDP and the price level. b. causes people to hold onto large sums of money. *c. results in no change in real GDP. d. encourages people to save more money.
106. The classical model of the price level: a. holds that the short run is distinct from the long run. *b. holds that the economy is always producing at some point on the LRAS. c. works best when an economy has low levels of inflation. d. does not consider the effects of the real quantity of money.
107. When an economy has high inflation: *a. wage and price stickiness lessen or disappear. b. the Keynesian model of the economy is most relevant. c. wages become more inflexible as workers wait for prices to stabilize. d. changes in the money supply take much longer to affect the inflation rate.
108. If a central bank pursues an expansionary monetary policy: *a. the aggregate price level and level of real GDP will increase in the short run.
b. the level of real GDP will increase, but the aggregate price level will stay the same in the long run. c. nominal prices and nominal wages will be unaffected in the long run. d. the aggregate price level will increase and the level of real GDP will decrease in the short run.
109. Monetizing the debt occurs when: a. the budget is approved by Congress. *b. the Fed buys back debt via open-market purchases. c. the government raises taxes. d. transfer payments are decreased.
110. Government's right to print money to finance deficits is referred to as: a. open-market sales. *b. seigniorage. c. fiat money implementation. d. crowding out.
111. Borrowers benefit when: *a. government engages in seigniorage. b. unexpected inflation is low. c. the Fed engages in continuous open-market sales. d. real GDP falls as a result of a decrease in AD.
112. A government with a large deficit will also produce high inflation in the
economy if it: a. raises taxes. b. reduces government spending. *c. finances the deficit via seigniorage. d. imposes a debt ceiling.
113. When inflation is high: a. people will increase their level of real-money holdings. b. people will save more. c. lenders gain at the expense of borrowers. *d. people will decrease their level of real-money holdings.
114. If government decides to print money to finance a deficit:
*a. people who hold money will be penalized as inflation increases. b. borrowers will be penalized because they will owe more as inflation increases. c. real GDP will decrease in the long run. d. the Fed must sell bonds in the open market.
115. During an inflationary gap: *a. the unemployment rate is less than the natural rate of unemployment. b. actual output is less than potential output. c. the unemployment rate is equal to the natural rate of unemployment. d. wages and prices must fall in order to restore the economy to its potential output.
116. A negative output gap is associated with: a. an unusually low unemployment rate. b. a natural rate of unemployment. *c. an unusually high unemployment rate. d. no changes in the unemployment rate.
117. A negative output gap implies an unemployment rate: *a. above the natural rate. b. below the natural rate. c. equal to the natural rate. d. that equals the frictional and structural amounts of unemployment.
1. Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2 percent.
Reference: Ref 41-1
(Figure: Expected Inflation and the Short-Run Phillips Curve) Refer to the information in the Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6 percent, no inflation, and no expectation of future inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4 percent, then inflation will: a. fall to –2 percent. b. not change. *c. rise to 2 percent. d. rise to 4 percent.
2. Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2 percent.
Reference: Ref 41-1
(Figure: Expected Inflation and the Short-Run Phillips Curve) Refer to the information in the Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6 percent, no inflation, and no expectation of future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8 percent, then inflation will: *a. fall to –2 percent. b. not change. c. rise to 2 percent. d. rise to 4 percent.
3. Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2 percent.
Reference: Ref 41-1
(Figure: Expected Inflation and the Short-Run Phillips Curve) Refer to the information in the Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6 percent, inflation of 2 percent, and an expectation of 2 percent future inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4 percent, then inflation will: a. fall to –2 percent. b. not change. c. rise to 2 percent. *d. rise to 4 percent.
4. Figure: Expected Inflation and the Short-Run Phillips Curve
SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2 percent.
Reference: Ref 41-1
(Figure: Expected Inflation and the Short-Run Phillips Curve) Refer to the information in the Figure: Expected Inflation and the Short-Run Phillips Curve. Suppose that this economy has an unemployment rate of 6 percent, inflation of 2 percent, and an expectation of 2 percent future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8 percent, then inflation will: *a. fall to zero. b. not change. c. rise to 2 percent. d. rise to 4 percent.
5. Suppose that commodity prices across the economy begin to fall and consumers
and firms begin to expect a lower rate of future inflation. What do we expect to happen to the SRAS curve and short-run Phillips curve? a. The SRAS curve will shift to the left, and the short-run Phillips curve will shift downward. *b. The SRAS curve will shift to the right, and the short-run Phillips curve will shift downward. c. The SRAS curve will shift to the left, and the short-run Phillips curve will shift upward. d. The SRAS curve will shift to the right, and the short-run Phillips curve will shift upward.
6. An increase in expected inflation will affect the short-run Phillips curve:
a. by shifting it downward; the actual rate of inflation at any given unemployment rate will fall by the same amount. *b. by shifting it upward, as a result the actual rate of inflation at any given unemployment rate will also be higher when the expected inflation rate is higher. c. by moving along the same curve, where it equals the actual rate of inflation. d. only if the economy is at the nonaccelerating inflation rate of unemployment.
7. Figure: Short-Run Phillips Curve
Reference: Ref 41-2
(Figure: Short-Run Phillips Curve) Refer to the information in the Figure: Short-Run Phillips Curve. SRPC2 is based on an expected inflation rate of: a. zero. b. 1 percent. *c. 2 percent. d. 5 percent.
8. Figure: Short-Run Phillips Curve
Reference: Ref 41-2
(Figure: Short-Run Phillips Curve) Refer to the information in the Figure: Short-Run Phillips Curve. SRPC1 is based on an expected inflation rate of: *a. zero. b. 1 percent. c. 2 percent. d. 3 percent.
9. Figure: Short-Run Phillips Curve
Reference: Ref 41-2
(Figure: Short-Run Phillips Curve) Refer to the information in the Figure: Short-Run Phillips Curve. The natural rate of unemployment is:
a. 3 percent. *b. 5 percent. c. 7 percent. d. 8 percent.
10. Figure: Short-Run Phillips Curve
Reference: Ref 41-2
(Figure: Short-Run Phillips Curve) Refer to the information in the Figure: Short-Run Phillips Curve. The NAIRU is: a. 3 percent. *b. 5 percent. c. 7 percent. d. 8 percent.
11. If the natural rate of unemployment is 5 percent and the actual rate of
unemployment is 4 percent: a. disinflation is likely to occur. b. there will be no effect on prices. *c. inflation will increase. d. the short-run Phillips curve will shift down.
12. A supply shock caused by an increase in the price of gasoline causes a(n): a. decrease in output and prices. *b. decrease in output and an increase in prices. c. increase in output and prices. d. increase in output and a decrease in prices.
13. According to the short-run Phillips curve, when actual real GDP is _________
potential output, the price level _________ and the unemployment rate falls. a. below; increases b. above; decreases c. below; decreases *d. above; increases
14. The short-run Phillips curve shows: a. a direct relationship between unemployment and inflation. *b. an inverse relationship between unemployment and inflation. c. consequences of the misperceptions theory. d. the optimal level of employment.
15. The short-run Phillips curve represents the relationship between the
unemployment rate and the rate of change in: a. the interest rate. b. output. c. wages only. *d. the aggregate price level.
16. A supply shock: a. moves our economy along the short-run aggregate supply curve. b. moves us along the short-run Phillips curve. *c. shifts the short-run Phillips curve. d. shifts the short-run aggregate supply curve but not the shortrun Phillips curve.
17. In 1958, which of the following economists came up with a theory regarding the
trade-off between unemployment and inflation? *a. A. W. H. Phillips b. John Maynard Keynes c. Joseph Schumpeter d. Milton Friedman
18. A trade-off between unemployment and inflation is depicted by: *a. the Phillips curve. b. Keynes's law. c. the multiplier. d. the Friedman curve.
19. The notion that there is a trade-off between inflation and unemployment is
expressed as a: *a. Phillips curve. b. Keynes curve. c. Schumpeter curve. d. Friedman curve.
20. A Phillips curve implies a negative relationship between: a. consumption and saving. b. inflation and prices. *c. inflation and unemployment. d. consumption and inflation.
21. Each point on a Phillips curve is a different combination of: a. price and quantity. *b. the inflation rate and the unemployment rate. c. the interest rate and investment. d. saving and disposable income.
22. Along a Phillips curve: a. consumption depends on prices. *b. the inflation rate varies inversely with the unemployment rate. c. the inflation rate varies directly with the unemployment rate. d. prices and tax rates are directly related.
23. Suppose that the unemployment rate rises at the same time that the inflation
rate declines. This situation would be consistent with a movement along the: a. vertical Phillips curve. b. horizontal Phillips curve. c. positively sloped Phillips curve. *d. negatively sloped Phillips curve.
24. The short-run Phillips curve is: a. upward sloping because inflation and unemployment rates have a positive relationship in the short run. b. vertical because there is no trade-off between inflation and unemployment rates in the short run. *c. downward sloping because there is a trade-off between inflation and unemployment rates in the short run. d. horizontal because there is no trade-off between inflation and unemployment rates in the short run.
25. Suppose a fall in commodity prices causes a supply shock. The short-run
Phillips curve will: *a. shift down. b. show a movement along the same curve. c. not be affected at all. d. shift up.
26. The negative relationship between the inflation rate and the unemployment rate
is known as the:
*a. short-run Phillips curve. b. short-run aggregate supply curve. c. long-run Phillips curve. d. aggregate demand curve.
27. Suppose you are told that the short-run Phillips curve has shifted upward.
Which must have happened? a. The AD curve has shifted to the right. b. The AD curve has shifted to the left. c. The SRAS curve has shifted to the right. *d. The SRAS curve has shifted to the left.
28. Suppose you are told that the short-run Phillips curve has shifted downward.
Which must have happened? a. The SRAS curve has shifted to the left. *b. The SRAS curve has shifted to the right. c. The AD curve has shifted to the left. d. The AD curve has shifted to the right.
29. Suppose you are told that there has been a downward movement along the
fixed short-run Phillips curve. Which must have happened? *a. The AD curve has shifted to the left. b. The AD curve has shifted to the right. c. The SRAS curve has shifted to the left. d. The SRAS curve has shifted to the right.
30. Suppose you are told that there has been an upward movement along the fixed
short-run Phillips curve. Which must have happened? a. The SRAS curve has shifted to the left. b. The SRAS curve has shifted to the right. c. The AD curve has shifted to the left. *d. The AD curve has shifted to the right.
31. The short-run Phillips curve represents a trade-off between which two
variables? a. output and interest rates b. inflation and interest rates *c. inflation and unemployment rates d. output and unemployment rates
32. What is measured on the vertical axis of the graph depicting the short-run
Phillips curve? a. unemployment rate *b. inflation rate c. real output d. price level
33. What is measured on the horizontal axis of the graph depicting the short-run
Phillips curve? *a. unemployment rate b. inflation rate c. real output d. price level
34. The downward slope of the short-run Phillips curve suggests that higher: a. rates of money supply growth are associated with higher inflation rates. b. rates of money supply growth are associated with lower inflation rates. *c. inflation rates are associated with lower unemployment rates. d. inflation rates are associated with higher unemployment rates.
35. Figure: Three Short-Run Phillips Curves
Reference: Ref 41-3
(Figure: Three Short-Run Phillips Curves) According to he Figure: Three Short-Run Phillips Curves, which statement correctly describes a shift from SRPC0 to SRPC1?
a. A negative supply shock has caused the level of inflation associated with each level of the unemployment rate to become higher than before. b. A negative supply shock has caused the level of inflation associated with each level of the unemployment rate to become lower than before. c. A positive supply shock has caused the level of inflation associated with each level of the unemployment rate to become higher than before. *d. A positive supply shock has caused the level of inflation associated with each level of the unemployment rate to become lower than before.
36. Figure: Three Short-Run Phillips Curves
Reference: Ref 41-3
(Figure: Three Short-Run Phillips Curves) According to the Figure: Three ShortRun Phillips Curves, which statement correctly describes a shift from SRPC0 to SRPC2? *a. A negative supply shock has caused the level of inflation associated with each level of the unemployment rate to become higher than before. b. A negative supply shock has caused the level of inflation associated with each level of the unemployment rate to become lower than before. c. A positive supply shock has caused the level of inflation associated with each level of the unemployment rate to become higher than before. d. A positive supply shock has caused the level of inflation associated with each level of the unemployment rate to become lower than before.
37. An increase in the expected rate of inflation: a. shifts the short-run Phillips curve down. *b. shifts the short-run Phillips curve up. c. moves the economy along the short-run Phillips curve to higher rates of inflation. d. moves the economy along the short-run Phillips curve to higher rates on unemployment.
38. If workers expect a lower rate of inflation, the short-run Phillips curve will: a. remain constant, but there will be a movement down the curve. b. be unaffected. c. shift up. *d. shift down.
39. Expectations of a higher inflation rate shift the short-run aggregate supply curve
to the _________, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _________. a. left; down b. right; up *c. left; up d. right; down
40. Figure: Two Short-Run Phillips Curves
Reference: Ref 41-4
(Figure: Two Short-Run Phillips Curves) According to the Figure: Two Short-Run Phillips Curves, SRPC0 is the short-run Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. When the expected inflation rate is 0 percent, what unemployment rate is associated with 0 percent inflation? a. 0 percent b. 4 percent *c. 6 percent d. 10 percent
41. Figure: Two Short-Run Phillips Curves
Reference: Ref 41-4
(Figure: Two Short-Run Phillips Curves According to the Figure: Two Short-Run Phillips Curves, SRPC0 is the short-run Phillips curve when the public expects a 0
percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. When the expected inflation rate is 0 percent, what unemployment rate is associated with 2 percent inflation? a. 0 percent *b. 4 percent c. 6 percent d. 10 percent
42. Figure: Two Short-Run Phillips Curves
Reference: Ref 41-4
(Figure: Two Short-Run Phillips Curves) According to the Figure: Two Short-Run Phillips Curves, SRPC0 is the short-run Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. When the expected inflation rate is 3 percent, what unemployment rate is associated with 0 percent inflation? a. 0 percent b. 4 percent c. 6 percent *d. 9 percent
43. Figure: Two Short-Run Phillips Curves
Reference: Ref 41-4
(Figure: Two Short-Run Phillips Curves) According to the Figure: Two Short-Run Phillips Curves, SRPC0 is the short-run Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. When the expected inflation rate is 3 percent, what unemployment rate is associated with 3 percent inflation? a. 0 percent b. 4 percent *c. 6 percent d. 9 percent
44. Figure: Two Short-Run Phillips Curves
Reference: Ref 41-4
(Figure: Two Short-Run Phillips Curves) According to the Figure: Two Short-Run
Phillips Curves, SRPC0 is the short-run Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. When the expected inflation rate is 3 percent, what is the actual inflation rate when the unemployment rate is 4 percent? a. 0 percent b. 2 percent c. 3 percent *d. 5 percent
45. A downward shift of the short-run Phillips curve could arise from a(n): a. increase in nominal wages. b. negative supply shock. *c. decrease in the expected inflation rate. d. increase in the expected inflation rate.
46. The long-run Phillips curve is: a. the same as the short-run Phillips curve. b. negatively sloped, showing an inverse relationship between unemployment and inflation. *c. vertical at the nonaccelerating-inflation rate of unemployment (NAIRU). d. unrelated to the NAIRU.
47. Which accurately portrays the shape of the long-run Phillips curve? a. horizontal curve *b. vertical curve c. upward sloping curve d. downward sloping curve
48. A long-run Phillips curve has a(n) _________ slope because _________. a. negative; there is a positive relationship between the output gap and the NAIRU *b. infinite; any unemployment rate below the NAIRU leads to ever-accelerating inflation c. zero; there is a positive relationship between expected inflation and unemployment d. positive; any unemployment rate above the NAIRU leads to everaccelerating inflation
49. As a consequence of the existence of a NAIRU: a. cyclical unemployment can never be zero.
b. there is no short-run trade-off between unemployment and inflation. c. money is neutral. *d. there is no long-run trade-off between unemployment and inflation.
50. If the natural rate of unemployment _________, the NAIRU _________, and the
long-run Phillips curve shifts to the left. *a. falls; falls b. rises; rises c. falls; rises d. rises; falls
51. When workers and firms become aware of a rise in the general price level: a. they will not do anything, because they know they are powerless to counter any economic changes. *b. they will incorporate higher prices into their expectations of future prices. c. firms with sticky prices will ultimately adjust their prices downward. d. they will agree to renegotiate wage contracts downward.
52. In the long run, when the actual inflation rate gets embedded into people's
expectation: a. the trade-off between inflation and unemployment becomes even stronger. b. it is possible to achieve lower unemployment in the long run by accepting higher inflation. *c. there is no longer a trade-off between inflation and unemployment. d. actual inflation at any unemployment rate is always higher than expected inflation.
53. The NAIRU is: a. the inflation rate at which the unemployment rate does not change over time. b. a trade-off between unemployment and inflation. *c. the unemployment rate at which inflation does not change over time. d. a rate at which it is possible to achieve lower unemployment by accepting higher inflation.
54. The long-run Phillips curve shows the relationship between:
a. potential aggregate output and the natural rate of unemployment at a given rate of expected inflation. b. expected inflation and actual inflation after the expectation becomes embedded in people's minds. c. the aggregate output and the aggregate price level in the economy at a given rate of expected inflation. *d. unemployment and inflation after expectations of inflation have had time to adjust to experience.
55. The long-run Phillips curve is: *a. vertical at unemployment rate equal to NAIRU. b. horizontal at inflation rate equal to NAIRU. c. upward sloping, showing that there is no trade-off between unemployment and inflation. d. downward sloping, showing that there is a trade-off between unemployment and inflation.
56. The long-run Phillips curve is vertical at the NAIRU because: *a. any unemployment rate below the NAIRU will lead to everaccelerating inflation. b. an unemployment rate equal to NAIRU will always lead to zero inflation. c. any unemployment rate above the NAIRU will lead to everaccelerating inflation. d. any unemployment rate below the NAIRU will lead to everdecelerating inflation.
57.
Reference: Ref 41-5
(Table: Combinations of Unemployment and Inflation) Refer to the information in the Table: Combinations of Unemployment and Inflation. Which combination of unemployment and inflation could lie on the same long-run Phillips curve? a. W and Z *b. W and Y c. X and Z d. X and Y
58. Suppose the economy is in long-run equilibrium. The government has just
decided to lower income taxes. The long-run impact of this policy will be:
a. a decrease in the natural rate of unemployment and an increase in inflation. b. a decrease in the natural rate of unemployment and no change in inflation. *c. no change in the natural rate of unemployment and an increase in inflation. d. no change in the natural rate of unemployment and no change in inflation.
59. In the long run, a persistent attempt to reduce unemployment at the expense of
higher inflation will: a. be effective. b. result in a permanently lower inflation rate. *c. cause accelerating inflation. d. cause a downward shift of the short-run Phillips curve.
60. Accelerating inflation can be avoided if: a. the Phillips curve shifts upward over time. *b. the unemployment rate is high enough that the actual rate of inflation matches the expected rate of inflation. c. unemployment is kept at 0 percent. d. increases in the money supply are used to combat unemployment.
61. The unemployment rate at which inflation does not change over time is known
as the: a. long-run unemployment rate. b. recovery unemployment rate. c. potential unemployment rate. *d. nonaccelerating inflation rate of unemployment.
62. If the economy does in fact have a nonaccelerating inflation rate of
unemployment (NAIRU), then: *a. there is no long-run trade-off between inflation and unemployment. b. the short-run Phillips curve will be the same as the long-run Phillips curve. c. unemployment can be kept permanently below its natural rate by expansionary policies. d. there is always a long-run trade-off between inflation and unemployment.
63. Which statement is TRUE?
a. A vertical long-run Philips curve suggests that there is a long-run trade-off between inflation and unemployment. *b. The long-run Phillips curve is vertical at the NAIRU. c. The long-run Phillips curve is equivalent to the short-run Phillips curve. d. A vertical long-run Phillips curve suggests that there is no limit to the effectiveness of expansionary policies.
64. Figure: Three Short-Run Phillips Curves
Reference: Ref 41-6
(Figure: Three Short-Run Phillips Curves) The figure shows three different short-run Phillips curves and one long-run Phillips curve for an economy. SRPC0 is the shortrun Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. SRPC6 is the short-run Phillips curve when the public expects a 6 percent rate of inflation. When the expected inflation rate is 0 percent, what actual inflation rate is required to keep unemployment at 5 percent? *a. 0 percent b. 3 percent c. 6 percent d. 9 percent
65. Figure: Three Short-Run Phillips Curves
Reference: Ref 41-6
(Figure: Three Short-Run Phillips Curves) The figure shows three different short-run Phillips curves and one long-run Phillips curve for an economy. SRPC0 is the shortrun Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the
short-run Phillips curve when the public expects a 3 percent rate of inflation. SRPC6 is the short-run Phillips curve when the public expects a 6 percent rate of inflation. When the expected inflation rate is 0 percent, what actual inflation rate is required to keep unemployment at 3 percent? a. 0 percent *b. 3 percent c. 6 percent d. 9 percent
66. Figure: Three Short-Run Phillips Curves
Reference: Ref 41-6
(Figure: Three Short-Run Phillips Curves) The figure shows three different short-run Phillips curves and one long-run Phillips curve for an economy. SRPC0 is the shortrun Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. SRPC6 is the short-run Phillips curve when the public expects a 6 percent rate of inflation. When the expected inflation rate is 3 percent, what actual inflation rate is required to keep unemployment at 3 percent? a. 0 percent b. 3 percent *c. 6 percent d. 9 percent
67. Figure: Three Short-Run Phillips Curves
Reference: Ref 41-6
(Figure: Three Short-Run Phillips Curves) The figure shows three different short-run Phillips curves and one long-run Phillips curve for an economy. SRPC0 is the shortrun Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. SRPC6 is the short-run Phillips curve when the public expects a 6 percent rate of inflation. When the expected inflation rate is 6 percent, what actual inflation rate is required to keep unemployment at 3 percent? a. 0 percent b. 3 percent c. 6 percent *d. 9 percent
68. Figure: Three Short-Run Phillips Curves
Reference: Ref 41-6
(Figure: Three Short-Run Phillips Curves) The figure shows three different short-run Phillips curves and one long-run Phillips curve for an economy. SRPC0 is the shortrun Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. SRPC6 is the short-run Phillips curve when the public expects a 6 percent rate of inflation. When the expected inflation rate is 6 percent, what actual inflation rate is consistent with an unemployment rate of 5 percent? a. 0 percent b. 3 percent *c. 6 percent d. 9 percent
69. (Figure: Three Short-Run Phillips Curves) The figure shows three different
short-run Phillips curves and one long-run Phillips curve for an economy. SRPC0 is the short-run Phillips curve when the public expects a 0 percent rate of inflation. SRPC3 is the short-run Phillips curve when the public expects a 3 percent rate of inflation. SRPC6 is the short-run Phillips curve when the public expects a 6 percent rate of inflation. Which statement is TRUE? *a. As long as unemployment is at the NAIRU, the actual inflation rate will match expectations and remain constant. b. The natural rate of unemployment is determined by monetary policy. c. The unemployment rate can be kept permanently at 3 percent by accepting an inflation rate above zero. d. The vertical shape of the long-run Phillips curve indicates that there is always a trade-off between inflation and unemployment in the long run.
70. Core inflation excludes the price of: a. new cars. b. luxury items, such as fur coats. c. houses. *d. energy and food.
71. Analysis of the Phillips curve reveals that a __________ in unemployment, like
that of the early 1980s, is needed to break the cycle of inflationary expectations. a. permanent increase b. permanent decrease *c. temporary increase
d. temporary decrease
72. Figure: The Great Disinflation
Reference: Ref 41-7
(Figure: The Great Disinflation) Refer to the information in the Figure: The Great Disinflation. In the early 1980s, the inflation rate was beaten down by the Federal Reserve's tight monetary policy. In the short run this policy led to a ______ level of actual output and a ______ rate of unemployment. a. high; high *b. low; high c. low; low d. high; low
73. The U.S. government reports a core inflation rate that excludes _____ and
_____ prices to remove the volatility of those two sectors from inflation estimates. a. housing; automobile b. steel; housing *c. energy; food d. gasoline; housing
74. To avoid accelerating inflation over time, a government's policy should: a. try to trade off lower unemployment for higher inflation rather than accept a lower unemployment rate, so that the actual inflation rate is less than the expected inflation rate. *b. not try to trade off lower unemployment for higher inflation rather than accept a high enough unemployment rate, so that the actual inflation rate matches the expected inflation rate. c. try to trade off lower unemployment for higher inflation rather than accept a higher unemployment rate, so that the actual inflation rate is higher than the expected inflation rate. d. not try to trade off lower unemployment for higher inflation rather than try to control inflation only by using aggressive disinflationary polices.
75. Which accurately describes disinflation? a. It must be accompanied by a decline in the price level. b. The inflation rate rises at a higher rate.
*c. It is the process of bringing down the inflation that has become embedded in expectations. d. It is a gradual reduction in the price level over time.
76. To bring disinflation to an economy, policy makers must: a. slow down labor productivity growth. b. increase the money supply in order to release the economy from the liquidity trap. c. keep unemployment below its natural rate for an extended period. *d. lower expectations about inflation.
77. If the Fed reduces the inflation rate from 5 percent to 3 percent, it is: a. following a policy rule. *b. engaging in disinflation. c. increasing employment. d. raising economic growth.
78. Disinflation means a decrease in: a. prices. *b. the rate of inflation. c. aggregate supply. d. the money supply.
79. The cost of disinflation is the: a. leftward shift in aggregate supply. b. decrease in prices. *c. loss of real GDP in the process. d. loss of international markets when prices change.
80. Disinflation is costly to the economy if: a. deflation is forced on the economy, employment decreases, and aggregate output falls. b. increasing inflation is forced on the economy, unemployment decreases, and aggregate price level increases. c. stagflation is forced on the economy, unemployment increases, and inflation increases. *d. a recession is forced on the economy, unemployment increases, and aggregate output falls.
81. The process of bringing down inflation that is embedded in expectations is
called: *a. disinflation. b. deflation. c. hyperinflation. d. the natural rate of inflation.
82. Disinflation is: a. a decline in the aggregate price level. b. an overall decline in nominal wages. *c. the process of bringing down inflation that has become embedded in expectations. d. a persistent attempt to keep unemployment below its natural rate.
83. To pursue a strategy of disinflation, policy makers must: *a. keep the unemployment rate above its natural rate for an extended period. b. shift the short-run Phillips curve up and to the right. c. shift the long-run Phillips curve to the left. d. shift the long-run Phillips curve to the right.
84. Deflation: *a. hurts borrowers and helps lenders. b. helps borrowers and hurts lenders. c. unlike inflation, affects neither borrowers nor lenders. d. has effects on borrowers and lenders that depend on the amount of the loan.
85. Deflation: a. can cause increases in output. b. can cause budget surpluses. *c. can cause decreases in output. d. will not affect output.
86. The problem of debt deflation deepens during an economic slump because: *a. borrowers have to reduce spending to pay back burdensome debts. b. the Fisher effect raises the nominal interest rate during a period of deflation. c. lenders have to lower spending in order to accommodate higher returns from loans.
d. the zero bound on the nominal interest rate is broken.
87. Debt deflation is the: a. increase in aggregate supply caused by deflation. b. reduction in aggregate supply caused by deflation. c. increase in aggregate demand caused by deflation. *d. reduction in aggregate demand caused by deflation.
88. Irving Fisher described debt deflation as a situation in which deflation: a. increases aggregate demand and improves the economic downturn, leading to less deflation. *b. reduces aggregate demand and worsens the economic downturn, leading to further deflation. c. reduces the debt obligation of the borrowers as they become better off under deflation. d. hurts lenders by reducing the value of their loans and lowering the interest rate on loan.
89. Irving Fisher argued that deflation is MOST likely to have which effect? a. expand the economy because the cost of goods has fallen b. increase aggregate supply c. increase aggregate demand *d. decrease aggregate demand
90. Who gains when there is unexpected deflation? a. real-asset owners. b. borrowers. *c. lenders. d. real-asset owners, borrowers, and lenders.
91. Who loses when there is unexpected deflation? a. nominal-asset holders. *b. borrowers. c. lenders. d. nominal-asset holders, borrowers, and lenders.
92. When there is deflation in the economy, there are winners and losers; for
example: *a. mortgage holders lose, but banks awaiting mortgage payments benefit.
b. landlords lose, but people paying rents gain. c. savings account holders lose, but the banks gain. d. bond and stock holders lose, while the brokerage company gains.
93. During periods of deflation _____ will be hurt and _____ will be helped. a. firms; borrowers *b. borrowers; lenders c. consumers; firms d. home buyers; home sellers
94. When economists state that there is a zero bound on nominal interest rates,
they mean that the: a. real interest rate cannot go below zero. *b. nominal interest rate cannot go below zero. c. real interest rate can very well be negative. d. nominal interest rate can always go below zero.
95. When the economic situation is such that monetary policy can no longer be
used because the nominal rate of interest cannot fall below zero, it is called the: a. liquidity preference. b. money neutrality. *c. liquidity trap. d. money illusion.
96. If the economy is in a liquidity trap: a. both monetary and fiscal policies are effective. b. neither monetary nor fiscal policy is effective. c. monetary policy is effective, but fiscal policy is not. *d. fiscal policy is effective, but monetary policy is not.
97. There is a zero bound to which of the following economic variables? a. real money supply *b. nominal interest rates c. potential output d. real money demand
98. Liquidity traps are most likely to occur when the: a. economy is going through a recovery. b. economy is booming.
c. public expects inflation. *d. public expects deflation.
99. Expecting the inflation rate to be 3 percent, Tony decides to put his savings in a
12-month certificate of deposit yielding a fixed 6 percent interest rate. If the actual inflation rate is ________, it can be argued that ________ is (are) worse off. a. above 3 percent; the bank issuing the certificate b. exactly 6 percent; both the bank and Tony c. below 3 percent; Tony *d. below 3 percent; the bank issuing the certificate
100. Expecting the inflation rate to be 3 percent, Adrianna decides to put her
savings in bonds yielding a fixed 5 percent interest rate over a year. If the actual inflation rate is ________, it can be argued that ________ is (are) better off. *a. below 3 percent; Adrianna b. exactly 5 percent; both the corporation issuing the bonds and Adrianna c. above 3 percent; Adrianna d. below 3 percent; the corporation issuing the bonds
101. A liquidity trap is a situation in which: a. using expansionary monetary policy is not effective because the real interest rate is negative. b. aggregate demand falls because consumers do not have enough liquidity to consume. *c. using expansionary monetary policy is not effective because the nominal interest rate is almost zero. d. lenders are trapped by large loans with declining rates of return.
102. A liquidity trap results from the: a. inflation tax. b. expansionary fiscal policy. c. Fisher effect. *d. zero bound of the nominal interest rate.
103. If there is too much deflation: a. people will switch from money to real assets. *b. the nominal interest rate will be constrained by the zero interest rate bound. c. lenders will be harmed. d. aggregate demand will increase.
104. The liquidity trap is associated with all EXCEPT: a. a large reduction in the demand for loanable funds. b. the nominal interest rate falls to zero. c. monetary policy becomes ineffective. *d. fiscal policy becomes ineffective.
105. To avoid falling into a liquidity trap, most central banks: *a. seek a positive but small inflation rate rather than zero inflation. b. target inflation rather than the money supply. c. conduct open-market operations to change the money supply instead of changing the discount rate. d. aim at a target of zero inflation so that inflation expectations are zero too.
106. A liquidity trap arises when: a. debt deflation reduces aggregate demand. *b. conventional monetary policy is ineffective because nominal interest rates are up against the zero lower bound. c. expansionary monetary policy has been used to keep the actual unemployment rate below its natural rate. d. the expected inflation rate equals the actual inflation rate.
107. When Fed officials worried about the possibility of “Japanification” in the United
States, it meant that they were worried that the U.S. economy would: a. grow faster than the economy of Japan after World War II. b. accumulate large trade surpluses, like Japan. c. fall into a period of hyperinflation. *d. fall into a deflationary trap.
108. The measure used by the Fed that excludes food and energy prices is the: a. consumer price index. b. wholesale price index. *c. core inflation rate. d. federal funds rate.
109. The measure that the Fed regards as the best guide to underlying inflation is
the: a. consumer price index.
b. wholesale price index. *c. core inflation rate. d. federal funds rate.
110. The Fed tries to keep the core inflation rate around: a. zero percent. *b. 2 percent. c. 4 percent. d. 5 percent.
111. The Fed measures the expected rate of inflation as the difference between the: *a. interest rate on ordinary government bonds and the interest rate on government bonds whose yield is protected from inflation. b. actual and potential output. c. the actual and natural rates of unemployment. d. consumer price index and the core rate of inflation.
112. In the late summer of 2010, the expected inflation and core inflation rate: a. had increased to over 10 percent. b. had become negative. *c. were below the Fed's 2 percent target. d. were below the Fed's 0 percent target.
113. In order to prevent deflation in November 2010, the Fed began: a. closing banks that had too much invested in the risky foreign exchange market. b. lending money to the central bank of China. c. to consider joining the European Union. *d. buying long-term bonds.
114. In the short run, a lower unemployment rate may be achieved at the cost of a higher inflation rate. *a. True b. False
115. In the long run, there is a negative relationship between the inflation rate and the unemployment rate. a. True *b. False
116. In the long run, the unemployment rate will equal the natural rate of unemployment at any price level. *a. True b. False
117. The short-run Phillips curve is believed to be downward sloping, with the inflation rate on the vertical axis and the unemployment rate on the horizontal axis. Can the SRPC extend below the horizontal axis? Can it extend to the left of the vertical axis? Explain. Correct Answer:
Yes, the SRPC can extend below the horizontal axis if prices are falling. Deflation would be shown as a negative rate of price inflation. No, the SRPC cannot extend to the left of the vertical axis. The unemployment rate cannot be negative. 118. Suppose that the public expects inflation to increase this year from 3 percent to 4 percent. How will this affect the short-run Phillips curve? Correct Answer:
If the public expects a higher inflation rate, these expectations will be built into contracts, wages, and other prices. Thus, at any unemployment rate, the inflation rate will be 4 percent rather than 3 percent. This is reflected in an upward shift in the SRPC. 119. Why is the long-run Phillips curve believed to be vertical at the natural rate of unemployment or NAIRU? Correct Answer:
In the short run, inflation may change and cause an opposite change in the unemployment rate. Over time, wages and prices will adjust to the new inflation expectations and the unemployment rate will return to the NAIRU. So while there is a short-run trade-off between unemployment and inflation and the short-run Phillips curve is downward sloping, in the long run the economy returns to the NAIRU and the long-run Phillips curve is vertical. 120. Suppose the economy is significantly weakened, real GDP is far below potential GDP, and the unemployment rate is high. The Federal Reserve is concerned that monetary policy might have limited effectiveness due to deflation. How can deflation limit the Fed's ability to increase aggregate demand? Correct Answer:
Deflation is a falling aggregate price level. If inflation expectations are actually negative, nominal interest rates will fall, but interest rates cannot fall below zero. The Fed would like to cut interest rates to fight this recession, but if interest rates are
already near zero and the economy is not recovering, the Fed cannot lower interest rates any further. This is known as a liquidity trap.
121. Which could lead to moderate inflation? *a. aggregate supply shock b. drop in consumer confidence c. contractionary fiscal policy d. pursuit of a balanced budget during an expansion
122. Suppose an economy's aggregate price level increases and its aggregate level
of real GDP decreases. This could arise from a: a. positive demand shock. *b. negative supply shock. c. positive supply shock. d. negative demand shock.
123. If an economy's short-run Phillips curve shifts up, this is most likely due to a(n): a. change in the inflation rate. b. increase in the unemployment rate. *c. increase in expected inflation. d. contractionary fiscal policy.
124. The MOST important factors affecting the rate of inflation in an economy are: a. expected inflation and the real growth rate. *b. the unemployment rate and expected inflation. c. the real growth rate and unemployment rate. d. fiscal policy effects and the presence of liquidity traps.
125. The long-run Phillips curve: a. depicts the negative relationship between the unemployment rate and the inflation rate. *b. suggests that policies have little impact on the natural rate of unemployment in the long run. c. explains how expansionary policies can affect an economy, while contractionary policies have little impact. d. shows the positive relationship that exists between the unemployment rate and the inflation rate.
126. The long-run Phillips curve shows that: a. there is a trade-off between unemployment and inflation.
b. an expansionary policy could lead to lower unemployment temporarily. *c. the natural rate of unemployment occurs when the actual inflation rate equals the expected inflation rate. d. lower unemployment can be sustained indefinitely with continuous expansionary policies.
127. Disinflation: a. involves eliminating inflation in an economy. *b. policy often results in plunging the economy into a major recession. c. occurs as a result of a policy makers' attempts to correct a major recession. d. results in a fall in the unemployment rate.
128. When an economy has debt deflation: a. aggregate demand increases, since the real debt burden is reduced. b. aggregate demand is not affected, since real variables are not affected. *c. aggregate demand decreases as borrowers' real debts increase, which leads to less spending. d. the economy moves quickly to its potential output.
129. During a liquidity trap: *a. monetary policy is ineffective, since nominal interest rates cannot fall below zero. b. the money market is in disequilibrium. c. the only tool that the Federal Reserve finds effective is expansionary monetary policy. d. nominal interest rates will rise regardless of what policy the Federal Reserve pursues.
130. If an economy finds itself in a liquidity trap: a. consumers are trapped by an abundance of liquidity and are spending abundantly. *b. the economy is trapped by the inability of monetary policy to reduce nominal interest rates further. c. money markets are trapped in a state of continuous disequilibrium. d. monetary authorities cannot stop nominal interest rates from rising.
1. A financial intermediary that provides liquid assets in the form of deposits to
savers and uses its funds to finance illiquid investment spending needs of borrowers is a(n): a. insurance company. *b. bank. c. pension fund. d. hedge fund.
2. A shadow bank is a: a. branch of the main office of a bank. b. bank that is operated by a shadow government. *c. financial firm that is not closely watched or effectively regulated. d. a credit union or a savings and loan institution.
3. Investment banks differ from commercial banks because commercial banks: a. are allowed to advertise, but investment banks are prohibited from advertising. b. can have offices only in one state, but investment banks can have offices in many countries. c. do not sell foreign currencies, but investment banks do. *d. accept deposits from customers, but investment banks do not.
4. Most funds received by depository banks are: a. borrowed from the U.S. Treasury. *b. deposits of individuals' savings. c. initially in the form of foreign currency. d. loans to the bank from businesses.
5. Depository banks borrow on a: *a. short-term basis from depositors and lend on a long-term basis to others. b. long-term basis from depositors and lend on a long-term basis to others. c. short-term basis from depositors and lend on a short-term basis to others. d. long-term basis from depositors and lend on a short-term basis to others.
6. Most of a bank's short-term liabilities are: a. loans from the Federal Reserve.
b. loans from the U.S. Treasury. c. loans to its customers. *d. deposits of customers' savings.
7. Most of a bank's assets are: a. loans from the Federal Reserve. b. loans to the Federal Reserve. *c. loans to its customers. d. deposits of savings from its customers.
8. Maturity transformation is converting: *a. short-term liabilities into long-term assets. b. short-term liabilities into short-term assets. c. long-term liabilities into long-term assets. d. long-term liabilities into short-term assets.
9. Which is an example of maturity transformation? a. Anne sells her house for $200,000 and uses the money to open a bakery. b. Matthew sells his car and uses the money to pay college tuition. *c. Justin takes $10,000 from his savings account and uses it to buy some Apple stock. d. Michael closes his checking account at Bank of America and opens a checking account at a local credit union.
10. Which is an example of maturity transformation? a. Jordan borrows $15,000 to buy a car. b. Aaron buys new running shoes and pays for them with his American Express credit card. c. Angela gives Russell $100 in cash for a graduation gift. *d. Tyler lends $1000 to his roommate Nick for a year.
11. Shadow banks differ from commercial banks because shadow banks: a. accept deposits only from businesses and state and local governments, not from individuals. *b. are not subject to as many regulations as commercial banks. c. are not allowed to pay interest on deposits. d. can operate branches in more than one state.
12. Since the early 1980s, shadow banks have increased because they:
*a. are not subject to capital requirements and reserve requirements. b. offer online bill payment to their depositors. c. pay lower interest rates on their deposits than commercial banks. d. offer lower interest rates on their commercial loans than commercial banks.
13. When shadow banks engage in maturity transformation, they raise funds by
___________ and invest in _________. a. issuing stock; stock of other companies b. selling bonds; Treasury bills *c. borrowing in short-term credit markets; longer-term speculative investments d. borrowing in long-term credit markets; short-term speculative investments
14. Shadow banks offer their customers a higher rate of return than commercial
banks because shadow banks: a. can pay interest on deposits, but commercial banks cannot pay interest on deposits. b. are allowed to invest in stocks of foreign corporations, while commercial banks can invest only in stocks of American corporations. c. must hold more reserves and capital than commercial banks. *d. are not subject to reserve and capital requirements, but commercial banks must hold reserves and meet capital requirements.
15. In a bank run: a. the bank has a surplus of deposits and must turn customers away. *b. bank customers try to withdraw their deposits. c. the bank runs out of money to lend to customers. d. the bank runs out of profitable investments for the funds of its depositors.
16. Which is a regulation intended to prevent bank runs? a. Sherman Anti-Trust law b. regulation Q, which prohibits banks from paying interest on demand deposits *c. deposit insurance d. maturity transformation
17. All are regulations designed to prevent bank runs EXCEPT: *a. asset bubbles. b. capital requirements. c. reserve requirements. d. provisions that allow banks to borrow from the Fed's discount window.
18. Which is a regulation designed to prevent bank runs? a. debt overhang *b. deposit insurance c. credit crunch d. shadow banks
19. A shadow bank engages in maturity transformation by: a. accepting short-term deposits from businesses and making short-term loans to commercial banks. b. accepting long-term deposits from businesses and making longterm loans to commercial banks. *c. borrowing money short term and lending or investing long term. d. borrowing money long term and lending or investing short term.
20. A banking crisis occurs: a. whenever there is an asset bubble. b. if shadow banks begin to accept deposits. c. when banks engage in maturity transformation by accepting short-term deposits and converting them into long-term loans or investments. *d. when a large part of the depository banking sector or the shadow banking sector fails or threatens to fail.
21. In an asset bubble: a. depositors withdraw their deposits from banks until the bank fails. *b. the price of an asset is pushed to an unreasonably high level because of expectations of further price gains. c. the price of an asset falls because demand for the asset is so high. d. savers and investors engage in maturity transformation by borrowing long term and making short-term loans to take advantage of interest rate increases.
22. The asset bubble that caused the savings and loan crisis of the 1980s was in: a. gold. b. oil futures. c. stocks of Internet companies. *d. commercial real estate.
23. The asset bubble in commercial real estate that caused the savings and loan
crisis in the 1980s burst because: *a. real estate developers built too much office space. b. construction costs were too high. c. the interest rates on construction loans were unprofitably low for banks. d. the government established rent controls on newly constructed office buildings.
24. A vicious downward spiral among banks in which each institution's failure
increases the likelihood that another will fail is a(n): a. asset bubble. b. maturity transformation. c. multiplier effect. *d. financial contagion.
25. In a vicious cycle of deleveraging, financial institutions: *a. sell assets at a deep discounts. b. sell assets at unreasonably high prices. c. buy assets at deep discounts. d. buy assets at unreasonably high prices.
26. When troubled financial institutions are forced to sell assets quickly at a deep
discount, this is a(n): a. debt overhang. *b. vicious cycle of deleveraging. c. maturity transformation. d. asset bubble.
27. A sudden and widespread disruption of financial markets that occurs when
people lose faith in the liquidity of financial institutions and markets is a(n): a. asset bubble. b. maturity transformation. c. financial panic. *d. debt overhang.
28. The primary reason for Lehman Brothers' bankruptcy in September 2008 was
its investment in: *a. subprime mortgages. b. bonds of foreign governments. c. U.S. government bonds. d. risky stocks.
29. The repo market: a. is where the Federal Reserve makes loans to banks. b. refers to transactions between lenders and borrowers with bad credit. c. is the market for houses in foreclosure. *d. is the overnight credit market.
30. Severe banking crises usually lead to: a. low levels of unemployment. *b. high levels of unemployment. c. high levels of saving and investment spending. d. rapid growth of real GDP per capita.
31. What did the panic of 1893 in the United States and the Swedish banking crisis
of 1991 have in common? a. Each was followed by a period of record high growth rates of real GDP. b. Both were ended by aggressive monetary policies of the central bank. *c. Each was followed by a deep recession and slow recovery. d. Both were caused by a real estate bubble.
32. Following a severe banking crisis, the average increase in the unemployment
rate is: a. 25 percent. b. 20 percent. c. 10 percent. *d. 7 percent.
33. Following a severe banking crisis, the average length of time that it takes the
unemployment rate to begin to fall is _______ years. a. 2
*b. 4.8 c. 10.5 d. 25
34. Which is NOT a reason banking crises usually lead to recessions? *a. low unemployment rates and high inflation rates b. credit crunches c. debt overhang d. loss of monetary policy effectiveness
35. A credit crunch causes a recession because: *a. potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending. b. banks have a surplus of funds to loan, so interest rates fall to very low levels. c. unemployment falls to very low levels, causing a problem of inflation. d. interest rates are so low that investors' incomes fall, and they decrease their spending.
36. Debt overhang is the result of: a. maturity transformation. *b. a vicious cycle of deleveraging. c. falling unemployment. d. rising inflation.
37. Debt overhang results in: a. reduced levels of debt and assets with higher values. b. increased levels of debt and assets with higher values. c. reduced levels of debt and assets with lower values. *d. increased levels of debt and assets with lower values.
38. Debt overhang often causes a recession because businesses and consumers
with a: a. low level of debt increase their spending. b. low level of debt decrease their spending. c. high level of debt increase their spending. *d. high level of debt decrease their spending.
39. Consumers and businesses with debt overhang are likely to:
a. increase their borrowing and decrease their spending. b. increase their borrowing and increase their spending. *c. decrease their borrowing and decrease their spending. d. decrease their borrowing and increase their spending.
40. The Fed usually responds to a recession by: *a. buying short-term government debt from banks. b. selling short-term government debt to banks. c. raising interest rates. d. increasing reserve requirements.
41. When the Fed purchases short-term government securities from banks, excess
reserves: a. decrease. *b. increase. c. remain constant. d. fluctuate randomly.
42. When the Fed conducts open market purchases from banks, interest rates: *a. decrease. b. increase. c. remain constant. d. fluctuate randomly.
43. The purpose of open market purchases is to: a. decrease the government budget deficit. b. increase the government budget deficit. *c. increase consumer and investment spending. d. decrease consumer and investment spending.
44. In a banking crisis, banks usually: a. see an increase in the value of their assets. b. lend out all of their excess reserves. *c. hold more excess reserves than usual. d. offer discounts to customers to give them the incentive to borrow money.
45. Monetary policy is often ineffective in a banking crisis because businesses and
consumers:
a. borrow too much because interest rates are so low and increase spending so much that inflation results. b. borrow large amounts because interest rates are so low, but they are unwilling to spend the money that they have borrowed. *c. aren't willing to borrow and spend even though interest rates are very low. d. aren't willing to borrow and spend because interest rates are so high.
46. When borrowers don't respond to short-term interest rates of zero, the economy
is experiencing: *a. a liquidity trap. b. hyperinflation. c. an asset bubble. d. maturity transformation.
47. In a credit crunch: a. interest rates are so low that savers decrease the quantity of available loanable funds. *b. borrowers are forced to pay very high interest rates or may not be able to borrow at all. c. unemployment is usually very low and the growth rate of output is very high. d. the spread becomes negative.
48. Before the Great Depression in the 1930s, the government: a. nationalized all banks that were close to failure. *b. allowed banks to fail, believing that free-market forces should be allowed to work. c. lent money to banks that were in poor financial condition. d. guaranteed deposits of individuals.
49. Which is an action of central banks and governments to lessen the severity of a
banking crisis? a. maturity transformation b. relaxing bank capital requirements *c. acting as a lender of last resort d. opening a liquidity trap
50. Which is an action of central banks and governments to lessen the severity of a
banking crisis? a. establishing shadow banks *b. government guarantees of bank deposits
c. encouraging asset bubbles d. opening a liquidity trap
51. When the central bank acts as a lender of last resort, it: a. raises reserve requirements. b. reduces reserve requirements. c. provides a liquidity trap. *d. provides funds to financial institutions when they are unable to borrow from the private credit markets.
52. By acting as a lender of last resort, the central bank: *a. prevents a loss of confidence in banks and avoids bank runs. b. is able to keep interest rates high so that spending increases. c. is increasing the amount of reserves that a bank is required to hold. d. may keep inflation low, but will likely cause unemployment to increase.
53. By acting as a lender of last resort, the central bank: a. causes a vicious cycle of deleveraging. *b. prevents a vicious cycle of deleveraging. c. is decreasing the amount of reserves that a bank is required to hold. d. may keep interest rates low but will likely cause unemployment to increase.
54. Following the 2008 financial crisis, commercial banks: a. borrowed an amount equal to 14 times their total reserves before the crisis. *b. avoided borrowing from the Fed. c. preferred to sell large amounts of their assets in order to raise cash to avoid bank runs rather than borrow from the Fed. d. insisted that market forces be allowed to work to resolve the crisis rather than accept loans from the Fed.
55. When the government guarantees a troubled bank's liabilities the: a. bank is merged into the Federal Reserve System and becomes a Federal Reserve bank. b. owners of the bank must pay a fee in order to receive the guarantee. *c. government takes over the bank temporarily, and then reprivatizes the bank by selling it to private investors.
d. bank is permanently closed.
56. During the financial crisis of 2008, the Fed: a. was closed for a three-week bank holiday by President George W. Bush. b. remained open but was severely limited in its operations. c. was merged with the Treasury Department to increase its power to deal with the crisis. *d. expanded its operations by lending to institutions other than commercial banks and buying financial assets other than Treasury bills.
57. The recession that began in 1929 turned into the Great Depression primarily
because of: *a. the banking crisis. b. the beginning of World War II. c. taxes that were too low to finance the new government programs that became necessary during the Depression. d. powerful labor unions that demanded high wages and generous benefits.
58. During the 2008 financial crisis: *a. both the United States and the European Union suffered severe economic downturns. b. the United States suffered a severe economic downturn, but the European Union was relatively unaffected by the crisis. c. the European Union suffered a severe economic downturn, but the United States was relatively unaffected by the crisis. d. both the United States and the European Union were unaffected by the crisis that was severe in Latin America only.
59. Following the 2008 financial crisis: a. both the United States and the European Union recovered very quickly, with output reaching its pre-crisis level by early 2009. *b. recovery in both the United States and the European Union was very slow. c. the United States recovered very quickly, but recovery in the European Union was very slow. d. the European Union recovered very quickly, but recovery in the United States was very slow.
60. The slow recovery from the 2008 financial crisis meant that the unemployment
rate:
a. remained low in spite of the crisis. b. returned quickly to its pre-crisis level. *c. increased and remained high for three years. d. fell to its natural rate.
61. Long-term unemployment is measured by the percentage of the unemployed
who have been out of work for: a. a week or longer. b. 6 weeks or longer. c. 20 weeks or longer. *d. 27 weeks or longer.
62. The 2008 financial crisis was caused primarily by problems with: *a. home loans. b. commercial real estate loans. c. credit cards. d. public debt.
63. The threat of a second financial crisis in 2011 and 2012 was due primarily to
problems with: a. home loans. b. commercial real estate loans. c. credit cards. *d. public debt.
64. The threat of a financial crisis in 2011 and 2012 was based on problems with: a. home loans in Germany. b. political instability in France. *c. public debt problems in southern Europe and Ireland. d. striking labor unions in northern Europe.
65. The European debt crisis began with: a. public debt problems in Great Britain. *b. public debt problems in Greece. c. the collapse of the real estate market in Norway. d. strikes by labor unions in Spain.
66. Financial problems began in Greece when: *a. the Greek government revealed that it had understated the size of its budget deficits and debt.
b. the European Union forced Greece to give up its membership. c. Greece adopted the euro. d. the United Nations imposed trade sanctions on Greece.
67. When private lenders learned the size of Greece's budget deficits and debt,
they: a. promptly made loans to the Greek government in order to prevent a financial crisis. *b. refused to make further loans to Greece. c. seized assets that belonged to the Greek government. d. nationalized banks and the manufacturing industry in Greece.
68. When private lenders refused to lend to the Greek government, other European
countries: a. also refused to lend money to Greece. b. forced Greece to abandon the euro and return to the drachma for its currency. *c. provided emergency loans to Greece but demanded harsh budget cuts in return. d. forced Greece to leave the European Union.
69. The effect of the harsh budget cuts required by the European countries who
made emergency loans to Greece in 2011 was: a. the speedy return of the Greek economy to full employment. b. an inflationary gap in the Greek economy. c. that the Greek economy fell into a liquidity trap. *d. that the Greek economy became even more depressed and was unable to repay its debts in full.
70. Greece's economy accounts for ________ of European GDP. *a. less than 3 percent b. approximately 10 percent c. approximately 20 percent d. almost 30 percent
71. The primary cause of the Spanish recession following the 2008 financial crisis
was a: a. stock market crash. *b. housing bubble. c. public debt crisis. d. devaluation of Spain's currency, the peseta.
72. During the 2008 financial crisis, investors feared that Spain's government might
default on its debt because: a. it spent large amounts of money helping homeowners avoid foreclosure. b. it lent too much money to Greece. *c. the government might have to spend large amounts of money to bail out Spanish banks. d. it was leaving the European Union.
73. After the 2008 financial crisis, interest rates on Italian debt increased because: a. the central bank raised interest rates because they were approaching the zero bound. b. the Italian government revalued the lira. c. Italy imposed trade sanctions on Iran. *d. the Italian economy was growing too slowly to generate enough tax revenue to repay its public debt.
74. Fiscal stimulus is: *a. expansionary fiscal policy, such as increases in government spending and tax cuts designed to reduce unemployment and increase output. b. expansionary fiscal policy, such as increases in government spending and tax cuts designed to increase unemployment and decrease output. c. contractionary fiscal policy, such as decreases in government spending and tax increases designed to reduce budget deficits. d. contractionary fiscal policy, such as decreases in government spending and tax increases designed to increase budget deficits.
75. Expansionary fiscal measures, such as more government spending and tax cuts
designed to reduce unemployment, are called: a. fiscal austerity. *b. fiscal stimulus. c. automatic stabilizers. d. maturity transformation.
76. Fiscal austerity is: a. expansionary fiscal policy, such as increases in government spending and tax cuts designed to reduce unemployment and increase output. b. expansionary fiscal policy, such as increases in government spending and tax cuts designed to increase unemployment and decrease output.
*c. contractionary fiscal policy, such as decreases in government spending and tax increases designed to reduce budget deficits. d. contractionary fiscal policy, such as decreases in government spending and tax increases designed to increase budget deficits.
77. Contractionary fiscal measures, such as less government spending and tax
increases designed to reduce budget deficits, are called: *a. fiscal austerity. b. fiscal stimulus. c. automatic stabilizers. d. maturity transformation.
78. Proponents argued that fiscal stimulus was appropriate after the 2008 financial
crisis because most major economies had: a. low unemployment and low inflation. b. low unemployment and high inflation. *c. high unemployment and low inflation. d. high unemployment and high inflation.
79. Proponents argued that fiscal stimulus was appropriate after the 2008 financial
crisis because: a. austerity would only increase inflation and unemployment. b. political instability in the Middle East was causing a depreciation of the euro and the dollar. c. the lag associated with automatic stabilizers was too long. *d. the effectiveness of monetary policy was limited by the zero bound on interest rates.
80. After the 2008 financial crisis, proponents of fiscal austerity argued that the
primary problem for the United States and Europe was: *a. high levels of government deficits and debt that eroded investor confidence. b. powerful labor unions that kept wages too high. c. unemployment. d. inflation.
81. After the 2008 financial crisis, proponents of austerity argued that it was the
appropriate policy because: a. cuts in government spending would increase the interest rates that savers could earn and would therefore increase the supply of loanable funds.
*b. cuts in government spending would keep interest rates on government debt low and improve investor confidence. c. fiscal stimulus would likely create a problem of deflation. d. the lag associated with fiscal stimulus was too long.
82. After the 2008 financial crisis, proponents of austerity argued that fiscal stimulus
was inappropriate because: a. cuts in government spending had increased interest rates. b. the increase in government spending had caused interest rates to increase. *c. unemployment remained high after the stimulus was implemented in 2009. d. monetary policy is more effective when the economy is close to the zero bound on interest rates.
83. Which is NOT one of the problems facing almost all major economies after the
2008 financial crisis? a. high unemployment b. low growth of output c. high interest rates on public debt *d. inflation
84. One of the lessons learned from the 2008 financial crisis was that: a. banks had been overregulated. b. the Federal Deposit Insurance Corporation was ineffective. *c. banking regulation was too narrow because before the crisis, shadow banks were not subject to the same regulation as depository institutions. d. financial crises are usually very short, and recovery from them is relatively quick and easy.
85. The bill that Congress passed in 2010 to correct many of the problems that led
to the 2008 financial crisis was called the: *a. Wall Street Reform and Consumer Protection Act. b. Sherman Anti-Trust Act. c. Glass-Steagall Act. d. Financial Institutions Modernization Act.
86. A repo is: a. a long-term loan. *b. a very short-term loan. c. another name for a corporate bond. d. government debt that the government is unable to repay.
87. The Dodd-Frank bill addressed all of the following issues EXCEPT: a. consumer protection. *b. regulation of shadow banks. c. election of members of the Federal Reserve Board of Governors. d. regulation of derivatives.
88. The purpose of the Consumer Financial Protection Bureau is to: a. guarantee the safety of food and drugs purchased by consumers. b. educate consumers on how to save for retirement above and beyond their Social Security. *c. police financial industry practices and protect borrowers. d. help consumers understand how to get the best health insurance.
89. The Dodd-Frank bill affected derivatives by: a. prohibiting them. b. requiring that the issuer guarantee 50 percent of the purchaser's investment. c. allowing them to be purchased and sold only by the Federal Reserve. *d. requiring that they be traded in transparent markets.
90. According to the Dodd-Frank bill, shadow banks: a. are prohibited. b. must all be merged with commercial banks. c. are allowed to operate only in other countries. *d. are subject to bank-like regulation of their capital and investments.
91. If the government guarantees liabilities of financial institutions other than
deposits: *a. those financial institutions will have the incentive to engage in overly risky behavior. b. those financial institutions will have the incentive to engage in less risky behavior. c. the Federal Reserve will be forced to raise reserve requirements. d. the economy will be pushed close to the zero bound on interest rates.
92. Resolution authority means that: *a. the government has the power to seize control of financial institutions that require a bailout. b. a member of Congress has the power to propose resolutions on the floor of Congress. c. banks have the ability transform short-term liabilities into long-term liabilities. d. Congress has given the Federal Reserve permission to act as a lender of last resort.
93. Maturity transformation involves converting long-term liabilities into short-term assets. a. True *b. False
94. Maturity transformation must always begin with the financial institution accepting deposits. a. True *b. False
95. Shadow banks are prohibited from engaging in maturity transformation. a. True *b. False
96. A bank run usually results in bank failure because banks keep only a small fraction of their depositors' funds in the bank vault and are therefore unable to meet their customers' demands for their money. *a. True b. False
97. Even if a bank is in excellent financial condition, a bank run can still result in its failure. *a. True b. False
98. Shadow banks are not subject to runs. a. True *b. False
99. Banking crises are usually followed by periods of economic expansion. a. True *b. False
100. The savings and loans crisis of the 1980s was caused by an asset bubble in commercial real estate. *a. True b. False
101. Following both the panic of 1893 in the United States and the Swedish banking crisis in 1991, the economies of both countries experienced rapid growth of real GDP and low unemployment rates. a. True *b. False
102. Severe banking crises are usually followed by deep recessions and slow recoveries. *a. True b. False
103. On average the unemployment rate increases by 7 percent following a severe banking crisis. *a. True b. False
104. Following a severe banking crisis, unemployment usually begins to decrease in a few months. a. True *b. False
105. In a credit crunch, interest rates are unusually low. a. True *b. False
106. In debt overhang consumers' debt level is diminished and the value of their assets has increased. a. True *b. False
107. During banking crises monetary policy is very effective, but fiscal policy is ineffective. a. True *b. False
108. In a recession, the Fed usually sells short-term government securities in order to increase interest rates and decrease spending. a. True *b. False
109. In a recession, the Fed usually purchases short-term government securities in order to decrease interest rates and increase spending. *a. True b. False
110. In a banking crisis, banks are likely to hold more excess reserves than usual. *a. True b. False
111. Monetary policy may be ineffective in a banking crisis because interest rates are so low that consumers and businesses borrow and spend too much. a. True *b. False
112. When the economy is in a liquidity trap, consumers and businesses aren't willing to borrow and spend even though interest rates may be zero. *a. True b. False
113. When the Fed acts as a lender of last resort, it lends money to homeowners who are in danger of losing their home through foreclosure. a. True *b. False
114. Following the financial crisis of 2008, commercial banks relied heavily on the Fed as a lender of last resort, borrowing approximately $700 billion. *a. True b. False
115. In a severe financial crisis if the public fears that a bank's assets aren't worth enough to cover its debts, a lender of last resort is not likely to be able to prevent bankruptcy of the bank. *a. True b. False
116. During the financial crisis of 2008, the Federal Reserve bought not only Treasury bills but also commercial paper issued by private companies and the debt of Fannie Mae and Freddie Mac. *a. True b. False
117. Following the 2008 financial crisis, by 2011, almost half of all unemployed workers were long-term unemployed. *a. True b. False
118. As a consequence of the financial crisis, the economies of the United States and the countries of the European Union shrank by more than 25 percent. a. True *b. False
119. Greece's financial difficulties following the crisis of 2008 were due primarily to a housing bubble. a. True *b. False
120. Spain's financial difficulties following the crisis of 2008 were due primarily to a housing bubble. *a. True b. False
121. Fiscal stimulus is expansionary fiscal measures, such as increases in government spending and decreases in taxes, designed to reduce unemployment. *a. True b. False
122. Fiscal austerity is expansionary fiscal measures, such as increases in government spending and decreases in taxes, designed to reduce unemployment. a. True *b. False
123. Almost all major economies faced high unemployment and low growth following the 2008 financial crisis. *a. True b. False
124. The 2008 financial crisis made it clear that banks were overregulated. a. True *b. False
125. In 2010, Congress passed the Dodd-Frank Act, which was designed to improve regulation of the financial sector and avoid another financial crisis like the one of 2008. *a. True b. False
126. A repo is a long-term loan. a. True *b. False
127. One of the elements addressed in the Dodd-Frank bill was authority over nonbank financial institutions that face bankruptcy. *a. True b. False
128. The Dodd-Frank bill created the Consumer Financial Protection Bureau for the purpose of helping consumers understand the financial impact of Social Security.
a. True *b. False
129. What is maturity transformation? Explain the difference between maturity transformation by depository banks and by shadow banks. Correct Answer:
Maturity transformation is the process of converting short-term liabilities into longterm assets. Depository banks' short-term liabilities are their deposits, which they convert into long-term loans. Shadow banks don't accept deposits. Their short-term liabilities are short-term loans, which they convert into long-term loans, which are often more risky than those made by depository banks. 130. Explain how shadow banks, which don't take deposits, can have bank runs. Correct Answer:
The liabilities that shadow banks use in maturity transformation are short-term loans, which are converted into long-term assets. If the shadow bank's lenders decide to discontinue making short-term loans to the shadow bank because they fear that its financial condition is unsound, the shadow bank must sell assets to raise cash. If the value of assets falls as a result of a vicious cycle of deleveraging, the shadow bank will not be able to raise enough cash to fund its liabilities as they mature, and the shadow bank will fail. 131. Explain the two main causes of banking crises. Correct Answer:
Bank crises are often caused by asset bubbles or financial contagion. In a bubble, some asset, such as real estate or stocks, is pushed to unreasonably high levels because of unrealistic expectations about future price increases. If the price of the asset begins to fall, the owners may default on their loans, leading to bank failures. In a financial contagion, as some banks fail possibly because of an asset bubble, depositors and investors lose confidence in other banks and withdraw their funds, causing other banks to fail. 132. Why are banking-crisis recessions so bad? Correct Answer:
Banking crises usually lead to recessions because they usually cause a credit crunch, debt overhang, and the loss of effectiveness of monetary policy. In a credit crunch, borrowers are either unable to get loans or must pay very high interest rates on them. This will cause decreases in consumer and business spending, leading to decreases in output and increases in unemployment. A debt overhang occurs when a vicious cycle of deleveraging leaves borrowers with high debt but assets whose value has decreased. Consumers and businesses will cut back on spending to
reduce their debt, increasing the likelihood of a recession. Monetary policy is often ineffective in a banking crisis because the Fed may lower interest rates, but consumers and businesses may not respond by borrowing and spending. 133. Explain the difference between fiscal stimulus and fiscal austerity in dealing with the recessions that occurred in many countries after the 2008 financial crisis. Correct Answer:
Fiscal stimulus is expansionary fiscal policy—increases in government spending and decreases in taxes—designed to increase spending and output and reduce unemployment. Fiscal austerity is contractionary fiscal policy, which uses decreases in government spending and possibly tax increases to reduce the budget deficit. 134. Briefly explain the four main elements of the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). Correct Answer:
The Dodd-Frank Act creates a new office, the Consumer Financial Protection Bureau, to police financial industry practices and protect borrowers from financial contracts that are difficult to understand. The new law requires that derivatives be bought and sold in open, transparent markets. Shadow banks are regulated more like depository banks under the new law. Under the Dodd-Frank Act the government has resolution authority to take control of any financial institution, not just depository banks that need a bailout.
135. The difference between commercial banks and investment banks is that
commercial banks: *a. accept deposits from customers, while investment banks trade financial assets but don't accept deposits. b. are not allowed to make profits, while investment banks are allowed to profit from buying and selling financial assets. c. cannot own financial assets, while investment banks are able to own a wide variety of financial assets. d. are a type of shadow bank, while investment banks are not.
136. Which financial institution is an example of a shadow bank? a. credit union b. commercial bank c. savings and loan *d. hedge fund
137. Depository banks:
a. buy short-term securities from investors, change their maturity, and sell them as long-term securities to other investors. b. buy long-term securities from investors, change their maturity, and sell them as short-term securities to other investors. *c. accept short-term deposits from depositors and use them to make long-term loans. d. accept long-term deposits from depositors and use them to make short-term loans.
138. Maturity transformation can be done by: a. depository banks but not by shadow banks. b. shadow banks but not by depository banks. *c. both depository banks and shadow banks. d. neither depository banks nor shadow banks.
139. Before the 2008 financial crisis, shadow banks were: a. much smaller than depository banks. b. strictly regulated and therefore offered their customers lower rates of return than depository banks. c. required to hold more reserves than depository banks. *d. not subject to regulations, such as capital requirements and reserve requirements.
140. A shadow bank may experience a bank run if: a. its depositors withdraw their funds because they fear that the shadow bank is financially unsound. b. depositors decide that the FDIC insurance of $250,000 per account is insufficient to cover their potential losses. c. they purchase too many government securities. *d. the shadow bank's lenders decide the shadow bank is unsafe and stop lending it money.
141. Which is an explanation of banking crises? *a. Many banks make the same mistake of investing in an asset bubble. b. Banks engage in maturity transformation. c. The Federal Reserve, acting as a lender of last resort, introduces too much competition into the system. d. Banks are paying low interest rates on deposits and charging high interest rates on loans.
142. In a vicious cycle of deleveraging:
a. banks buy some type of asset and push the price up to an unreasonable level. *b. banks are forced to sell assets at a deep discount to reduce their debt. c. depository banks and shadow banks engage in maturity transformation. d. the Fed is prohibited from acting as a lender of last resort.
143. A sudden and widespread disruption of financial institutions and markets is
known as: a. a liquidity trap. b. the fallacy of composition. *c. a financial panic. d. stagflation.
144. Subprime mortgages are mortgages: a. on which the interest rate is less than the prime rate. b. that are in default. *c. that are made to buyers with too little income or too few assets to qualify for a standard mortgage. d. that only the government can make.
145. Loans to home buyers with too little income or too few assets to qualify for a
standard mortgage are called: a. subsidized mortgages. *b. subprime mortgages. c. government-guaranteed mortgages. d. shadow mortgages.
146. Banking crises are: a. not very harmful to the real economy, since money is neutral in the long run. *b. typically followed by recessions. c. typically the beginning of long periods of economic growth. d. usually over with very quickly.
147. In a severe banking crisis: a. very few banks in the system actually go into bankruptcy. b. government intervention usually is not required, since the market outcome is always preferable to one that results from government intervention.
*c. the economy usually falls into a severe recession followed by a slow recovery. d. economic growth usually resumes quickly after the crisis is resolved.
148. A situation in which borrowers cannot find credit or must pay very high interest
rates for loans is called a: a. liquidity trap. b. zero-bound limit. *c. credit crunch. d. stagflation.
149. Long recessions often follow banking crises because: a. banking crises may cause a surplus of credit, so that interest rates fall to levels so low that investors earn very little in interest income. b. the vicious cycle of deleveraging that follows leads to overpriced assets. c. consumer and investment spending increase too rapidly, causing high rates of inflation. *d. monetary policy is not very effective because banks hold on to excess reserves and are unwilling to lend them out.
150. After a banking crisis, when the Federal Reserve buys government securities
to increase the money supply and decrease interest rates: *a. consumers and businesses may not respond by increasing their spending because of debt overhang. b. consumers and businesses usually borrow too much and spend too much, causing inflation. c. banks may fear runs, so they hold on to excess reserves rather than lending them to consumers and businesses. d. consumers and businesses may not respond because the recession has increased the value of their assets so much that they don't need to borrow money in order to buy more.
151. Since the 1930s, following banking crises, if financial institutions are not able
to borrow in private credit markets: a. the Federal Reserve takes a laissez-faire attitude, allowing market forces to determine which institutions will survive. *b. the Federal Reserve may act as a lender of last resort. c. the U.S. Treasury may make short-term loans to them. d. they are not allowed to engage in maturity transformation until their financial condition improves.
152. Policy for dealing with banking crises changed from laissez-faire to taking
steps to contain the damage from bank failures: a. after Ronald Reagan became president in 1980. b. after World War II in 1945. *c. during the Great Depression in the 1930s. d. after the Civil War in the 1860s.
153. If the government guarantees not only the deposits but also the other liabilities
of a failing bank, the government usually: a. temporarily takes over the bank but then reprivatizes it as soon as possible. *b. merges it with the Treasury. c. merges it with the Federal Reserve. d. closes the bank permanently.
154. From the 1930s until the 2008 financial crisis, banking regulation addressed all
except: a. deposit insurance. b. capital requirements. *c. reserve requirements. d. shadow banks.
155. Financial regulation was not adequate to deal with the 2008 financial crisis
because: a. before 2008 banks were very small and could be effectively regulated by the states. b. up until the 2008 crisis, the market had worked very well in preventing banking crises, so there was very little need for bank regulation. *c. the role of shadow banks had become very important, but shadow banks were not subject to banking regulation at the time of the 2008 crisis. d. the Supreme Court had ruled that the regulatory powers of the Federal Reserve were unconstitutional and prohibited the Fed from using its regulatory powers.
156. A repo is a: a. share of stock in a depository bank. b. share of stock in a shadow bank. c. long-term loan. *d. short-term loan.
157. After the 2008 financial crisis, policy makers realized that the scope of banking
regulation was too: a. narrow, because the Federal Reserve was the only agency with any power to regulate banks. b. broad, because both depository and shadow banks were overregulated. c. broad, because market forces, not government regulation, should be allowed to determine the outcome of a financial crisis. *d. narrow, because shadow banks were not subject to much regulation.
158. Before the financial crisis in 2008 shadow banks: *a. were outside of the lender-of-last resort system. b. offered checkable deposits to their customers. c. were not allowed to operate across state lines. d. were required to hold more capital than depository banks.
159. The special office created by the Dodd-Frank Act to police financial industry
practices and protect borrowers is called the: a. Food and Drug Administration. *b. Consumer Financial Protection Bureau. c. Board of Governors. d. Consumer Protection Agency.
160. The Wall Street Reform and Consumer Protection Act of 2010 addressed all
EXCEPT: a. consumer protection. b. derivatives regulation. c. regulation of shadow banks. *d. interest rate ceilings on checkable deposits.
161. Under the Dodd-Frank Act of 2010, derivatives: *a. have to be bought and sold in open, transparent markets so that there is a limit to the invisible risk that financial traders can assume. b. are prohibited. c. may be purchased and sold in foreign markets only. d. may be purchased and sold only by state and local governments.
162. If a financial institution is systemically important: a. it is an important part of the Federal Reserve banking system.
b. it is affected more than the average financial institution by the business cycle. *c. its activities have the potential to create a banking crisis. d. it is not allowed to engage in maturity transformation.
1. When the dollar value of the Swiss franc was very high following the financial
crisis in 2008: *a. Swiss exports were more expensive in the United States. b. Swiss exports were less expensive in the United States. c. the Swiss National Bank sold Swiss francs to increase its value. d. the Swiss National Bank bought francs to decrease its value.
2. Open-economy macroeconomics is the branch of economics that deals with: a. reducing regulations on business. *b. the relationships between economies of different nations. c. reducing employment discrimination. d. the provision of financial information to investors.
3. Economists summarize a country's transactions with other countries with a(n)
_____ account. a. circular flow *b. balance of payments c. exchange rate d. purchasing power parity
4. If the United States imports more goods from Japan than it exports to Japan, how
can the difference be financed? a. U.S. consumers would simply borrow money from domestic banks. b. The United States could buy more Japanese assets. *c. The United States could sell assets and create a liability obligating Americans to pay for those imports in the future. d. The United States could sell assets to the Japanese, which would reduce its liabilities.
5. When the United States gives foreign aid to developing nations in Africa, which
balance of payments account is affected? *a. current account b. financial account c. reserve account d. foreign exchange account
6. The difference between a country's exports and imports of goods alone—not
including services—is the: *a. merchandise trade balance. b. balance of payments on good and services.
c. balance of payments on current account. d. current account.
7. Table: International Transactions
Reference: Ref 43-1
(Table: International Transactions) Refer to the information in the Table: International Transactions. The merchandise trade balance is: a. $51,000. *b. $48,000. c. $46,000. d. $2000.
8. Table: International Transactions Reference: Ref 43-1
(Table: International Transactions) Refer to the information in the Table: International Transactions. The balance of payments on goods and services is: *a. $51,000. b. $48,000. c. $3000. d. –$29,000.
9. Table: International Transactions Reference: Ref 43-1
(Table: International Transactions) Refer to the information in the Table: International Transactions. The balance on current account is: a. $29,000. b. $22,000. c. –$8000. *d. –$29,000.
10. Table: International Transactions Reference: Ref 43-1
(Table: International Transactions) Refer to the information in the Table: International Transactions. What additional capital inflows are needed to equilibrate the balance of payments? a. –$29,000 b. $20,000 c. $29,000 *d. $80,000
11. If the balance of payments on financial account is $25, the balance of payments
on goods and services is –$20, and the statistical discrepancy in the financial account is $2, then net international transfer payments and net international factor income are: *a. –$7. b. –$5. c. $7. d. $47.
12. Which would be included in the U.S. current account? a. factory in Japan purchased by a firm in the United States b. share of stock of a company in the United States sold to someone in Japan *c. dividend on a share of stock of a company in the United States paid to someone in Japan d. bond issued by a firm in Japan sold to someone in the United States
13. When a Japanese investor buys stock in General Motors, which balance of
payments accounts is affected? a. current account *b. financial account c. reserve account d. foreign exchange account
14. If the United States exports $100 billion of goods and services and imports $150
billion of goods and services and there is no other factor income or transfers, the balance on the current account is: a. $250 billion. b. –$250 billion. c. $50 billion.
*d. –$50 billion.
15. If the United States exports $100 billion of goods and services and imports $150
billion of goods and services and there is no other factor income or transfers, the balance on the financial account is: a. $250 billion. b. –$250 billion. *c. $50 billion. d. –$50 billion.
16. Assume that Tom sells a crate of Florida oranges to a retailer in Canada and
Susan sells a U.S. bond to a customer in Britain. Which illustrates the difference and/or similarities between these two transactions? a. Only Tom will actually receive U.S. dollars as a result of this transaction. *b. The sale of the bond to the customer in Britain creates a liability, while the sale of the oranges does not. c. Both sales create an asset for the United States. d. Both sales create a liability for the United States.
17. If a country has a current account deficit, it must have a: *a. financial account surplus. b. balance of payment surplus. c. financial account deficit. d. balance of payments deficit.
18. Which would be included in the U.S. financial account? a. computer made in the United States and exported to Britain b. computer made in Britain and imported into the United States c. interest on a U.S. company's bond sold to someone living overseas *d. the value of a bond from a company in the United States sold to someone living in Britain
19. Which would NOT be included in the U.S. financial account? a. factory in Japan purchased by a U.S. company b. share of stock in a company in the United States sold to someone in Japan c. bond issued by a firm in Japan sold to someone in the United States *d. a video game made in China and imported into the United States
20. Which would be included in the U.S. current account? a. public purchases and sales of financial assets *b. trade balance c. financial account balance d. private purchases and sales of financial assets
21. If a country has a positive balance of payments on the current account, then it
must: a. be exporting too much. b. be importing too much. c. have a surplus on the financial account. *d. have a deficit on the financial account.
22. Money flows into the United States from other countries as a result of: a. U.S. purchases of foreign goods and services. b. payments to foreign owners of U.S. assets. c. domestic purchases of U.S. goods and services. *d. transfer payments from foreign individuals, firms, or governments to U.S. residents.
23. Money flows into the United States from other countries as a result of: *a. foreign purchases of U.S. goods and services. b. U.S. purchases of foreign goods and services. c. U.S. investment in foreign companies. d. U.S. purchases of foreign assets.
24. The balance between spending flowing into a country from other countries and
spending flowing out of that country to other countries is the: a. singular account. b. euro/dollar account. c. universal exchange account. *d. balance of payments.
25. This question refers to the accounting for U.S. international transactions.
Suppose that a family from New York City eats in a restaurant in Mexico City. This transaction would appear in the _______, and it would be entered as a ______. *a. current account; payment to foreigners b. current account; payment from foreigners c. financial account; payment to foreigners
d. financial account; payment from foreigners
26. This question refers to the accounting for U.S. international transactions.
Suppose that a Peruvian financial investor purchases a sporting goods store in Colorado Springs, Colorado. This transaction would appear in the ______, and it would be entered as a ______. a. current account; payment from foreigners b. current account; payment to foreigners *c. financial account; payment from foreigners d. financial account; payment to foreigners
27. This question refers to the accounting for U.S. international transactions.
Suppose that a family from Peru eats in a restaurant in Salt Lake City, Utah. This transaction would appear in the ______, and it would be entered as a ______. *a. current account; payment from foreigners b. current account; payment to foreigners c. financial account; payment from foreigners d. financial account; payment to foreigners
28. This question refers to the accounting for U.S. international transactions.
Suppose that a financial investor from Los Angeles purchases bonds issued by the government of Peru. This transaction would appear in the _____, and it would be entered as a _____. a. current account; payment from foreigners b. current account; payment to foreigners c. financial account; payment from foreigners *d. financial account; payment to foreigners
29. A statement of spending flows into and out of the country for purchases of
assets during a particular period is the nation's: a. current account. *b. financial account. c. universal exchange position. d. statistical discrepancy.
30. A country has a financial account surplus if the balance on the: a. financial account is negative. *b. financial account is positive. c. current account is zero. d. current account is positive.
31. A country has a capital account deficit if the balance on the: *a. financial account is negative. b. financial account is positive. c. current account is negative. d. current account is zero.
32. A surplus in the current account means there will be: a. a surplus in the financial account. *b. a deficit in the financial account. c. a balanced financial account. d. either a surplus or a deficit in the financial account.
33. A deficit in the current account means there will be: *a. a surplus in the financial account. b. a deficit in the financial account. c. a balanced financial account. d. either a surplus or a deficit in the financial account.
34. A current account surplus exists when: *a. the balance on the current account is positive. b. net exports are negative. c. spending flowing out of the country for goods and services exceeds spending flowing into the country for its goods and services. d. imports exceed exports.
35. A current account deficit exists when: *a. the balance on current account is negative. b. spending flowing out of the country for goods and services is less than spending flowing into the country for its goods and services. c. net exports are positive. d. an economy buys less from foreigners than it sells to them.
36. Which statement is TRUE? *a. A positive balance on the financial account is a financial account surplus. b. A negative balance on the financial account is a financial account surplus. c. A positive balance on financial account is a financial account deficit.
d. A positive balance on the financial account means a positive balance on current account.
37. A current account deficit is generally a result of: *a. imports exceeding exports. b. U.S. purchases of bonds issued by foreign corporations. c. a large amount of U.S. purchases of foreign real estate. d. exports exceeding imports.
38. A current account surplus is generally a result of: a. imports exceeding exports. b. sales of stock in American companies to citizens of foreign countries. c. a large influx of foreign investment income. *d. exports exceeding imports.
39. When there is a deficit in the U.S. balance of payments on the current account,
we pay for the difference by: a. allowing the price of currency to rise. b. allowing the price of currency to fall. c. buying assets from other countries. *d. selling assets to other countries.
40. In 2010, the $471 billion deficit on the U.S. current account was offset by a
surplus of $255 billion on financial account. This difference is the result of: a. budget deficit. *b. statistical discrepancy. c. trade deficit. d. national debt.
41. If the merchandise trade balance is –$15, net international transfer payments
and net international factor income are $4, the balance of payments on goods and services is –$25, and the balance of payments on the financial account is $18, then the statistical discrepancy in the financial account is: a. $15. *b. $3. c. –$3. d. –$1.
42. The difference between a country's exports and its imports of goods and
services is known as the:
a. trade balance. *b. balance of payments on goods and services. c. balance of payments on current account. d. balance of exchange.
43. The difference between a country's balance of payments on goods and services
and the merchandise trade balance is that the: *a. merchandise trade balance does not include exports and imports of services. b. balance of payments does not include exports and imports of services. c. merchandise trade balance does not include imports of goods and services. d. balance of payments does not include imports of goods and services.
44. A country's balance of payments on financial account is the: a. difference between the dollar value of a country's exports and imports of goods and services. b. difference between the dollar value of a country's exports and imports of goods only. *c. difference between the country's sale of assets to foreigners and the purchases of assets from foreigners. d. same value as the country's merchandise trade balance.
45.
Reference: Ref 43-2
(Table: Balance of Payment) Refer to the Table: Balance of Payments. In this case, the country's balance of payments on goods and services is: a. $375 billion. *b. –$375 billion. c. $4045 billion. d. $355 billion.
46.
Reference: Ref 43-2
(Table: Balance of Payment) Refer to the Table: Balance of Payments. The country's balance of payments on current account is: a. $355 billion. b. –$395 billion.
c. $375 billion. *d. –$355 billion.
47.
Reference: Ref 43-2
(Table: Balance of Payment) Refer to the T: Balance of Payments. The country's balance of payments on financial account is: a. zero. b. $375 billion. *c. $355 billion. d. –$355 billion.
48. If a country runs a deficit on its balance of payments on goods and services, in
order to pay for its imports, it must: a. raise taxes. b. print new money. *c. sell assets to foreigners. d. increase its exports.
49. The relationship between a country's balance of payments on current account
(CA) and its balance of payments on financial account (FA) is described by all EXCEPT: a. CA + FA = 0. *b. CA = FA. c. CA = –FA. d. FA = –CA.
50. The United States exports corn to other nations. In the U.S. balance of
payments account, this transaction is entered as a payment: *a. from foreigners in the current account. b. from foreigners in the financial account. c. to foreigners in the current account. d. to foreigners in the financial account.
51. A Japanese banker buys some newly issued U.S. Treasury bonds. In the U.S.
balance of payments account, this transaction is entered as a payment: a. from foreigners in the current account. b. to foreigners in the current account. c. to foreigners in the financial account. *d. from foreigners in the financial account.
52. Microsoft, a Seattle software company, purchases a new office building in
Vancouver. In the U.S. balance of payments account, this transaction is entered as a payment: a. from foreigners in the current account. *b. to foreigners in the financial account. c. to foreigners in the current account. d. from foreigners in the financial account.
53. American retailers import toys from China. In the U.S. balance of payments
account, this transaction is entered as a payment: a. to foreigners in the financial account. b. from foreigners in the financial account. *c. to foreigners in the current account. d. from foreigners in the current account.
54. An American buys a new Volvo, a car built in Sweden. In the U.S. balance of
payments, this transaction causes the balance on the _____ account to _____. *a. current; decrease b. current; increase c. financial; decrease d. financial; increase
55. After a hurricane devastates New Orleans, a Canadian charity sends $1 million
to the United States to help the survivors rebuild their homes. In the U.S. balance of payments, this transaction causes the balance on the _____ account to _____. a. current; decrease *b. current; increase c. financial; decrease d. financial; increase
56. A Brazilian bank buys shares of stock in Intel, an American high-tech company.
In the U.S. balance of payments, this transaction causes the balance on the _____ account to _____. a. current; decrease b. current; increase c. financial; decrease *d. financial; increase
57. An American deposits $10,000 in an account in a London bank. In the U.S.
balance of payments, this transaction causes the balance on the _____ account to _____.
a. financial; increase *b. financial; decrease c. current; decrease d. current; increase
58. A country's balance of payments accounts are: a. its records of government expenditures. b. its records of government tax revenues. c. a summary of government debts. *d. a summary of its transactions with other countries.
59. If an American citizen earns income working in Paris for a French company, her
wages are considered to be: *a. factor income. b. an international transfer. c. a purchase of assets in the United States' financial account. d. a sale of assets in the United States' financial account.
60. Suppose a Brazilian citizen working in the United States sends part of her
earnings to family members in Sao Paulo. This transaction is considered to be: a. factor income. *b. an international transfer. c. a purchase of assets in the United States' financial account. d. a sale of assets in the United States' financial account.
61. The profits earned by the U.S. operations of a German-owned auto company
are considered to be: *a. factor income. b. an international transfer. c. a purchase of assets in the United States' financial account. d. a sale of assets in the United States' financial account.
62. The sale of American-made Boeing aircraft to an airline in the United Arab
Emirates is considered to be: a. factor income. b. a sale or purchase of assets in the financial account *c. a sale or purchase of goods and services. d. an international transfer
63. The purchase of Vietnamese cinnamon by a bakery in Boston, Massachusetts,
is considered to be: a. factor income. b. a sale or purchase of assets in the financial account. *c. a sale or purchase of goods and services. d. an international transfer.
64. When an American citizen pays someone in India to prepare his income tax
return, the payment would be considered: a. factor income. b. a sale or purchase of assets in the financial account. *c. a sale or purchase of goods and services. d. an international transfer.
65. When an American citizen purchases shares of stock in the French company
Airbus, the transaction would be *a. a private sale or purchase of assets in the financial account. b. an official sale or purchase of assets in the financial account. c. a sale or purchase of goods and services. d. an international transfer.
66. If a British citizen works for an American-owned company in Chicago, her
wages are considered to be: *a. factor income. b. a sale or purchase of assets in the financial account. c. a sale or purchase of goods and services. d. an international transfer .
67. When computer software designed in the United States is sold to an Australian
firm for use in its Melbourne office, the transaction is considered to be a(n): a. official sale or purchase of assets in the financial account. b. private sale or purchase of assets in the financial account. *c. sale or purchase of goods and services. d. international transfer.
68. In the balance of payments accounts: a. factor income will always equal international transfers. *b. the current account and the financial account will always sum to zero.
c. the value of a country's exports will always equal to the value of its imports in any given year. d. the current account and the financial account are independent of one another.
69. Economists usually use GDP rather than GNP because: a. they are usually interested only in transactions on the current account. b. they are usually interested only in transactions on the capital account. *c. the primary purpose of the national accounts is to track production rather than income. d. the primary purpose of the national accounts is to track income rather than production.
70. Suppose that the equilibrium interest rate in the U.S. market for loanable funds
is 3 percent prior to any international capital flows in the United States. In Japan, the equilibrium interest rate in the Japanese market for loanable funds is 7 percent. If lenders in both nations believe that loans to foreigners are just as good as loans to their own citizens, we would expect: a. capital to flow from the United States to Japan, making interest rates rise in Japan and interest rates fall in the United States. b. capital to flow from Japan to the United States, making interest rates fall in Japan and interest rates rise in the United States. c. capital to flow from Japan to the United States, making interest rates rise in Japan and interest rates fall in the United States. *d. capital to flow from the United States to Japan, making interest rates fall in Japan and interest rates rise in the United States.
71. Suppose that the rate of interest in the United States is 4 percent and in India it
is 7 percent. Assuming that loans in India and the United States are of equal risk, this implies that: *a. U.S. lenders will lend to borrowers in India. b. Indian lenders will lend to borrowers in the United States. c. the interest rate in India will increase further as compared to the interest rate in the United States. d. the central bank of India has adopted a more expansionary monetary policy.
72. Scenario: Japan and the United States
Suppose that the interest rate in the United States is 4%, in Japan it is 7%, and financial assets in the two countries are equal in risk. Reference: Ref 43-3
(Scenario: Japan and the United States) Refer to the Scenario: Japan and the United States. As a result: a. financial capital will flow from Japan to the United States. *b. financial capital will flow from the United States to Japan. c. there will no movement in financial capital between Japan and the United States. d. Japan will export more goods to the United States.
73. Scenario: Japan and the United States
Suppose that the interest rate in the United States is 4%, in Japan it is 7%, and financial assets in the two countries are equal in risk. Reference: Ref 43-3
(Scenario: Japan and the United States) Refer to the Scenario: Japan and the United States. The implication is that: a. interest rates in Japan will increase further compared to those in the United States. b. interest rates in the United States will decrease further compared to those in Japan. *c. the capital flow between Japan and the United States eventually will render the interest rates equal. d. the interest rates in both countries will remain unchanged.
74. Direct foreign investment means the purchase of: a. shares of stock in foreign companies. b. bonds of a foreign country. c. bank loans in a foreign country. *d. factories in a foreign country.
75. Figure: The Loanable Funds Model in the U.S. Market
Reference: Ref 43-4
(Figure: The Loanable Funds Model in the U.S. Market) Refer to the information in the Figure: The Loanable Funds Model in the U.S. Market. If the actual interest rate is higher than 4 percent in the U.S. market, then the quantity supplied of loanable funds will be ______ the quantity of loanable funds demanded.
*a. greater than b. less than c. equal to d. unrelated to
76. Figure: The Loanable Funds Model in the U.S. Market
Reference: Ref 43-4
(Figure: The Loanable Funds Model in the U.S. Market) Refer to the information in the Figure: The Loanable Funds Model in the U.S. Market. If the actual interest rate is less than 4 percent in the U.S. market, then the quantity supplied of loanable funds will be ______ the quantity of loanable funds demanded. a. greater than *b. less than c. equal to d. unrelated to
77. Figure: The Loanable Funds Model in the U.S. Market
Reference: Ref 43-4
(Figure: The Loanable Funds Model in the U.S. Market) Refer to the information in the Figure: The Loanable Funds Model in the U.S. Market. If the actual interest rate is equal to 4 percent in the U.S. market, then the quantity supplied of loanable funds will be ______ the quantity of loanable funds demanded. a. greater than b. less than *c. equal to d. unrelated to
78. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. Assume that each country's loanable funds market is such that its equilibrium interest rate is 4 percent. Which is likely to be the next
logical step to reconcile the apparent disequilibrium in both markets, assuming that assets and liabilities are viewed as homogenous? a. Capital outflow from the United States will lower U.S. interest rates. b. Capital outflow from Britain will lower interest rates in Britain. *c. Capital outflow from Britain will raise interest rates in Britain. d. Capital inflow to the United States will raise U.S. interest rates.
79. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. At an interest rate of 4 percent, the quantity of loanable funds demanded by American borrowers is ______ the quantity of loanable funds supplied by American lenders. *a. greater than b. less than c. equal to d. not related to
80. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. At an interest rate of 4 percent, the quantity of loanable funds supplied by American lenders is ______ the quantity of loanable funds demanded by American borrowers. a. greater than *b. less than c. equal to d. not related to
81. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. At an interest rate of 4 percent, the quantity of
loanable funds supplied by British lenders is ______ the quantity of loanable funds demanded by British borrowers. *a. greater than b. less than c. equal to d. not related to
82. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. At an interest rate of 4 percent, the quantity of loanable funds demanded by British borrowers is ______ the quantity of loanable funds supplied by British lenders. a. greater than *b. less than c. equal to d. not related to
83. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. At an interest rate of 4 percent, the total quantity of loanable funds demanded across the two markets is ______ the total quantity of loanable funds supplied by lenders. a. greater than b. less than *c. equal to d. not related to
84. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. At an interest rate of 4 percent, the excess of loanable funds supplied by ______ lenders will be exported to ______ borrowers. a. American; British *b. British; American
c. American or British; British or American d. American; worldwide
85. Figure: International Capital Flows
Reference: Ref 43-5
(Figure: International Capital Flows) Refer to the information in the Figure: International Capital Flows. At an interest rate of 4 percent, the shortage of loanable funds available to ______ borrowers will be satisfied by ______ lenders. *a. American; British b. British; American c. American or British; British or American d. British; worldwide
86. In the absence of international capital flows, the equilibrium interest rate in the
U.S. market for loanable funds is 3 percent, while in Germany it is 7 percent. International borrowing and lending between the United States and Germany may result in a common interest rate of ________ and ________. a. 5 percent; capital inflows to the United States matching the capital outflows from Germany b. 3 percent; massive capital inflows from Germany into the United States *c. 4 percent; capital outflows from the United States matching the capital inflows into Germany d. 7 percent; massive capital inflows from the United States into Germany
87. Interest rates between two countries tend to converge if: a. both countries have a financial account surplus. b. both countries have a current account surplus. *c. the residents of the two countries believe that a foreign asset is as good as a domestic one. d. the residents of the two countries prefer their assets to foreign assets.
88. If assets owners in Japan and the United States consider Japanese and U.S.
assets as good substitutes for each other and if the U.S. interest rate is 5 percent and the Japanese interest rate is 2 percent, then all will occur EXCEPT that: a. financial inflows will reduce the U.S. interest rate. b. financial outflows will increase the Japanese interest rate. c. the interest rate gap between the United States and Japan will be eliminated.
*d. loanable funds will be exported from the United States to Japan.
89. If asset owners in Japan and the United States consider Japanese and U.S.
assets as good substitutes for each other and if the U.S. interest rate is 5 percent while the Japanese interest rate is 2 percent: *a. financial inflows will reduce the U.S. interest rate. b. financial outflows will reduce the Japanese interest rate. c. the interest rate gap between the United States and Japan will grow. d. financial inflows will increase the U.S. interest rate.
90. When our interest rates are higher in country A than those in other countries, we
expect that: a. other countries will borrow more from country A. *b. capital will flow into country A. c. capital will flow out of country A. d. country A will lend more to other countries.
91. Which statement is TRUE? a. Money flowing into the United States from foreigners who purchase U.S. assets is the positive component of the U.S. current account. *b. Money flowing into the United States from foreigners who purchase U.S. assets is the positive component of the U.S. financial account. c. Money flowing into the United States from foreigners who purchase U.S. assets is the negative component of the U.S. current account. d. Money flowing into the United States from foreigners who purchase U.S. assets is the negative component of the U.S. financial account.
92. The _________ component of the U.S. _________ account arises from money
flowing out of the United States to the rest of the world as payment for imports, factor payments, and international transfers. a. positive; financial b. positive; current c. negative; financial *d. negative; current
93. International capital flows serve to:
a. widen the gap between interest rates in different countries. *b. narrow the gap between interest rates in different countries. c. increase the quantity of loanable funds supplied in places where interest rates are relatively low. d. decrease the quantity of loanable funds supplied in places where interest rates are relatively high.
94. In countries with rapidly growing economies, like China and India, the demand
for loanable funds is _______ and interest rates are _______ than in countries with slowly growing economies. . *a. larger; higher b. larger; lower c. smaller; higher d. smaller; lower
95. Financial capital tends to move from: a. less developed to more developed countries. b. more developed to less developed countries. *c. slow-growing countries to faster-growing countries. d. fast-growing countries to slow-growing countries.
96. The underlying motives behind capital flows reflect international differences in: a. savings. b. investment opportunities. c. technology. *d. savings and investment opportunities.
97. International differences in the demand for loanable funds primarily reflect: a. differences in climate. b. differences in population. c. differences in the type of products that are exported. *d. differences in investment opportunities.
98. International differences in the supply of loanable funds primarily reflect
differences in: a. education levels across countries. *b. differences in savings rates across countries. c. differences in investment opportunities. d.D) differences in labor productivity.
99. A country's balance of payments on financial account is the difference between the country's sales of assets to foreigners and its purchases of assets from foreigners during a given period. *a. True b. False
100. The value of accounting services purchased by clients in China is included in the merchandise trade balance. a. True *b. False
101. Included in the financial account is the income U.S. residents earn on assets owned in other countries. a. True *b. False
102. A change in the U.S. balance of payments on financial account generates an equal and opposite reaction in the balance of payments on current account. *a. True b. False
103. If the current account is in surplus, the financial account must also be in surplus. a. True *b. False
104. If Toyota builds a factory in Alabama, this is an example of direct foreign investment. *a. True b. False
105. Countries with government budget surpluses are likely to have capital inflows, all other things equal. a. True *b. False
106. Consider these transactions. How would they be entered in the U.S. balance of payments accounts? A. A U.S. citizen purchases a shirt produced in Mexico.
B. A bank in Mexico City purchases a U.S. Treasury bond. C. An American company buys an office building in Mexico City. Correct Answer:
A. This transaction is importation of a good and is regarded as a payment to foreigners in the current account. B. This transaction is the foreign purchase of an American asset. The purchase of the bond is regarded as a payment from foreigners in the financial account. When the U.S. Treasury pays this bank interest on the bond, it is a payment to foreigners in the financial account. C. This transaction is a payment to foreigners in the financial account. 107. Suppose a nation has a trade deficit on goods and services in the current account. What does this imply about the total balance of the current account? Correct Answer:
Nothing. The current account also includes the net payments to factor income and transfers. If the nation had a surplus in factor income and/or transfers, it might be large enough to offset a trade deficit. 108. Suppose the economy of Alpha in 2008 imported $800 billion in goods and $400 billion in services. The nation exported $500 billion in goods and $600 billion in services. Citizens of foreign nations also purchased $200 billion of Alpha's assets. A. What was the merchandise trade balance? B. What was the balance of payments on the current account? C. What was the balance of payments on the financial account, and what was the value of Alpha's purchases of assets from the rest of the world? Correct Answer:
A. The merchandise (goods) trade balance is ($500 billion – $800 billion) = –$300 billion. B. Including the export and import of services, the balance of payments on the current account is –$300 billion + ($600 billion – $400 billion) = –$100 billion. C. The balance of payments on the current account must exactly offset the balance of payments on the financial account. Since the current account balance is –$100 billion, the financial account balance must be +$100 billion. If the financial account balance is +100 and Alpha received $200 billion from other nations, then $100 billion must have been sent out of Alpha to buy foreign assets. 109. Suppose that the United States and Canada are the only trading partners in the world. Suppose the U.S. Congress passes more restrictive import policies. Assuming that the Canadian Parliament does not retaliate, what will happen to the U.S. balance of payments on the current account? All else equal, what impact will more restrictive import policies have on the U.S. balance of payments on the financial account? Explain the intuition behind your conclusions.
Correct Answer:
If the United States is importing fewer goods and services from Canada, the balance of payments on the current account will increase. This happens because the United States is making fewer payments to Canada. The sum of the balance of payments on current account and the balance of payments on financial account must equal zero. So if the balance of payments on current account is increasing, the balance of payments on financial account must be decreasing. The intuition is that fewer American dollars are heading to Canada for Canadian goods. This means that there are fewer U.S. dollars out there that return to America as investments in American assets in the financial account.
110. A country's balance of payments accounts: a. measure a country's exports and imports. *b. summarize a country's transactions with other countries. c. are always positive. d. measures the sales of assets to foreigners and the purchases of assets by foreigners.
111. If a country's current account is positive, its: a. financial account is also positive. b. balance of payments is positive. *c. financial account is negative. d. balance of payments is negative.
112. The merchandise trade balance: a. is the difference between the sales of assets to foreigners and the purchases of assets by foreigners. *b. is the difference between a country's exports and imports of goods. c. includes the value of services traded. d. is not part of the current account.
113. A country's balance of payments is made up of the: a. current account and merchandise trade account. *b. current account and financial account. c. financial account and the services account. d. financial account alone.
114. Which is a payment the United States makes to foreigners? *a. dollar value of tea the United States imports from India b. dollar value of services provided to Canada
c. dollar value of tourism purchases by visitors from the European Union d. fees for financial services provided by the United States to China
115. If the country's balance of payments on the current account is positive: a. the balance of payments on the financial account is also positive. *b. the balance of payments on the financial account must be negative so that the sum of the accounts equal zero. c. a country's flow of funds into the country must be greater than the flow of funds out of the country. d. the country's imports are greater than its exports.
116. In 2012, the United States: *a. had a substantial current account deficit. b. operated on a fixed exchange rate regime. c. also had a substantial capital account deficit. d. operated on the gold standard.
117. A decrease in capital flows into a country, holding everything else constant,
will: *a. result in an increase in the current account for the country. b. be recorded as an increase in the balance of financial account for the country. c. result in a decrease in the balance of payments on the current account. d. cause the balance of payments to become negative.
118. Assume two countries trade freely with each other. Suppose interest rates in
the loanable funds market in one country are lower than they are in the other country. This means: *a. funds will flow from the low-interest country to the highinterest country. b. this interest rate differential will persist as long as citizens view domestic assets as substitutes for foreign assets. c. funds will flow from the high-interest country to the lowinterest country. d. interest rate differentials cannot be changed.
119. A country that pursues a contractionary monetary policy will MOST likely have
a(n):
a. increase in the level of investment spending. *b. increase in the demand for its currency in the foreign exchange market. c. increase in the supply of its currency in the foreign exchange market. d. lowering of its interest rate.
120. If a country's loanable funds market is initially in equilibrium and then there are
capital outflows, this will result in a(n): a. fall in the equilibrium interest rate, while the equilibrium quantity of loanable funds will increase. *b. rise in the equilibrium interest rate, while the equilibrium quantity of loanable funds will decrease. c. fall in the equilibrium interest rate, while the equilibrium quantity of loanable funds will decrease. d. rise in the equilibrium interest rate, while the equilibrium quantity of loanable funds will increase.
121. A shift in the demand for loanable funds to the left could be caused by: a. more business spending financed through borrowing. *b. less business spending financed through borrowing. c. a loosening of requirements needed to borrow funds. d. a more optimistic economy.
122. Fast-growing economies often have a greater demand for loanable funds than
do slower-growing economies because: a. fast-growing economies also have high private savings rates. *b. fast-growing economies have more investment opportunities. c. they tend to have high public savings rates. d. their balance of payments tends to be in surplus most of the time.
1. The market in which foreign currencies are traded is known as the: a. stock market. b. bond market. c. commodities market. *d. foreign exchange market.
2. The market in which currencies can be exchanged for each other is known as
the: a. loanable funds market. *b. foreign exchange market. c. resource market. d. market for goods and services.
3. When the exchange rate changes from (180 Japanese yen = 1 dollar) to (170
Japanese yen = 1 dollar), the yen has _____ and the dollar has _____. a. appreciated; appreciated b. depreciated; depreciated c. depreciated; appreciated *d. appreciated; depreciated
4. The real exchange rate is the nominal exchange rate adjusted for differences in: a. population. b. unemployment. *c. the aggregate price level. d. interest rates.
5. The nominal exchange rate at which a given basket of goods and services would
cost the same in two countries is known as the: a. floating exchange rate. b. fixed exchange rate. c. real exchange rate. *d. purchasing power parity.
6. The behavior of the balance of payments on goods and services is determined in
the international _______ market. *a. goods and services b. loanable funds c. money d. stock
7. The behavior of the financial accounts is determined in the international _______
market. a. goods and services *b. loanable funds c. money d. stock
8. Suppose that the value of the euro fell from $1.32 on April 30, 2012, to $1.24 on
July 5, 2012. This implies that: *a. The euro depreciated and the dollar appreciated during this period. b. The dollar depreciated and the euro appreciated during this period. c. The euro depreciated and there is insufficient information about the dollar's value during this period. d. The euro appreciated and there is insufficient information about the dollar's value during this period.
9. If the rate of exchange is €1 = US$2, then US$1 = *a. €0.50. b. €2. c. $0.50. d. $2.00.
10. The exchange rate is the: a. interest rate differential between countries. b. balance of trade differential between countries. *c. relative price of currencies between countries. d. relative price of gold between countries.
11. If the exchange rate is $1 = ¥110, a $20,000 Ford truck costs _________ in
Japan. a. ¥20,000 b. ¥18,182 *c. ¥2.2 million d. ¥3 million
12. When the value of a pound sterling changes from US$1.50 to US$2, it follows
that the: *a. U.S. dollar has depreciated. b. British pound has depreciated.
c. U.S. dollar has appreciated. d. value of a U.S. dollar has gone from £0.5 to £0.6.
13. If the value of a U.S. dollar changes from ¥120 to ¥110, it follows that: a. the Japanese yen is depreciating and the U.S. dollar is appreciating. *b. U.S. goods become cheaper for Japanese consumers to purchase. c. Japanese goods become cheaper for U.S. consumers to purchase. d. U.S. services become more expensive for Japanese firms to purchase.
14. If the U.S. dollar changes from $1 = €1 to $0.80 = €1, then: a. the dollar has depreciated relative to the euro. b. the dollar has been fixed by the United States and the euro bloc. *c. the dollar has appreciated relative to the euro. d. U.S. goods are now cheaper in the euro bloc.
15. If the U.S. dollar changes from $1 = ¥200 to $1 = ¥100, then: *a. the dollar has depreciated relative to the yen. b. the dollar has been fixed by the United States and Japan. c. the dollar has appreciated relative to the yen. d. U.S. goods are now more expensive in Japan.
16. When a currency becomes more valuable in terms of other currencies, we say
that it: *a. has appreciated. b. is no longer in equilibrium. c. has depreciated. d. is overvalued.
17. When a currency becomes less valuable in terms of other currencies, we say
that it: a. has appreciated. *b. has depreciated. c. is undervalued. d. is no longer in equilibrium.
18. When the exchange rate changes from (5.5 pesos = 1 dollar) to (6.5 pesos = 1
dollar), the peso has ________ and the dollar has ________.
a. appreciated; appreciated b. depreciated; depreciated *c. depreciated; appreciated d. appreciated; depreciated
19. If the exchange rate is $1 = 12.95 Mexican pesos, then the price of a $10,000
Harley Davidson motorcycle is ______ pesos in Mexico. a. 10,000 b. 772.2 c. 12,950 *d. 129,500
20. If the exchange rate is initially $1 = 12.95 pesos but changes to $1 = 15 pesos,
then the dollar has ________ and the price in Mexico of a $10,000 Harley Davidson motorcycle has _______. a. depreciated; decreased b. depreciated; increased *c. appreciated; increased d. appreciated; decreased
21. When a country's currency appreciates, the prices of its exports in terms of
foreign currency will ______. *a. increase b. decrease c. remain constant. d. fluctuate randomly.
22. When a country's currency depreciates, the prices of its exports in terms of
foreign currency will _______. a. increase *b. decrease c. remain constant. d. fluctuate randomly.
23. When a country's currency appreciates, the prices of its imports in terms of the
domestic currency will _______. a. increase *b. decrease c. remain constant. d. fluctuate randomly.
24. When a country's currency depreciates, the prices of its imports in terms of the
domestic currency will _______. *a. increase b. decrease c. remain constant. d. fluctuate randomly.
25. If the British pound appreciates against the dollar, then: a. British imports and exports have become more expensive. b. American imports and exports have become more expensive. c. British imports and exports have become less expensive. *d. British exports have become more expensive but the price of American exports to Britain has fallen.
26. When the value of the euro changes from $1.30 to $1.20, it follows that: a. European Union imports from the United States increase. b. U.S. exports to the European Union increase. *c. U.S. imports from the European Union increase. d. European Union exports to the United States decrease.
27. When the dollar appreciates relative to the Canadian dollar: a. Canadian goods become more expensive in the United States. *b. U.S. goods become more expensive in Canada. c. U.S. residents tend to buy more from Canada, since the United States has a weak currency. d. the United States sells more goods to Canada.
28. When the U.S. dollar price of a foreign currency rises: *a. it becomes cheaper for foreigners to buy U.S. goods. b. it becomes cheaper for us to buy foreign goods. c. foreign goods go down in price. d. we need fewer dollars to buy the foreign currency.
29. If the U.S. dollar appreciates, we expect all EXCEPT that: a. Americans will buy more foreign currency. b. Americans will buy more goods from abroad. c. American exports to other countries will decline. *d. Americans will buy fewer goods from abroad.
30. Suppose that the United States and European Union are the only trading
partners in the world. If interest rates in the United States are significantly lower than those in the European Union, we would expect the: a. supply of the dollar to fall, appreciating the dollar. *b. demand for the dollar to fall, depreciating the dollar. c. supply of euros to increase, depreciating the euro. d. demand for euros to decrease, depreciating the euro.
31. Suppose that the United States and European Union are the only trading
partners in the world. If the United States lowers import restrictions from the European Union, we would expect the: *a. demand for euros to increase, appreciating the euro. b. demand for the dollar to increase, appreciating the dollar. c. supply of dollars to increase, appreciating the dollar. d. supply of euros to increase, depreciating the euro.
32. Suppose that the United States and European Union are the only trading
partners in the world. If the European Union imposes some import tariffs on U.S. goods, we would expect the: a. supply of the euro to decrease, depreciating the euro. *b. demand for the dollar to decrease, depreciating the dollar. c. demand for the dollar to increase, appreciating the dollar. d. supply of the dollar to decrease, depreciating the dollar.
33. Figure: Change in the Demand for U.S. Dollars
Reference: Ref 44-1
(Figure: Change in the Demand for U.S. Dollars) Refer to the information in the Figure: Change in the Demand for U.S. Dollars. The change from D1 to D2 will occur, all other things being equal, if the: a. supply of euros decreases. b. demand for euros increases. c. demand for euros decreases. *d. demand for dollars increases.
34. Figure: Change in the Demand for U.S. Dollars
Reference: Ref 44-1
(Figure: Change in the Demand for U.S. Dollars) Refer to the information in the Figure: Change in the Demand for U.S. Dollars. The change from D1 to D2 will occur, all other things being equal, if: a. interest rates are higher in Europe. *b. interest rates are higher in the United States. c. interest rates in the United States and Europe are equal. d. inflation is higher in Europe.
35. Figure: Change in the Demand for U.S. Dollars
Reference: Ref 44-1
(Figure: Change in the Demand for U.S. Dollars) Refer to the information in the Figure: Change in the Demand for U.S. Dollars. A flow of capital from Europe to the United States would cause a movement in this foreign exchange market that is best represented by the shift from: a. D2 to D1. b. E2 to E1. *c. D1 to D2. d. E1 to E2.
36. Figure: Change in the Demand for U.S. Dollars
Reference: Ref 44-1
(Figure: Change in the Demand for U.S. Dollars) Refer to the information in the Figure: Change in the Demand for U.S. Dollars. A movement from E1 to E2 in this foreign exchange market would cause Americans to purchase ______ goods and services from Europe. a. the same amount of b. fewer *c. more d. zero
37. Figure: Change in the Demand for U.S. Dollars
Reference: Ref 44-1
(Figure: Change in the Demand for U.S. Dollars) Refer to the information in the Figure: Change in the Demand for U.S. Dollars. A movement from E2 to E1 in this
foreign exchange market would cause Americans to purchase ______ goods and services from Europe. a. the same amount of *b. fewer c. more d. zero
38. As the balance of payments in the financial account________, the balance of
payments on current account increases and the U.S. dollar ________. a. increases; depreciates *b. decreases; depreciates c. increases; appreciates d. decreases; appreciates
39. All other things being equal, if the economy of Europe expands rapidly and this
increases tourism dramatically in the United States, which will be the likely result? a. The euro will appreciate. *b. The U.S. dollar will appreciate. c. The demand for the dollar will fall. d. The demand for the euro will fall.
40. Suppose that Europeans begin to view the United States as a more attractive
investment opportunity. Which is likely to occur? a. depreciation of the dollar, which will raise U.S. exports *b. appreciation of the dollar, which will discourage Europeans from buying American goods and services c. depreciation of the dollar, which will lower U.S. exports d. depreciation of the dollar, which will make Europeans buy more American products
41. In the foreign exchange market, when the demand for the euro increases, the
equilibrium U.S. dollar price of the euro ________ and the U.S. dollar ________. a. rises; appreciates b. falls; depreciates c. falls; appreciates *d. rises; depreciates
42. In the foreign exchange market, an increase in the rate of return available in the
European Union, all other things equal, will shift the ________, and the euro will ________. *a. demand curve for the euro to the right; appreciate
b. supply curve for the euro to the right; depreciate c. demand curve for the euro to the left; depreciate d. demand curve for the U.S. dollar to the right; appreciate
43. If the supply of U.S. dollars in Britain increases, then all occurs EXCEPT that
the: a. dollar depreciates against the British pound. b. British pound appreciates against the dollar. c. dollar price of the pound increases. *d. dollar appreciates.
44. If the demand for British pounds in the United States rises, then the: a. U.S. dollar appreciates. b. British pound price of the U.S. dollar increases. *c. U.S. dollar price of the British pound increases. d. pound depreciates.
45. Suppose interest rates rise in the United States. We expect capital _____
to(from) the United States and the U.S. dollar price of foreign currencies to _____, all other things equal. a. outflows; fall b. outflows; rise *c. inflows; fall d. inflows; rise
46. If foreign countries are increasing their demand for U.S. financial assets, then
we can expect the U.S. dollar to ______ and the current account balance to _____, all other things equal. a. appreciate; increase *b. appreciate; decrease c. depreciate; increase d. depreciate; decrease
47. If the U.S. dollar appreciates relative to currencies in other countries, then U.S.
imports: a. and exports will both increase. b. and exports will both decrease. c. will decrease and exports will increase. *d. will increase and exports will decrease.
48. If the U.S. dollar depreciates relative to currencies in other countries, then U.S.
imports: a. and exports will both increase. b. and exports will both decrease. *c. will decrease and exports will increase. d. will increase and exports will decrease.
49. Consider the demand for and the supply of the U.S. dollar and that the
exchange rate is measured in terms of yen per dollar. If the demand for the U.S. dollar decreases, all will be true EXCEPT that: a. the demand curve for dollars will shift to the left. b. the Japanese will buy more American goods. *c. Americans will buy more Japanese goods. d. the exchange rate of yen per U.S. dollar will fall.
50. The Japanese will demand U.S. dollars in all of these cases EXCEPT to: a. buy real estate in New York City. b. buy a GM car in Japan. c. see a Hollywood movie in Tokyo. *d. invest in Japanese stocks.
51. If Japanese buyers demand more U.S. dollars, then the dollar will: a. appreciate, the yen will depreciate, the U.S. balance of payments on current account will rise, and the U.S. balance of payments on financial account will fall. b. depreciate, the yen will appreciate, the U.S. balance of payments on current account will rise, and the U.S. balance of payments on financial account will fall. c. appreciate, the yen will depreciate, and both the U.S. balance of payments on current account and the U.S. balance of payments on financial account will rise. *d. appreciate, the yen will depreciate, the U.S. balance of payments on current account will fall, and the U.S. balance of payments on financial account will rise.
52. An increased demand for U.S. dollars on the part of Europeans would cause: a. the euro to appreciate against the dollar. *b. the dollar to appreciate against the euro. c. an increase in the supply of U.S. dollars. d. a decrease in the supply of U.S. dollars.
53. An increased demand for euros on the part of Koreans would cause:
*a. the euro to appreciate against the Korean won. b. the Korean won to appreciate against the euro. c. an increase in the supply of euros. d. a decrease in the supply of euros.
54. If a significant capital inflow into the United States creates an increase in the
balance of payments on financial account: a. the dollar will depreciate, causing an increase in U.S. exports. b. the dollar will appreciate, causing an increase in U.S. exports. *c. there must be an offsetting decline in the balance of payments on current account. d. the balance of payments on current account will increase as well, but by a smaller amount.
55. If capital flows from Europe to the United States decrease, the: *a. dollar will depreciate, causing an increase in U.S. net exports. b. balance of payments on the current account will decrease as well, but by a smaller amount. c. euro will depreciate, causing an increase in U.S. net exports. d. euro will appreciate, causing a decrease in U.S. net exports.
56. If a country's currency appreciates, all other things equal, exports _______, and
imports _______. a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease
57. If a country's currency depreciates, all other things equal, exports _______, and
imports _______. a. increase; increase *b. increase; decrease c. decrease; increase d. decrease; decrease
58. Who would demand dollars in the foreign exchange market?
I. Americans who want to buy American goods, services, and assets
II. Americans who want to buy European goods, services, and assets III. Europeans who want to buy American goods, services, and assets a. I only b. II only *c. III only d. I, II, and III
59. Who would supply dollars in the foreign exchange market?
I. Americans who want to buy American goods, services, and assets II. Americans who want to buy European goods, services, and assets III. Europeans who want to buy American goods, services, and assets a. I only *b. II only c. III only d. I, II, and III
60. Who would demand euros in the foreign exchange market?
I. Americans who want to buy American goods, services, and assets II. Americans who want to buy European goods, services, and assets III. Europeans who want to buy American goods, services, and assets a. I only *b. II only c. III only d. I, II, and III
61. Who would supply euros in the foreign exchange market?
I. Americans who want to buy American goods, services, and assets II. Americans who want to buy European goods, services, and assets III. Europeans who want to buy American goods, services, and assets a. I only b. II only *c. III only d. I, II, and III
62. If the exchange rate is 8 Chinese yuan per U.S. dollar, the U.S. price index is
145, and the Chinese price index is 206, the real exchange rate is: a. 11.36 yuan. b. 7.62 yuan. *c. 5.63 yuan.
d. 0.08 yuan.
63. If the exchange rate is ¥200 per U.S. dollar, and the U.S. price level is 120, and
the Japanese price level is 600, then the real exchange rate is: a. ¥1. *b. ¥40. c. ¥1000. d. ¥2400.
64. If the exchange rate is $1.50 per euro, the U.S. price level is 180, and the
Eurozone price level is 120, then the real exchange rate is: *a. $1. b. $1.50. c. $2.40. d. $1.20.
65. Between 1990 and 2007, the Mexican peso fell against the U.S. dollar by almost
three-fourths of its original value. However, economists have concluded that this did not result in the price of Mexican products expressed in dollars to fall by two-thirds. Which is the explanation for this apparent paradox? a. Interest rates in the United States were increasing. b. Inflation in the United States was moving up steadily. *c. The inflation rate in Mexico over that same period was higher than that of the United States. d. The real exchange rate had fallen.
66. Suppose that in a particular year, the Japanese yen falls from ¥800 to ¥1200 to
the dollar and the price level in Japan increases by 50 percent, but there is no change in the price level in the United States. Which is true? a. The nominal exchange rate of the yen has appreciated against the dollar. b. The nominal exchange rate of the dollar has depreciated against the yen. c. The real exchange rate of the yen has decreased. *d. The real exchange rate has remained unchanged.
67. Suppose the U.S. dollar depreciates nominally against the Mexican peso by 5
percent. Assume furthermore that the price level in the United States increases by 7 percent, with no change in the price level for Mexico. From this we can conclude? a. U.S. goods became cheaper relative to goods made in Mexico. *b. U.S. goods became more expensive relative to goods made in Mexico.
c. There was no change in the real exchange rate. d. The real exchange rate for the United States depreciated.
68. The real exchange rate between the U.S. dollar and the Canadian dollar will
remain constant if an increase in the value of the U.S. dollar against the Canadian dollar is offset by: a. inflation in the United States. *b. inflation in Canada. c. worldwide inflation. d. inflation in the United States or in Canada.
69. The current account responds to changes in: a. the nominal exchange rate. *b. the real exchange rate. c. the interest rate. d. both the nominal and real exchange rates.
70. If the Chinese government wants to keep the real and nominal exchange rates
between the yuan and the U.S. dollar fixed at 8 yuan per dollar, the: *a. inflation rate in China must be equal to the inflation rate in the United States. b. interest rate in China must be higher than the interest rate in the United States. c. inflation rate in China must be constantly lower than the inflation rate in the United States. d. inflation rate in China must be constantly higher than the inflation rate in the United States.
71. The real exchange rate between the U.S. dollar and the Indian rupee is the: a. exchange rate between the dollar and the rupee. b. exchange rate between the dollar and the rupee divided by the price level in India. *c. amount of Indian rupees per dollar multiplied by the relative price levels in the United States and India. d. official exchange rate between the dollar and the rupee quoted by the banks in the United States and India.
72. Scenario: Exchange Rate between the United States and India
Suppose that initially the nominal exchange rate 40 rupees per dollar. The nominal exchange rate has changed to 50 rupees per dollar. Reference: Ref 44-2
(Scenario: Exchange Rate between the United States and India) Consider the
information in the Scenario: Exchange Rate between the United States and India. If the nominal exchange rate is 50 rupees per dollar and the inflation rate in India is 25 percent while the aggregate price level has remained unchanged in the United States, the real exchange rate between the U.S. dollar and the Indian rupee: *a. remains unchanged at 40. b. remains unchanged at 50. c. increases from 40 to 50. d. increases by more than 25 percent.
73. Scenario: Exchange Rate between the United States and India
Suppose that initially the nominal exchange rate 40 rupees per dollar. The nominal exchange rate has changed to 50 rupees per dollar. Reference: Ref 44-2
(Scenario: Exchange Rate between the United States and India) Consider the information provided in the Scenario: Exchange Rate between the United States and India. Under which scenario will the real exchange rate change by the greatest amount? a. when the inflation rates in both the United States and India are zero *b. when the U.S. inflation rate is 5 percent and the Indian inflation rate is 2 percent c. when the U.S. inflation rate is 2 percent and the Indian inflation rate is 12 percent d. when the inflation rates in both the United States and India are 5 percent
74. Scenario: Purchasing Power Parity
A car costs $30,000 in the United States and the exchange rate is $1 = £0.50. The same car costs £12,000 in Britain. Reference: Ref 44-3
(Scenario: Purchasing Power Parity) Refer to the information provided in the Scenario: Purchasing Power Parity. What is the purchasing power parity of the pound? a. $5 *b. $2.50 c. $1.25 d. $0.80
75. Scenario: Purchasing Power Parity
A car costs $30,000 in the United States and the exchange rate is $1 = £0.50. The same car costs £12,000 in Britain. Reference: Ref 44-3
(Scenario: Purchasing Power Parity) Refer to the information provided in the
Scenario: Purchasing Power Parity. To have purchasing power parity, the pound must: *a. appreciate. b. depreciate. c. remain constant. d. be purchased in foreign exchange markets.
76. Scenario: Purchasing Power Parity
A car costs $30,000 in the United States and the exchange rate is $1 = £0.50. The same car costs £12,000 in Britain. Reference: Ref 44-3
(Scenario: Purchasing Power Parity) Refer to the information provided in the Scenario: Purchasing Power Parity. For there to be purchasing power parity, the nominal exchange rate for the dollar must be: a. £2. b. £1.25. c. £1. *d. £0.40.
77. According to the principle of purchasing power parity, if a 20-ml bottle of Diet
Coke costs €0.80 in Paris, £0.50 in London, and $1.10 in Chicago, the exchange rate between the: a. euro and the pound should be €0.40 = £1. b. U.S. dollar and the euro should be $0.72 = €1. c. U.S. dollar and the pound should be $0.45 = £1. *d. euro and the pound should be €1.60 = £1.
78. Purchasing power parity refers to: a. how many units of foreign currency a dollar will buy. b. how many foreign assets the United States is buying. c. how many foreign assets a foreign country is buying. *d. the nominal exchange rate for which a market basket would cost the same in each country.
79. A hamburger costs $8 in the United States and ¥960 in Japan. The nominal
exchange rate between the U.S. dollar and the Japanese yen is ¥110 per dollar. The inflation rates in the United States and in Japan are 2 percent and 4 percent, respectively. The purchasing power parity is: a. ¥110 per dollar. *b. ¥120 per dollar. c. ¥125 per dollar. d. ¥112 per dollar.
80. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. Reference: Ref 44-4
(Scenario: Exchange Rates) Refer to the information provided in the Scenario: Exchange Rates. The euro has: a. depreciated. *b. appreciated. c. been devalued. d. not been affected for use in international trade.
81. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. Reference: Ref 44-4
(Scenario: Exchange Rates) Refer to the information provided in the Scenario: Exchange Rates. The dollar has: *a. depreciated. b. appreciated. c. been revalued. d. not been affected for use in international trade.
82. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. Reference: Ref 44-4
(Scenario: Exchange Rates) Refer to the information provided in the Scenario: Exchange Rates. The exchange rate for the dollar has changed from: a. €0.25 to €0.50. b. €1.25 to €1.50. *c. €0.80 to €0.67. d. €0.67 to €0.80.
83. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. Reference: Ref 44-4
(Scenario: Exchange Rates) Refer to the information provided in the Scenario: Exchange Rates. French exports to the United States will: a. be cheaper. *b. be more expensive. c. be unaffected. d. increase.
84. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. Reference: Ref 44-4
(Scenario: Exchange Rates) Refer to the information provided in the Scenario: Exchange Rates. In Germany, exports: a. will increase, and imports will decrease. b. and imports will increase. *c. will decrease, and imports will increase. d. and imports will decrease.
85. Scenario: Exchange Rates
The value of a euro goes from US$1.25 to US$1.50. Reference: Ref 44-4
(Scenario: Exchange Rates) Refer to the information provided in the Scenario: Exchange Rates. In the United States, exports: *a. will increase and imports will decrease. b. and imports will increase. c. will decrease and imports will increase. d. and imports will decrease.
86. If the U.S. dollar depreciates, other things being equal, then: a. the U.S. financial account is in surplus. b. exports from the United States to other countries will decrease. *c. it falls in value against some other currency. d. the U.S. current account is in deficit.
87. The exchange rate ensures that the balance of payments really does balance. *a. True b. False
88. The exchange rate is determined in the commodities markets. a. True *b. False
89. If the exchange rate for the U.S. dollar changes from $1.25 per euro to $1.50 per euro, then the value of the dollar depreciates. *a. True
b. False
90. If the dollar value of the pound falls, then the dollar has depreciated. a. True *b. False
91. When a currency becomes more valuable in terms of other currencies, it has appreciated. *a. True b. False
92. When a currency becomes more valuable in terms of other currencies, it has depreciated. a. True *b. False
93. If the dollar exchange rate for the euro is $1.38, the one dollar exchanges for 0.7246 euros. *a. True b. False
94. If the dollar exchange rate for the Japanese yen is $0.009784, the one dollar exchanges for 9.784 yen. a. True *b. False
95. If the euro depreciates, then a Mediterranean cruise will be cheaper for Americans. *a. True b. False
96. If the euro depreciates, then a Chevrolet will be cheaper for Italians. a. True *b. False
97. In the foreign exchange market for dollars and pounds, the demand for dollars is also the supply of pounds.
*a. True b. False
98. Demand for British pounds in the foreign exchange market might come from people in Britain who want use them to buy American goods, services, and assets. a. True *b. False
99. The supply of British pounds in the foreign exchange market might come from people in Britain who want to buy American goods, services and assets. *a. True b. False
100. If a country's currency appreciates, all other things equal, its exports and imports will increase. a. True *b. False
101. If a country's currency appreciates, all other things equal, its exports will decrease, and its imports will increase. *a. True b. False
102. If the U.S. receives increased capital inflows from Europe, the dollar will depreciate. a. True *b. False
103. If the dollar appreciates because of increased capital inflows from Asia, the balance on the U.S. financial account will increase and the balance on the current account will decrease. *a. True b. False
104. If the nominal exchange rate and the price level fall, then the real exchange rate will fall as well. a. True
*b. False
105. If the price levels in two countries are equal, then the real exchange rate between their currencies equals the nominal exchange rate. *a. True b. False
106. Real exchange rates are exchange rates that are only recognized by the International Monetary Fund. a. True *b. False
107. Suppose the nominal exchange rate is 0.593 British pounds per dollar. If the price level in the U.S. is 250, and the price level in Britain is 225, then the real exchange rate is 0.659 pounds per dollar. *a. True b. False
108. The current account responds to changes in both real and nominal exchange rates. a. True *b. False
109. The purchasing power parity between two currencies is the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country. *a. True b. False
110. Suppose that a Ford costs $20,000 in the U.S, and the price of the same truck is 10,000 pounds in Britain. In this case, purchasing power parity is an exchange rate of 2 pounds per dollar. a. True *b. False
111. According to purchasing power parity, if the price of a Big Mac in terms of dollars is lower India and China than in Europe, then the currencies of India and China are undervalued. *a. True
b. False
112. If there is purchasing power parity between currencies, in terms of domestic currency the price of a Big Mac will fall in countries whose currency has appreciated. a. True *b. False
113. Suppose that on January 1 the exchange rate was ¥120 per U.S. dollar. On December 31 of that year, a person needed ¥125 to buy $1. Over the course of that year, did the dollar appreciate or depreciate against the yen? Did the change in the exchange rate make American goods and services more or less attractive to Japanese consumers? Explain. Correct Answer:
At the end of the year, it took more yen to buy a dollar. In other words, the price of a dollar has increased, or appreciated. Because it takes more yen to buy a dollar, the price of American goods to Japanese consumers will increase. As a result, American goods will be less attractive to Japanese consumers. 114. Suppose that on January 1 the exchange rate was 15 Mexican pesos per U.S. dollar. On December 31 of that year, a person needed 11 pesos to buy a dollar. Over the course of that year, did the dollar appreciate or depreciate against the peso? Did the change in the exchange rate make American goods and services more or less attractive to Mexican consumers? Explain. Correct Answer:
At the end of the year, it took fewer pesos to buy a dollar. In other words, the price of a dollar has decreased, or depreciated. Because it takes fewer pesos to buy a dollar, the price of American goods to Mexican consumers will decrease. As a result, American goods will be more attractive to Mexican consumers. 115. Suppose that on January 1 the exchange rate was US$1.40 per euro. On December 31 of that year, a person needed $1.45 to buy a euro. Over the course of that year, did the dollar appreciate or depreciate against the euro? Did the change in the exchange rate make it easier or more difficult for American college students to spend a semester at a European university? Explain. Correct Answer:
At the end of the year it took more dollars to buy a euro. In other words, the price of a euro increased, which appreciates the euro and depreciates the dollar. This change will make it more expensive for Americans to travel to Europe because items priced in euros, like college tuition and books, just got more expensive. This is going to make it more difficult for Americans to study abroad in Europe.
116. Donald owns several hotels in New York, Las Vegas, and other centers of tourist activity. Much of Donald's hotel revenue comes from European tourists. Suppose the U.S. dollar depreciates against the euro. Explain how this will affect Donald's hotel business. Correct Answer:
When the dollar depreciates against the euro, the dollar becomes less expensive to purchase with those euros. Because Donald's hotel rates are quoted in dollars, those prices just fell for European tourists. Donald's hotel business should expect increased revenue from Europeans, who now find it less expensive to travel to the United States. 117. Suppose that the United States and Canada are the only trading partners in the world. What will happen to the value of the U.S. dollar if the U.S. Congress passes more restrictive import policies? Explain. Correct Answer:
If the United States increases import restrictions, it will decrease the demand for Canadian products, thus decreasing the demand for the Canadian dollar. Because the United States and Canada are the only trading partners, this decreases the supply of the U.S. dollar. The decreased supply of the U.S. dollar causes the price of the U.S. dollar to increase. The Canadian dollar just depreciated while the U.S. dollar appreciated.
118. When a country's currency depreciates: *a. foreigners find the country's goods to be relatively cheaper. b. the country's exports fall. c. the country's imports rise. d. foreign goods become cheaper.
119. Suppose a U.S. dollar initially trades for €1.20. After a few months, the U.S.
dollar trades for €1.40. This means: a. the dollar has depreciated. *b. the dollar has appreciated. c. it now costs more U.S. dollars to buy euro-denominated goods. d. one can expect to see less euro goods bought by U.S. citizens.
120. Holding everything else constant, if the U.S. dollar falls against the Mexican
peso: *a. U.S. goods will look cheaper to Mexico. b. U.S. goods will look more expensive to Mexico. c. Mexico's goods will look cheaper to the United States d. one peso buys fewer U.S. dollars.
121. A currency has depreciated when: *a. that currency buys fewer foreign goods than it did previously. b. that currency buys more foreign goods than it did previously. c. one unit of that currency buys more units of a foreign currency than it did previously. d. domestic goods become more expensive to holders of that currency.
122. When a country's currency undergoes a real appreciation: *a. exports fall, and imports rise. b. exports rise, and imports fall. c. the merchandise trade balance becomes positive. d. exports and imports do not change.
123. The United States dollar–Mexican peso exchange market is initially in
equilibrium. Suppose there is a decrease in demand for U.S. dollars. Holding everything else constant, this will result in a movement along the: a. supply of U.S. dollars and an increase in the number of pesos in a U.S. dollar. b. demand for U.S. dollars and an increase in the number of pesos in a dollar. *c. supply of U.S. dollars and a decrease in the number of pesos in a dollar. d. demand of U.S. dollars and a decrease in the number of pesos in a dollar.
1. The rule that governs a country's policy toward its exchange rate is known as: a. the fixed exchange rate system. b. the floating exchange rate system. *c. an exchange rate regime. d. the rules of exchange.
2. The nominal exchange rate is:
I. the evaluation and ranking of different global stock exchanges II. the price of a country's currency in terms of another country's currency *a. I only b. II only c. I and II d. neither I nor II
3. A rule governing policy toward the exchange rate is:
I. the terms of trade II. an exchange rate regime a. I only *b. II only c. I and II d. neither I nor II
4. A fixed exchange rate is: a. determined by the market. *b. set by government. c. set by the International Monetary Fund. d. determined by the United Nations.
5. A floating exchange rate is: *a. determined by the market. b. set by government. c. set by the International Monetary Fund. d. determined by the United Nations.
6. A system in which exchange rates are set by government policy is a: a. universal exchange system. b. floating exchange rate system. c. commodity standard system. *d. fixed exchange rate system.
7. Fixed exchange rates are determined by the: *a. policies of the domestic government. b. forces of demand and supply in the developed countries. c. forces of demand and supply in the foreign exchange market. d. forces of demand and supply in the domestic money market.
8. A country has a fixed exchange rate when the: *a. government keeps the exchange rate near a particular target. b. government allows the exchange rate to be set by market forces. c. exchange rate fluctuates according to changes in supply and demand. d. exchange rate responds to changes in market conditions.
9. If a government fixes the exchange rate ________ the market equilibrium, there
will be a shortage of the domestic currency and a tendency for the exchange rate (U.S. dollars per unit of the domestic currency) to ________. a. below; fall b. above; rise *c. below; rise d. above; fall
10. If a government wants to increase the value of its currency in foreign exchange
markets, it can: *a. use contractionary monetary policy. b. use expansionary monetary policy. c. decrease interest rates. d. sell its currency.
11. Which would NOT be a method by which a country could maintain a fixed
exchange rate? a. purchases or sales of currency in the foreign exchange market b. changing monetary policy to shift the supply and demand curve for its own currency c. implementing foreign exchange controls *d. passing a law requiring that the exchange rate remain fixed
12. If a government fixes the exchange rate at a value that creates a surplus of the
domestic currency, there will be a tendency for the exchange rate (U.S. dollars per
unit of the domestic currency) to ________. To maintain the fixed exchange rate, the government must ________. *a. fall; increase the international demand of the domestic currency b. rise; increase the international demand of the domestic currency c. fall; decrease the international demand of the domestic currency d. fall; increase the domestic supply of the domestic currency
13. Assume that the foreign exchange market is trading the domestic currency at a
rate (U.S. dollars per unit of the domestic currency) above the rate fixed by the government. To maintain the fixed exchange rate, the government must: a. decrease foreign exchange reserves. *b. lower the domestic interest rate. c. facilitate the domestic purchase of foreign financial assets. d. raise the domestic interest rate.
14. A depreciation of the domestic currency below the exchange rate fixed by the
government can be countered by all of thesemeasures EXCEPT by: a. decreasing capital flows out of the country. b. limiting the domestic purchase of foreign financial assets. *c. decreasing capital flows into the country. d. decreasing foreign exchange reserves.
15. To fix its exchange rate, a government can use: a. competition. *b. exchange market intervention. c. speculation. d. arbitrage.
16. Figure: Exchange Market Intervention
Reference: Ref 45-1
(Figure: Exchange Market Intervention) Refer to panel (a) in the Figure: Exchange Market Intervention. Which approach could the Genovian government use to raise the value of the geno above its present equilibrium exchange rate and into the target range?
a. use its own currency to buy U.S. dollars *b. shift the demand for genos to the right by raising interest rates in Genovia c. eliminate the exchange controls that limit the right of Genovian citizens to buy U.S. dollars d. tighten the exchange controls that limit purchases of U.S. dollars by Genovian citizens
17. Figure: Exchange Market Intervention
Reference: Ref 45-1
(Figure: Exchange Market Intervention) Refer to panel (b) in the Figure: Exchange Market Intervention. Which approach could the Genovian government use to decrease the value of the geno below its present equilibrium exchange rate and into the target range? *a. use its own currency to buy U.S. dollars b. shift the demand for genos to the right by increasing interest rates in Genovia c. eliminate exchange controls that limit the right of Genovian citizens to sell foreign currency d. tighten the exchange controls that limit purchases of U.S. dollars by Genovian citizens
18. Foreign exchange controls are: a. fixed exchange rates. *b. a government licensing system that limits the amount of foreign currency an individual can buy. c. floating exchange rates. d. international limits on exchange rates.
19. When countries seek to maintain fixed exchange rates through intervention,
their governments or central banks: a. never have to intervene in currency markets because the exchange rate is fixed. b. may have to stop printing domestic currency. c. must buy domestic currency when foreign demand for their currency increases. *d. must sell domestic currency when foreign demand for their currency increases.
20. A country wants to maintain a fixed exchange rate with the dollar; but at the
current exchange rate, there is an excess supply of the domestic currency. The country can adopt all of these policies to maintain its exchange rate, EXCEPT:
a. buy domestic currency and sell U.S. dollars in the foreign exchange market. *b. sell domestic currency and buy U.S. dollars in the foreign exchange market. c. impose foreign exchange controls. d. pursue a contractionary monetary policy to raise domestic interest rates.
21. Foreign exchange controls refer to the: a. fixed exchange rate system maintained by a country. b. restrictions imposed by a country on the amount of foreign exchange that its central bank can hold. c. system of a common currency used by several countries such as the euro. *d. licensing systems that limit the rights of individuals to buy foreign currency.
22. The stocks of foreign currency that governments use to buy and sell their own
currency are known as: a. foreign exchange controls. *b. foreign exchange reserves. c. foreign exchange inventory. d. intervention inventory.
23. Licensing systems that limit the ability of citizens to buy foreign currency are
known as: *a. foreign exchange controls. b. foreign exchange reserves. c. foreign exchange inventory. d. intervention inventory.
24. Which is NOT a strategy for maintaining a fixed exchange rate at a level other
than its equilibrium value? a. buying or selling the currency through exchange market intervention *b. allowing the exchange rate to be determined by market forces c. shifting the supply and demand curves for the domestic currency d. implementing foreign exchange controls
25. Government purchases or sales of currency in the foreign exchange market
constitute:
I. a floating exchange rate regime II. foreign exchange controls III. exchange market intervention a. I only b. II only *c. III only d. I, II, and III
26. Licensing systems that limit the ability of individuals to buy foreign currency are:
I. floating exchange rate regimes II. foreign exchange controls III. exchange market interventions a. I only *b. II only c. III only d. I, II, and III
27. Foreign exchange reserves are:
I. stocks of foreign currency II. gold and silver III. bonds of foreign governments *a. I only b. II only c. III only d. I, II, and III
28. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.40. At the target rate of $0.50: a. the quantity demanded of gizmos equals the quantity supplied. *b. there is a surplus of gizmos. c. there is a shortage of gizmos. d. the quantity demanded of gizmos is greater than the quantity supplied.
29. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.40. If Gizmovia uses exchange market intervention to increase the value of its currency to $0.50, it should ________ gizmos and _____ dollars in the foreign exchange market.
a. sell; sell b. sell; buy *c. buy; sell d. buy; buy
30. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.40. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should ________ interest rates by _______ the money supply. a. decrease; decreasing b. decrease; increasing c. increase; increasing *d. increase; decreasing
31. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.40. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should ________ interest rates, which will _______ capital inflows of gizmos. a. decrease; decrease b. decrease; increase *c. increase; increase d. increase; decrease
32. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.40. If Gizmovia uses foreign exchange controls to bring the exchange rate of the gizmo to $0.50, it should require licenses to ______ gizmos and ______ dollars. a. buy; buy b. buy; sell c. sell; sell *d. sell; buy
33. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.75. At the target rate of $0.50: a. the quantity demanded of gizmos equals the quantity supplied. b. there is a surplus of gizmos. *c. there is a shortage of gizmos. d. the quantity demanded of gizmos is greater than the quantity supplied.
34. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.75. If Gizmovia uses exchange market intervention to decrease the value of its currency to $0.50, it should ________ gizmos and _____ dollars in the foreign exchange market. a. sell; sell *b. sell; buy c. buy; sell d. buy; buy
35. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.40. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.75, it should ________ interest rates by _______ the money supply. a. decrease; decreasing *b. decrease; increasing c. increase; increasing d. increase; decreasing
36. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.75. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should ________ interest rates, which will _______ capital inflows of gizmos. *a. decrease; decrease b. decrease; increase c. increase; increase d. increase; decrease
37. Suppose that the country of Gizmovia wants to maintain the exchange rate of its
currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.75. If Gizmovia uses foreign exchange controls to bring the exchange rate of the gizmo to $0.50, it should require licenses to ______ gizmos and ______ dollars. a. buy; buy *b. buy; sell c. sell; sell d. sell; buy
38. Which are methods that a country can use to maintain a fixed exchange rate?
I. exchange market intervention
II. monetary policy III. foreign exchange controls a. I only b. II only c. III only *d. I, II, and III
39. If the equilibrium exchange rate is below the target rate, the government should:
I. buy its domestic currency in foreign exchange markets II. engage in expansionary monetary policy III. restrict the purchase of the domestic currency by foreigners *a. I only b. II only c. III only d. I, II, and III
40. If the equilibrium exchange rate is above the target rate, the government should:
I. buy its domestic currency in foreign exchange markets II. engage in expansionary monetary policy III. restrict the purchase of foreign currencies a. I only *b. II only c. III only d. I, II, and III
41. A floating exchange rate:
I. leaves monetary policy available for stabilization of the domestic economy II. reduces the uncertainty of international trade *a. I only b. II only c. I and II d. neither I nor II
42. A floating exchange rate:
I. leaves monetary policy available for stabilization of the domestic economy II. is less expensive to maintain than a fixed exchange rate a. I only b. II only
*c. I and II d. neither I nor II
43. A floating exchange rate:
I. leaves monetary policy available for stabilization of the domestic economy II. is less expensive to maintain than a fixed exchange rate III. adds uncertainty to international trade a. I only b. II only c. III only *d. I, II, and III
44. A fixed exchange rate:
I. leaves monetary policy available for stabilization of the domestic economy II. reduces the uncertainty of international trade a. I only *b. II only c. I and II d. neither I nor II
45. A fixed exchange rate:
I. leaves monetary policy available for stabilization of the domestic economy II. is less expensive to maintain than a fixed exchange rate a. I only b. II only c. I and II *d. neither I nor II
46. A fixed exchange rate:
I. leaves monetary policy unavailable for stabilization of the domestic economy II. is more expensive to maintain than a fixed exchange rate III. reduces uncertainty in international trade a. I only b. II only c. III only *d. I, II, and III
47. A floating exchange rate:
*a. retains the ability of monetary policy to help stabilize the economy. b. reduces the ability of monetary policy to stabilize the economy. c. reduces the uncertainty faced by business firms. d. makes foreign goods easier to price.
48. One of the advantages of adopting a fixed exchange rate system is that it: *a. reduces uncertainty. b. reduces the need for fiscal policy. c. increases the strength of monetary policy. d. does not require the country to maintain any large foreign exchange reserve.
49. One limitation of maintaining a fixed exchange rate system is that: a. it subjects the country's exchange rate to wide fluctuations in the foreign exchange market. b. it provides an incentive for the country to frequently change its inflationary policy. *c. the country may not be able to use monetary policy to achieve other goals, such as full employment. d. it leads to wide fluctuations in the growth rate.
50. The advantage of a fixed exchange rate is that it: a. leaves monetary policy available for macroeconomic stabilization. b. eliminates the possibility of the twin deficits. *c. eliminates uncertainty about the value of a currency. d. tends to create trade surpluses.
51. Which is NOT true of a fixed exchange rate system? a. It is good for business. b. Foreign exchange reserves are costly. c. It keeps a country from pursuing inflationary policies. *d. It makes pursuing domestic macroeconomic objectives easier.
52. A major drawback of adopting a floating exchange rate is the: a. opportunity cost associated with the accumulation of foreign exchange reserves. *b. uncertainty about the value of goods traded internationally. c. increased discipline brought on monetary policy.
d. distorted incentives imposed on the normal flow of imports and exports.
53. All are major drawbacks of adopting a fixed exchange rate EXCEPT that: a. exchange controls must be imposed at the cost of more administrative red tape and corruption. b. resources must be diverted to the accumulation of large foreign exchange reserves. c. monetary policy cannot be used to stabilize output and the inflation rate. *d. commerce among countries is more uncertain and riskier.
54. With a fixed exchange rate regime, monetary policy is: a. fully flexible. *b. limited in its ability to shift aggregate demand to the right. c. limited in its ability to shift aggregate supply to the right. d. independent of exchange rate issues.
55. Which statement is TRUE? a. A floating exchange rate creates a more stable environment for international business transactions. b. A fixed exchange rate allows more flexibility in conducting monetary policy. *c. Foreign exchange controls distort incentives for international trade. d. The creation of the euro was motivated by the advantages of a floating exchange rate regime.
56. Why did China buy $450 billion in foreign exchange reserves? a. to encourage free trade between all nations b. to keep the yuan from depreciating *c. to keep the yuan from appreciating d. to slow down the growth of the Chinese economy
57. China's exchange rate policy: a. led to current account deficits in the early 2000s. b. led to the supply of yuan exceeding the demand for yuan. c. is a floating exchange rate policy. *d. is a fixed exchange rate policy.
58. An exchange rate regime is a rule governing policy toward the exchange rate. *a. True b. False
59. The nominal exchange rate is the number of times that a unit of currency changes hands in a year. a. True *b. False
60. Since governments control the quantity of the currency of their country, they have more control over exchange rates than other prices. *a. True b. False
61. Fixed exchange rates are set by the market. a. True *b. False
62. A fixed exchange rate implies that supply and demand of the currency determine its equilibrium exchange rate. a. True *b. False
63. A country has a floating exchange rate when the government lets the exchange rate go wherever the market may take it. *a. True b. False
64. A fixed exchange rate implies that the government keeps the exchange rate against some other currency at or near a particular target. *a. True b. False
65. All countries must have either a fully fixed or floating exchange rate since there are no possible compromises between the two policies. a. True *b. False
66. Some countries have exchange rate policies that lie somewhere between fully fixed and floating exchange rates, such as rates that are managed by the government to avoid wide swings. *a. True b. False
67. Under a fixed exchange rate regime, if a currency is below its target exchange rate, the government will sell its own currency in foreign exchange markets. a. True *b. False
68. Governments can use foreign exchange controls to help them fix the value of their currency. *a. True b. False
69. Since they reduce uncertainty, fixed exchange rates are good for business. *a. True b. False
70. If the government fixes the exchange rate below the market equilibrium rate, there will be a surplus of the domestic currency. *a. True b. False
71. If the government fixes the exchange rate above the market equilibrium rate, there will be a surplus of the domestic currency. a. True *b. False
72. If the government wants to increase the value of its currency in foreign exchange markets, it can sell its domestic currency in the foreign exchange market. a. True *b. False
73. If the government wants to decrease the value of its currency in foreign exchange markets, it can sell its domestic currency in the foreign exchange market. *a. True b. False
74. If the government wants to increase the value of its currency in foreign exchange markets, it can use expansionary monetary policy. a. True *b. False
75. If the government wants to decrease the value of its currency in foreign exchange markets, it can use expansionary monetary policy. *a. True b. False
76. If the government wants to increase the value of its currency in foreign exchange markets, it can limit the ability of foreigners to buy its currency. a. True *b. False
77. If the government wants to decrease the value of its currency in foreign exchange markets, it can limit the ability of foreigners to buy its currency. *a. True b. False
78. Foreign exchange controls are the same thing as floating exchange rates. a. True *b. False
79. Exchange market intervention refers to government purchases or sales of currency in the foreign exchange market to maintain a target exchange rate for its domestic currency. *a. True b. False
80. Foreign exchange reserves are gold and silver stocks that a government maintains in order to buy their domestic currency in foreign exchange markets. a. True *b. False
81. Foreign exchange reserves are stocks of foreign currencies that a government maintains in order to buy their domestic currency in foreign exchange markets. *a. True b. False
82. Foreign exchange controls refers to a common currency system used by a group of countries, such as the Asian Tigers. a. True *b. False
83. If the target exchange rate of the domestic currency in a fixed exchange rate regime is below the equilibrium exchange rate, in order to reach the target rate, the government should sell the domestic currency and buy foreign currencies. *a. True b. False
84. If the target exchange rate of the domestic currency in a fixed exchange rate regime is above the equilibrium exchange rate, in order to reach the target rate, the government should sell the domestic currency and buy foreign currencies. a. True *b. False
85. If the target exchange rate of the domestic currency in a fixed exchange rate regime is above the equilibrium exchange rate, in order to reach the target rate, the government should raise interest rates. *a. True b. False
86. If the target exchange rate of the domestic currency in a fixed exchange rate regime is above the equilibrium exchange rate, in order to reach the target rate, the government should lower interest rates. a. True *b. False
87. If the target exchange rate of the domestic currency in a fixed exchange rate regime is above the equilibrium exchange rate, in order to reach the target rate, the government should encourage capital inflows. *a. True b. False
88. If the target exchange rate of the domestic currency in a fixed exchange rate regime is below the equilibrium exchange rate, in order to reach the target rate, the government should limit the ability of foreigners to buy their domestic currency. *a. True b. False
89. If the target exchange rate of the domestic currency in a fixed exchange rate regime is below the equilibrium exchange rate, in order to reach the target rate, the government should limit the ability of its citizens to buy foreign currencies a. True *b. False
90. If a country tries to fix its exchange rate, it loses its ability to use monetary policy for macroeconomic stabilization. *a. True b. False
91. A fixed exchange rate regime leads to more stable conditions for international trade. *a. True b. False
92. A floating exchange rate regime leads to more stable conditions for international trade. a. True *b. False
93. Foreign exchange controls may distort incentives for exporting and importing goods and services. *a. True
b. False
94. Foreign exchange controls decrease the costs associated with red tape and corruption surrounding international trade. a. True *b. False
95. The benefits of a floating exchange rate regime served as one of the motivations for the international system of floating exchange rates created after World War II. a. True *b. False
96. The benefits of a fixed exchange rate regime served as one of the motivations for the international system of fixed exchange rates created after World War II. *a. True b. False
97. If a country adopts a fixed exchange rate they are committing not to engage in inflationary policies because inflationary policies would destabilize the exchange rate. *a. True b. False
98. A floating rate system can be expensive because it requires that a country keep large amounts of foreign currency on hand, which is usually a low-return investment. a. True *b. False
99. A fixed rate system can be expensive because it requires that a country keep large amounts of foreign currency on hand, which is usually a low-return investment. *a. True b. False
100. A floating rate system eliminates uncertainty about the future value of a currency. a. True
*b. False
101. A fixed rate system eliminates uncertainty about the future value of a currency. *a. True b. False
102. Foreign exchange controls, unlike tariffs and quotas, do not distort incentives for trade between countries. a. True *b. False
103. Many of China's trading partners feel that the yuan is undervalued. *a. True b. False
104. In the early 2000s, Chinese exports led to a large surplus on its current account. *a. True b. False
105. China's current account surplus and private capital inflows resulted in an equilibrium exchange rate below the Chinese government's target exchange rate. a. True *b. False
106. In order to maintain its target exchange rate for the yuan, China had to sell yuan and buy dollars and other currencies. *a. True b. False
107. Suppose that the United States adopts a fixed exchange rate regime, and the target rate is 1.50 euros per dollar. If the current rate is 1.25 euros per dollar, what can the United States do to reach the target rate? Correct Answer:
If the current exchange rate is 1.25 euros per dollar, there is a surplus of dollars at the target rate of 1.50 euros per dollar. The United States could buy dollars with
euros in the foreign exchange market, which would increase the exchange rate, or price, of dollars. The Fed could decrease the money supply to increase interest rates. This would increase the demand for dollars as foreigners seek to invest in the higher return United States Finally, the United States could reduce the supply of dollars, which would increase their price, by requiring residents to get a license to buy foreign currency. 108. Suppose that China's target exchange rate for the yuan is below its current equilibrium exchange rate. What is the possible disadvantage of using monetary policy to achieve the target exchange rate? Correct Answer:
In order to reduce the value of the yuan China would need to decrease interest rates in China. In order to decrease interest rates, the money supply would have to be increased, which could cause inflation. 109. What are the costs of fixing the exchange rate? Correct Answer:
In order to intervene in foreign exchange markets to fix exchange rates, a country must have vast amounts of reserves in foreign currencies, which is usually costly because cash reserves are a low-return investment. Additionally, using monetary policy to stabilize exchange rates may destabilize the domestic economy since monetary policy would not be available to control unemployment and inflation. Last, foreign exchange controls used to fix exchange rates may distort incentives for importing and exporting goods and services and may lead to corruption and red tape. 110. What are the advantages and disadvantages of fixed and floating exchange rates? Correct Answer:
Fixed exchange rates reduce almost all of the uncertainty about future values of a currency, which makes it easier to make trade agreements between countries. Fixed exchange rates are costly because countries must hold large amounts of foreign currency in reserves which earn little, if any, interest. Additionally, pursuing a fixed exchange rate usually means that monetary policy is no longer dedicated to domestic goals, and foreign exchange controls interfere with international trade. If a country uses a floating exchange rate, monetary policy is available for domestic stabilization, but there will be considerable uncertainty in international trade.
111. If a country wishes to increase the exchange rate to a rate above its
equilibrium value in the foreign exchange market, it will notice: *a. a surplus of its currency at the desired exchange rate. b. a shortage of its currency at the desired exchange rate.
c. that it can achieve this rate by pursuing expansionary monetary policy. d. that it must increase the supply of its currency in the foreign exchange market.
112. If a country on a fixed exchange rate regime finds its currency falling, it: *a. can use foreign exchange reserves to purchase some of its own currency. b. can add to its foreign exchange reserves by selling some of its own currency. c. cannot use monetary policy to maintain its exchange rate. d. will allow its currency rate to fall.
113. A government can target its exchange rate only if it: *a. is willing to give up its use of monetary policy for stabilization purposes. b. continues to actively use monetary policy for exchange market intervention and stabilization purposes. c. increases the amount of uncertainty in the foreign exchange markets. d. pursues policies that tend to be inflationary.
114. A country with a fixed exchange rate regime: a. tends to increase uncertainty regarding the value of its currency. b. allows countries to use both fiscal and monetary policies for stabilization purposes. *c. reduces a country's bias toward inflationary policies. d. reduces the amount of foreign currency a country must hold.
115. Countries that follow floating exchange rate regimes: *a. tend to insulate themselves from economic fluctuations in other countries. b. give up the ability to use monetary policy as a stabilization tool. c. find that they are more susceptible to economic fluctuations in other countries. d. give up the ability to use fiscal policy as a stabilization tool.
1. The primary economic disadvantage of adopting the euro for Britain is: *a. the loss of the ability to conduct an independent monetary policy. b. the loss of national pride. c. a decrease in international trade and growth of GDP. d. the risk of a higher rate of unemployment.
2. What is the effect of a devaluation of a domestic currency? a. Domestic goods will become more expensive in terms of foreign currency, and consequently exports will increase. b. Domestic goods will become more expensive in terms of foreign currency, and consequently exports will decrease. *c. Domestic goods will become cheaper in terms of foreign currency, and consequently exports will increase. d. Domestic goods will become cheaper in terms of foreign currency, and consequently exports will decrease.
3. Which country did NOT adopt the euro?
I. Britain II. Switzerland III. Sweden a. I only b. II only c. III only *d. I, II, and III
4. Which was an argument in favor of Britain's adoption of the euro?
I. Using the same currency as many other European countries would expand trade and increase productivity. II. Using the euro would increase the effectiveness of monetary policy. *a. I only b. II only c. I and II d. neither I nor II
5. Which was an argument against Britain's adoption of the euro?
I. Using the same currency as many other European countries would discourage trade and decrease productivity. II. Using the euro would decrease the effectiveness of monetary policy.
a. I only *b. II only c. I and II d. neither I nor II
6. The euro was created in: a. 1865 b. 1933 *c. 1999 d. 2008
7. Devaluation of a currency occurs under _____ exchange rates when the price of
the domestic currency in terms of foreign currency _____. a. flexible; falls b. flexible; rises *c. fixed; falls d. fixed; rises
8. A revaluation makes: a. domestic goods cheaper relative to foreign goods. b. both domestic and foreign goods less expensive. c. both domestic and foreign goods more expensive. *d. domestic goods more expensive relative to foreign goods.
9. Which statement regarding exchange rate intervention is NOT true? a. A devaluation can be used to increase exports and reduce imports. b. A devaluation can be used to eliminate a recessionary gap. *c. A revaluation can be used to eliminate a recessionary gap. d. Devaluations and revaluations can be used to eliminate shortages or surpluses in the foreign exchange market.
10. When the Mexican government changes the fixed exchange rate of the peso
relative to the U.S. dollar from 1.5 (pesos/U.S. dollar) to 3.0 (pesos/U.S. dollar), the peso is ________. When the foreign exchange market changes the equilibrium exchange rate of the euro relative to the U.S. dollar from 1.15 (U.S. dollars/euro) to 1.30 (U.S. dollars/euro), the euro is ________. a. revaluated; appreciated b. appreciated; devaluated *c. devaluated; appreciated d. appreciated; revaluated
11. The 2001 devaluation of the Argentinean peso had all the effects EXCEPT: a. promoting Argentinean exports. b. helping close a recessionary gap. c. reducing the deficit of the balance on current account. *d. helping close an inflationary gap.
12. A revaluation: a. increases exports and decreases imports. *b. decreases exports and increases imports. c. increases imports and exports. d. decreases imports and exports.
13. Under fixed exchange rates, a devaluation: a. decreases aggregate demand. *b. increases aggregate demand. c. decreases aggregate supply. d. increases aggregate supply.
14. Under fixed exchange rates, a revaluation decreases aggregate demand by: a. increasing exports. b. reducing imports. c. causing a financial account deficit. *d. decreasing exports.
15. Devaluation is reduction in the: a. value of a currency due to inflation. b. value of a currency that is determined in a floating exchange rate system. *c. value of a currency that is set under a fixed exchange rate regime. d. rate of inflation of a country.
16. All other things unchanged, an increase in the value of the dollar against the
euro _______ U.S. net exports and shifts the aggregate demand curve to the _______. a. increases; right b. decreases; right c. increases; left *d. decreases; left
17. All other things unchanged, a decrease in the value of the dollar against the
euro _______ U.S. net exports and shifts the aggregate demand curve to the _______. *a. increases; right b. decreases; right c. increases; left d. decreases; left
18. A reduction in the value of a currency governed by a fixed exchange rate regime
is known as a(n): a. appreciation. b. revaluation. *c. devaluation. d. depreciation.
19. An increase in the value of a currency governed by a fixed exchange rate
regime is known as a(n): a. appreciation. *b. revaluation. c. devaluation. d. depreciation.
20. What is the effect of a revaluation of a domestic currency? a. Domestic goods will become more expensive in terms of foreign currency, and consequently exports will increase. *b. Domestic goods will become more expensive in terms of foreign currency, and consequently exports will decrease. c. Domestic goods will become cheaper in terms of foreign currency, and consequently exports will increase. d. Domestic goods will become cheaper in terms of foreign currency, and consequently exports will decrease.
21. Which country has switched from fixed to floating exchange rates since World
War II? I. Britain II. Argentina a. I only b. II only *c. I and II d. neither I nor II
22. A reduction in the value of a currency that is set under a fixed exchange rate
regime is called a(n): a. depreciation. *b. devaluation. c. appreciation. d. revaluation.
23. An increase in the value of a currency that is set under a fixed exchange rate
regime is called a(n): a. depreciation. b. devaluation. c. appreciation. *d. revaluation.
24. A reduction in the value of a currency that is determined under a floating
exchange rate regime is called a(n): *a. depreciation. b. devaluation. c. appreciation. d. revaluation.
25. An increase in the value of a currency that is determined under a floating
exchange rate regime is called a(n): a. depreciation. b. devaluation. *c. appreciation. d. revaluation.
26. The British pound is a floating exchange rate currency. If the exchange rate for
the pound changes from $1.68 to $1.75, the pound has: a. depreciated. b. been devalued. *c. appreciated. d. been revalued.
27. The British pound is a floating exchange rate currency. If the exchange rate for
the pound changes from $1.68 to $1.60, the pound has: *a. depreciated. b. been devalued. c. appreciated.
d. been revalued.
28. A devaluation of a currency will make exports ________ expensive and imports
______ expensive. a. more; more b. more; less c. less; less *d. less; more
29. A revaluation of a currency will make exports ________ expensive and imports
______ expensive. a. more; more *b. more; less c. less; less d. less; more
30. After the devaluation of a currency, all other things equal, exports will likely
_______ and imports will likely ______. a. increase; increase b. decrease; decrease *c. increase; decrease d. decrease; increase
31. After the revaluation of a currency, all other things equal, exports will likely
_______ and imports will likely ______. a. increase; increase b. decrease; decrease c. increase; decrease *d. decrease; increase
32. After the devaluation of a currency, all other things equal, a country's balance of
payments on the current account will likely: *a. increase. b. decrease. c. remain the same. d. fluctuate randomly.
33. After the revaluation of a currency, all other things equal, a country's balance of
payments on the current account will likely:
a. increase. *b. decrease. c. remain the same. d. fluctuate randomly.
34. The devaluation of a currency can help reduce a(n):
I. inflationary gap II. recessionary gap a. I only *b. II only c. I and II d. neither I nor II
35. The revaluation of a currency can help reduce a(n):
I. inflationary gap II. recessionary gap *a. I only b. II only c. I and II d. Neither I nor II
36. The revaluation of a domestic currency can help reduce:
I. shortages of domestic currency II. surpluses of domestic currency *a. I only b. II only c. I and II d. neither I nor II
37. The devaluation of a domestic currency can help reduce:
I. shortages of domestic currency II. surpluses of domestic currency a. I only *b. II only c. I and II d. neither I nor II
38. The Bretton Woods monetary system:
a. was abandoned by the United States in 1996. *b. broke down in 1971. c. was abandoned by the United States, but the dollar is still backed by gold. d. remains in effect today.
39. The Bretton Woods agreement called for: a. each currency's value to be flexible relative to other currencies. *b. maintaining fixed exchange rates by government intervention. c. most nations to adopt the euro as their official currency. d. what amounted to a floating exchange rate.
40. The result of the meeting of representatives of the Allied Nations at Bretton
Woods, New Hampshire in 1944 was: a. the North American Free Trade Agreement. b. a system of floating exchange rates. *c. a system of fixed exchange rates. d. the Treaty of Ghent.
41. After the Bretton Woods agreement broke down in 1971, the United States and
most industrialized countries adopted: a. the euro. b. the bitcoin. c. a system of fixed exchange rates. *d. a system of floating exchange rates.
42. A decrease in U.S. interest rates causes the dollar to _____ and aggregate
demand to ______. *a. depreciate; increase b. depreciate; decrease c. appreciate; increase d. appreciate; decrease
43. An increase in U.S. interest rates causes a decrease in aggregate demand by: a. increasing investment, appreciating the dollar, and increasing imports. *b. decreasing investment, appreciating the dollar, and increasing imports. c. increasing investment, depreciating the dollar, and increasing exports.
d. decreasing investment, depreciating the dollar, and decreasing exports.
44. With a floating exchange rate: a. monetary policy is ineffective. b. monetary policy is not independent. *c. a central bank can pursue an independent monetary policy. d. an independent fiscal policy cannot be pursued.
45. Expansionary monetary policy in the United States causes U.S. interest rates to
_____ and the dollar to ______. a. rise; appreciate b. rise; depreciate c. fall; appreciate *d. fall; depreciate
46. Suppose a country has adopted a floating exchange rate regime and the central
bank decides to engage in expansionary monetary policy. Which is LIKELY to occur? a. Interest rates will fall and there will be a capital inflow. b. Interest rates will rise and there will be a capital outflow. *c. Interest rates will fall and there will be a capital outflow. d. Its exchange rate will appreciate.
47. Assume a country has adopted a floating exchange rate regime and the central
bank decides to engage in a contractionary monetary policy. Which is LIKELY to occur? a. The country's currency will depreciate. *b. Interest rates will rise, the currency will appreciate, and this will close any inflationary gap that might exist. c. Interest rates will fall, which will reduce aggregate demand. d. Net exports will be larger.
48. A reduction in the interest rate has ________ impact on aggregate demand with
________ than with ________. a. a smaller; floating exchange rates; fixed exchange rates *b. a larger; floating exchange rates; fixed exchange rates c. the same; fixed exchange rates; floating exchange rates d. a larger; fixed exchange rates; floating exchange rates
49. Under a floating exchange rate regime, raising the interest rate has all these
effects EXCEPT: a. increasing foreign imports. b. reducing capital outflows from the country. *c. increasing domestic investment spending. d. reducing domestic exports.
50. The difference between a fixed and a floating exchange rate regime is that
under a: a. fixed exchange rate regime the central bank retains its ability to pursue independent monetary policy, whereas under a floating exchange rate regime it does not. *b. floating exchange rate regime the central bank retains its ability to pursue independent monetary policy, whereas under a fixed exchange rate regime it does not. c. fixed exchange rate regime the government can pursue independent fiscal policy, whereas under a floating exchange rate regime it does not. d. floating exchange rate regime the government can pursue independent fiscal policy, whereas under a fixed exchange rate regime it does not.
51. If a country with floating exchange rates uses an expansionary monetary policy,
the domestic interest rate: a. falls, demand for the domestic currency decreases, supply of the domestic currency increases, and the effect on the exchange rate is ambiguous. b. increases, demand for the domestic currency increases, supply of the domestic currency decreases, and the exchange rate increases. *c. falls, demand for the domestic currency decreases, supply of the domestic currency increases, and the exchange rate decreases. d. falls, demand for the domestic currency remains unchanged, supply of the domestic currency increases, and the exchange rate decreases.
52. If a country with floating exchange rates follows a contractionary monetary
policy, with everything else remaining unchanged, it leads to a(n): a. increase in interest rates and a depreciation in the currency. b. decrease in interest rates and an appreciation in the currency. c. decrease in interest rates and a depreciation in the currency. *d. increase in interest rates and an appreciation in the currency.
53. All else equal, if the Federal Reserve decreases the money supply, interest
rates will _____ and the dollar will _____ against other currencies. a. increase; depreciate b. decrease; depreciate c. decrease; appreciate *d. increase; appreciate
54. In an open economy with a floating exchange rate, a lowering of the domestic
interest rate will lead to a(n) _____ of the currency, which will _____ exports. *a. depreciation; increase b. depreciation; decrease c. appreciation; increase d. appreciation; decrease
55. If the United States is experiencing a recessionary gap, the appropriate
monetary policy action is to ________ the money supply to ________ interest rates. a. increase; increase *b. increase; decrease c. decrease; increase d. decrease; decrease
56. When the interest rate in the United States decreases as a result of
expansionary monetary policy, investment spending ________, and consumption ________. *a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases
57. As a result of expansionary monetary policy, lower U.S. interest rates will result
in a(n) _______ in the demand for dollars and a(n) _________ in the supply of dollars. a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease
58. Expansionary monetary policy in the United States will cause the dollar to: a. appreciate. b. be revalued. *c. depreciate.
d. be devalued.
59. When the dollar depreciates, exports from the United States will ______ and
imports into the United States will ______. a. increase; increase *b. increase; decrease c. decrease; increase d. decrease; decrease
60. A depreciated dollar will cause aggregate demand in the United States to: *a. increase. b. decrease. c. remain constant. d. fluctuate randomly.
61. If the United States is experiencing an inflationary gap, the appropriate
monetary policy action is to ________ the money supply to ________ interest rates. a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease
62. When the interest rate in the United States increases as a result of
contractionary monetary policy, investment spending ________, and consumption _________. a. increases; increases b. increases; decreases c. decreases; increases *d. decreases; decreases
63. As a result of contractionary monetary policy, higher U.S. interest rates will
result in a(n) _______ in the demand for dollars and a(n) _________ in the supply of dollars. a. increase; increase *b. increase; decrease c. decrease; increase d. decrease; decrease
64. Contractionary monetary policy in the United States will cause the dollar to:
*a. appreciate. b. be revalued. c. depreciate. d. be devalued.
65. When the dollar appreciates, exports from the United States will ______ and
imports into the United States will ______. a. increase; increase b. increase; decrease *c. decrease; increase d. decrease; decrease
66. An appreciated dollar will cause aggregate demand in the United States to: a. increase. *b. decrease. c. remain constant. d. fluctuate randomly.
67. Countries A and B are important trading partners. Country A is in a recession.
Country B will be better insulated from the recession originating in country A if country: a. B has a fixed exchange rate system. *b. B has a floating exchange rate system. c. A has a fixed exchange rate system. d. A has a floating exchange rate system.
68. China has fixed the exchange rate between the yuan and the U.S. dollar.
Therefore, a recession in China ________ American ________ to China more than would happen under a floating exchange rate regime. a. raises; exports b. reduces; imports c. raises; imports *d. reduces; exports
69. Adopting a floating exchange rate regime: *a. makes the domestic economy less susceptible to business cycles abroad. b. limits the use of monetary policy for economic stabilization purposes. c. makes the domestic economy more susceptible to business cycles abroad. d. commits the country to maintaining low inflation rates.
70. An advantage to floating exchange rates is that they help: a. insulate countries from currency fluctuations. *b. insulate countries from recessions starting in other countries. c. keep exports from replacing domestic jobs. d. keep export prices down.
71. Britain, Sweden, and Switzerland chose not to adopt the euro in 1999. *a. True b. False
72. The euro was created during World War II in 1944. a. True *b. False
73. An argument in favor of Britain's adoption of the euro was that using the same currency as many other European countries would expand trade and increase productivity. *a. True b. False
74. An argument in favor of Britain's adoption of the euro was that using the same currency as many other European countries would make monetary policy more effective. a. True *b. False
75. An argument against Britain's adoption of the euro was that using the euro would make trade more difficult and decrease British productivity. a. True *b. False
76. An argument against Britain's adoption of the euro was that using the euro would make monetary policy less effective. *a. True b. False
77. The first country to adopt the euro was Great Britain. a. True *b. False
78. A devaluation of a currency tends to decrease the current account deficit. *a. True b. False
79. If a country revalues its currency, it increases its aggregate demand. a. True *b. False
80. In the period following World War II, Britain changed from a fixed exchange rate regime to a floating exchange rate regime. *a. True b. False
81. A reduction in the value of a currency that is set under a fixed exchange rate regime is called a depreciation. a. True *b. False
82. A reduction in the value of a currency that is set under a fixed exchange rate regime is called a devaluation. *a. True b. False
83. An increase in the value of a currency that is set under a fixed exchange rate regime is called an appreciation. a. True *b. False
84. An increase in the value of a currency that is set under a fixed exchange rate regime is called a revaluation. *a. True b. False
85. A reduction in the value of a currency that is set under a floating exchange rate regime is called a devaluation. a. True *b. False
86. A reduction in the value of a currency that is set under a floating exchange rate regime is called a depreciation. *a. True b. False
87. An increase in the value of a currency that is set under a floating exchange rate regime is called an appreciation. *a. True b. False
88. An increase in the value of a currency that is set under a floating exchange rate regime is called a revaluation. a. True *b. False
89. The Cuban peso is a fixed rate exchange currency. If the government of Cuba uses foreign exchange controls to change the exchange rate of the peso from $1 to $1.20, the Cuban peso has been revalued. *a. True b. False
90. The Japanese yen is a floating rate currency. If the exchange rate for the yen changes from $0.0098 to $0.01, the yen has appreciated. *a. True b. False
91. The Canadian dollar is a floating rate currency. If the exchange rate for the Canadian dollar changes from $0.95 to $0.98 (U.S. dollars), the Canadian dollar has appreciated. a. True *b. False
92. The devaluation of a domestic currency will make exports less expensive and imports more expensive. *a. True b. False
93. The revaluation of a domestic currency will make exports less expensive and imports more expensive. a. True *b. False
94. After the devaluation of a domestic currency, all other things equal, exports will likely increase and imports will likely decrease. *a. True b. False
95. After the revaluation of a domestic currency, all other things equal, exports will likely increase and imports will likely decrease. a. True *b. False
96. After the devaluation of a domestic currency, all other things equal, the country's balance of payments on the current account will likely increase. *a. True b. False
97. After the revaluation of a domestic currency, all other things equal, the country's balance of payments on the current account will likely increase. a. True *b. False
98. The devaluation of a domestic currency can help reduce an inflationary gap in the domestic economy. a. True *b. False
99. The revaluation of a domestic currency can help reduce an inflationary gap in the domestic economy.
*a. True b. False
100. The revaluation of a domestic currency can help reduce shortages of domestic currency. *a. True b. False
101. The devaluation of a domestic currency can help reduce shortages of domestic currency a. True *b. False
102. The Bretton Woods agreement called for a flexible exchange rate system. a. True *b. False
103. The Bretton Woods agreement was abandoned in the early 1990s. a. True *b. False
104. The 1944 Bretton Woods agreement established a system of fixed exchange rates among major currencies. *a. True b. False
105. In the 1970s most European countries were unhappy with the floating exchange rate regimes because they made each country's domestic monetary policy ineffective. a. True *b. False
106. The Exchange Rate Mechanism established a target zone for European exchange rates during the late 1980s and 1990s. *a. True b. False
107. Since the adoption of the euro in 2001, monetary policy has become much more effective in individual European countries. a. True *b. False
108. All other things equal, an expansionary monetary policy in Britain will decrease British interest rates and increase the demand and decrease the supply of their currency, the pound. *a. True b. False
109. All other things equal, a contractionary monetary policy in the Canada will decrease Canadian interest rates and increase the demand and decrease the supply of their currency, the Canadian dollar. a. True *b. False
110. All other things equal, a contractionary monetary policy will cause the domestic currency to appreciate. *a. True b. False
111. All other things equal, an expansionary monetary policy will cause the domestic currency to appreciate. a. True *b. False
112. Floating exchange rates help insulate countries from recessions in other countries. *a. True b. False
113. All other things equal, a depreciation of a country's currency will cause aggregate demand in that country to increase. *a. True b. False
114. All other things equal, an appreciation of a country's currency will cause aggregate demand to in that country to increase.
a. True *b. False
115. A recession in the United States may be caused by negative demand shocks in countries that are U.S. trading partners. *a. True b. False
116. Other things equal, a recession in Mexico would cause U.S. exports to Mexico to increase and U.S. aggregate demand to increase. a. True *b. False
117. If exports from the United States decrease because of a recession in Europe, all other things equal, the demand for dollar will decrease. *a. True b. False
118. If exports from the U.S. decrease because of a recession in Japan, all other things equal, the dollar will appreciate. a. True *b. False
119. Explain the purposes of devaluation and revaluation in a fixed exchange rate regime. Correct Answer:
If the fixed exchange rate is above the equilibrium exchange rate, a devaluation of a domestic currency will reduce the surplus of the currency on the foreign exchange market. This implies that less government intervention and resources are needed to maintain the fixed exchange rate regime. Additionally, because a devaluation makes exports cheaper and imports more expensive, net exports usually increase after a devaluation, which increases aggregate demand and helps reduce or eliminate a recessionary gap in the domestic economy. If the fixed exchange rate is below the equilibrium exchange rate, a revaluation of a domestic currency will reduce shortages of the currency. Revaluations also make exports more expensive and imports cheaper, so they will decrease aggregate demand and can help reduce or eliminate an inflationary gap in the domestic economy. 120. Suppose the Federal Reserve is concerned about an inflationary gap, and as a result the Fed conducts contractionary monetary policy. All else equal, how will this affect the value of the dollar in global currency markets? Explain.
Correct Answer:
The Fed's policy will increase interest rates in the United States. Americans will now find it more attractive to invest dollars domestically rather than in other foreign financial markets. This decreases the supply of dollars in global currency markets. At the same time, foreigners will invest their currency in American financial markets, thus increasing the demand for the dollar. The combination of a decrease in the supply and increase in the demand for dollars will increase the price of the dollar. The dollar will appreciate against other currencies. 121. Explain the impact of expansionary monetary policy in the United States, where exchange rates are floating. Correct Answer:
Expansionary monetary policy is used to reduce or eliminate a recessionary gap. The money supply is increased which causes interest rates to decrease. The lower interest rates cause investment spending and consumption to increase, which increases aggregate demand. The lower interest rates will also discourage foreign investors from buying U.S. assets and the demand for dollars will decrease. At the same time, Americans will want to invest in in other countries where interest rates are higher, so they will increase the supply of dollars to buy foreign currencies. The decrease in demand and increase in supply of dollars will cause the dollar to depreciate. As the dollar depreciates, U.S. exports will increase and imports will decrease, which will increase aggregate demand even further. 122. Explain how floating exchange rates in the United States can help insulate the U.S. economy from a recession in Europe compared to a fixed exchange rate regime. Correct Answer:
If there is a recession in Europe, demand for U.S. exports will decrease, causing aggregate demand in the United States to decrease as well. However, the fall in U.S. exports implies that the European demand for dollars will also decrease. If the demand for dollars decreases, the dollar will depreciate since the United States has a floating exchange rate regime. The depreciation of the dollar will make exports cheaper and imports more expensive, both of which will have a positive effect on aggregate demand in the United States and lessen the impact of the European recession on the American economy. If, instead, exchange rates were fixed in the United States, the dollar would not depreciate and thus net exports would not rise and help offset the original decrease in aggregate demand.
123. A revaluation of a currency, holding everything else constant: *a. makes foreign goods more attractive to purchase in the domestic economy. b. leads to an increase in aggregate demand and can therefore be expansionary. c. increases the balance of payments account toward a surplus.
d. leads to a merchandise trade surplus.
124. A country with a recessionary gap and a fixed exchange rate will be helped by
a(n): a. revaluation of its currency. *b. devaluation of its currency. c. expansionary monetary policy. d. No policy option will aid this country.
1. Classical economists believed all EXCEPT that: a. there could be temporary periods of unemployment. b. emphasis should be placed on the long run, and in the long run all would be set right because of the smooth functioning of the price system. c. the Great Depression would be a short-run aberration. *d. monetary policy could tame the business cycle.
2. A fundamental feature of early classical macroeconomics is that: a. aggregate demand and aggregate income are usually unequal. b. prices of inputs and outputs are usually relatively rigid. c. the economy's level of employment can remain substantially below its natural level over a long period. *d. the economy can achieve full employment on its own, though there could be short periods in which employment falls below the natural level.
3. Which year is often described as the worst year of the Great Depression? a. 1913 *b. 1933 c. 1953 d. 1973
4. Prior to the 1930s, the _____ model of economics dominated economic thinking
about how the economy worked. a. Keynesian *b. classical c. monetarist d. real business cycle
5. Adam is an economist who believes that in the long run, all prices are flexible
and that any increase in the money supply will lead only to inflation, not to an increase in aggregate output. Because the economy would self-correct to long-run equilibrium output, there is no role for either fiscal or monetary policy. Adam is best described as a: a. supply-side economist. b. Keynesian economist. *c. classical economist. d. monetarist.
6. According to the classical model:
a. the aggregate supply curve is horizontal. *b. increases in the money supply lead to proportional increases in the price level but not to change in real output. c. increases in the money supply lead to proportional changes in output, but no change in the price level. d. we are all dead in the long run.
7. In the classical model of the price level, prices are _________, the short-run
aggregate supply curve is vertical, and as a result, a decrease in the money supply leads to _________ in the aggregate price level. a. sticky; a more than proportional decrease *b. flexible; a proportional decrease c. sticky; a more than proportional increase d. flexible; a proportional increase
8. Because classical economists stressed the long run, they: *a. perceived the economy as being mostly self-adjusting. b. favored the use of fiscal policy over monetary policy. c. expected the government to purge the rottenness from the system. d. favored the use of monetary policy over fiscal policy.
9. Classical economists focused mainly on: a. unemployment. b. the short run. *c. the long run. d. government economic policy.
10. Classical economists point out that: a. there is a tradeoff between unemployment and inflation. *b. an increase in the money supply leads to a proportional rise in the price level. c. government spending can affect aggregate demand. d. there is the possibility of a liquidity trap.
11. According to the classical model of the price level, the short-run and long-run
aggregate supply curves are: a. flat. b. negatively sloped. *c. vertical. d. unstable.
12. Classical macroeconomics was based largely on the foundation of: *a. flexible wages and prices. b. persistent unemployment. c. government intervention in the market. d. Adam Smith's model of imperfectly competitive markets.
13. The theory that dominated economic thinking up to the 1930s was: a. monetarism. *b. classical economics. c. Keynesian economics. d. rational expectations theory.
14. The school of economics that dominated economic thinking prior to the Great
Depression was the: a. business cycle theorists. *b. classical school. c. post-Keynesian school. d. Marxists.
15. Which is a characteristic of the classical school of economics? a. It emphasizes the short run. *b. It emphasizes the flexibility of wages and prices. c. Potential output is a problem, since it cannot be achieved without active policy. d. It advocates the use of discretionary fiscal policy.
16. If wages and prices are perfectly flexible, a decrease in aggregate demand will
cause a(n): a. increase in the price level and unemployment. b. decrease in the price level and employment. c. increase in the price level and no change in employment. *d. decrease in the price level and no change in employment.
17. According to the classical model, prices are: a. sticky, making the aggregate supply curve upward rising in the short run. *b. flexible, making the aggregate supply curve vertical in the short run. c. flexible, making the aggregate supply curve downward in the short run.
d. sticky, making the aggregate supply curve vertical in the short run.
18. When other things are equal and using the classical model, an increase in the
money supply leads to an equal proportional: a. increase in the aggregate output, with no effect on the aggregate price level. b. fall in the aggregate price level, with no effect on aggregate output. *c. rise in the aggregate price level, with no effect on aggregate output. d. decrease in the aggregate output, with no effect on aggregate price level.
19. In the classical model, an increase in the money supply will result in: *a. inflation only, without affecting the aggregate output. b. economic expansion, as the aggregate output will increase. c. higher interest rates, lower investment, and ultimately lower aggregate output. d. recession only, without affecting the aggregate price level.
20. Policy makers before the Great Depression were: *a. uncertain about the appropriate measure to use against a recession in the absence of any clear theory about the cause of business cycles. b. using both fiscal and monetary policies to combat the harmful effects of recession on output and employment. c. against using monetary policies to fight the economic downturns caused by business cycles. d. in favor of using only fiscal policies to fight the economic booms caused by business cycles.
21. The measurement of business cycles was pioneered by: a. Ragnar Frisch. b. John Maynard Keynes. *c. Wesley Mitchell. d. Andrew Mellon.
22. In response to the Great Depression, the classical economists: a. stressed the use of monetary policy over fiscal policy. b. tried to tame the “animal spirits” that caused the recession in the first place. c. stressed the use of fiscal policy over monetary policy.
*d. did not advocate any action because of the lack of consensus about the consequences of policy.
23. The beginning of a recession is declared by the: *a. National Bureau of Economic Research. b. Treasury Department. c. Fed. d. president.
24. The start of an expansion is determined by the: a. Treasury Department. b. Federal Reserve. c. president. *d. National Bureau of Economic Research.
25. At the time of the Great Depression, there was: a. general agreement that monetary policy could help in the short run. *b. no widely accepted theory on why depressions happen. c. general agreement that fiscal policy could help in the short run. d. a consensus about what economic policies to adopt.
26. Which is FALSE? At the time of the Great Depression: a. the measurement of the business cycle was well advanced. b. there was no widely accepted theory on why depressions happened. c. economists recognized that the economy did not always grow smoothly. *d. the U.S. economy was substantially agricultural.
27. The General Theory of Employment, Interest, and Money was written by: a. Adam Smith. b. Paul Samuelson. c. Joseph Schumpeter. *d. John Maynard Keynes.
28. According to Keynesian theory: a. the long-run and short-run aggregate supply curves are identical.
*b. a decrease in aggregate demand leads to decreases in output and prices. c. a decrease in aggregate demand will decrease prices but not output. d. the short run is relatively unimportant.
29. Which statement is INCONSISTENT with or INCORRECTLY describes
Keynesian economics? a. It emphasizes the effects of shifts in aggregate demand on aggregate output. b. It focuses the attention of economists on situations in which the short-run aggregate supply curve slopes upward. c. “Animal spirits” are mainly responsible for business cycles. *d. Changes in business confidence would have no effect on either the aggregate price level or aggregate output.
30. In the Keynesian model, prices and nominal wages are _________, the short-
run aggregate supply curve is upward sloping and, as a result, an increase in the money supply leads to _________ in the aggregate price level. a. sticky; a less than proportional decrease b. flexible; a proportional decrease *c. sticky; a less than proportional increase d. flexible; a proportional increase
31. According to Keynes, changes in “animal spirits” will affect actual output through
changes in: *a. business confidence and investment. b. government expenditure and taxes. c. money supply and interest rates. d. labor productivity and technological progress.
32. Keynesian economics emphasizes ______ shifts in aggregate ______. a. long-run; demand b. long-run; supply *c. short-run; demand d. short-run; supply
33. Keynesian economics emphasized that economic downturns could be due to: a. inflation. b. technological shocks. *c. a decline in business confidence. d. deflation.
34. Keynes suggested that: a. money is the prime factor affecting aggregate supply. b. money is the prime factor affecting aggregate demand. c. a variety of factors affect aggregate supply. *d. a variety of factors affect aggregate demand.
35. Figure: Classical Versus Keynesian Macroeconomics
Reference: Ref 47-1
(Figure: Classical Versus Keynesian Macroeconomics) Refer to the information in the Figure: Classical Versus Keynesian Macroeconomics. According to the Keynesian view, if this economy shifts from AD1 to AD2 because of a large decline in investment spending by businesses: a. the price level will increase, but real GDP will decrease. b. GDP will increase, but the price level will not change. c. the price level will increase, but real GDP will not change. *d. both GDP and the price level will decrease.
36. Figure: Classical Versus Keynesian Macroeconomics
Reference: Ref 47-1
(Figure: Classical Versus Keynesian Macroeconomics) Refer to the information in the Figure: Classical Versus Keynesian Macroeconomics. According to the Keynesian view, if this economy shifts from AD2 to AD1, perhaps because of a large increase in government spending: a. the price level will rise, but real GDP will decrease. b. GDP will increase, but the price level will not change.
c. the price level will rise, but real GDP will not change. *d. both the price level and real GDP will increase.
37. Figure: Classical Versus Keynesian Macroeconomics
Reference: Ref 47-1
(Figure: Classical Versus Keynesian Macroeconomics) Refer to the information in the Figure: Classical Versus Keynesian Macroeconomics. According to the classical view, if this economy shifts from AD1 to AD2, perhaps because of a large decline in investment spending by businesses: a. the price level will rise, but real GDP will decrease. b. GDP will increase, but the price level will not change. *c. the price level will fall, but real GDP will not change. d. both GDP and the price level will decrease.
38. Figure: Classical Versus Keynesian Macroeconomics
Reference: Ref 47-1
(Figure: Classical Versus Keynesian Macroeconomics) Refer to the information in the Figure: Classical Versus Keynesian Macroeconomics. According to the classical view, if this economy shifts from AD2 to AD1, perhaps because of a large increase in government spending: a. the price level will rise, but real GDP will decrease. *b. the price level will rise, but real GDP will not change. c. GDP will increase, but the price level will not change. d. both GDP and the price level will decrease.
39. The General Theory of Employment, Interest, and Money, written by _______
and published in _______, transformed the way economists thought about macroeconomics. a. Milton Friedman; 1946 b. Paul Samuelson; 1940 *c. John Maynard Keynes; 1936 d. Paul Lucas; 1966
40. The General Theory of Employment, Interest, and Money was: a. the first economics textbook of the 1980s. b. a defense of fiscal policy written by Milton Friedman. *c. an analysis of the Great Depression. d. an explanation of globalization.
41. Keynesian economics stresses the role of: *a. aggregate demand. b. aggregate supply. c. the long run. d. both aggregate demand and the long run.
42. _______ was a _______ economist who believed that _______ in wages and
prices could block adjustments to full employment. a. Adam Smith; British; flexibility b. Milton Friedman; U.S.; inflexibility *c. John Maynard Keynes; British; stickiness d. Robert Lucas; U.S.; stickiness
43. The idea of sticky wages and prices is most closely associated with: a. monetarism. b. classical economics. *c. Keynesian economics. d. rational expectations theory.
44. Keynesian economics placed its emphasis on the: a. role of money. b. long run. *c. impact of changes in aggregate demand. d. impact of changes in aggregate supply.
45. Which statement is TRUE? a. Keynes treated short-run macroeconomics as a minor issue. *b. Keynes emphasized the short-run effects of shifts in aggregate demand on aggregate output, employment, and prices, whereas the classical economists focused on the long-run determination of the aggregate price level. c. The classical economists believed that the short-run aggregate supply curve was upward sloping. d. The classical economists emphasized the short-run effects of shifts in aggregate demand on aggregate output, whereas Keynes focused on the long-run determination of the aggregate price level.
46. We now typically refer to the Keynesian term animal spirits as:
a. rational expectation. *b. business confidence. c. adaptive expectation. d. irrational exuberance.
47. The main ideas of Keynesian economics are the importance of the: a. long run over the short run, and an emphasis on a vertical SRAS curve. b. long run over the short run, and an equal emphasis on the AD curve and the SRAS curve. *c. short run over the long run, and an emphasis on the AD curve and a rising SRAS curve. d. free market with no government intervention, and an emphasis on monetary policy in the long run.
48. The groundbreaking book The General Theory of Employment, Money, and
Interest was written by famed economist: a. Ronald Reagan. *b. John Maynard Keynes. c. Adam Smith. d. Barack Obama.
49. Keynes believed that wages and prices were sticky. Therefore, a rightward shift
of the aggregate demand curve would cause a(n): a. decrease in the level of income. b. increase in the unemployment level. c. change in the long-run aggregate supply curve. *d. increase in employment, production, and income.
50. According to Keynesian economics, a tax cut will _____ aggregate demand and
output by ______. a. increase; decreasing exports b. decrease; decreasing incentives to work and save *c. increase; increasing income and consumption d. increase; decreasing government spending
51. Christina is an economist who believes that shifts in aggregate demand cause a
change in both real output and the price level. She believes that an economic recession will not necessarily self-correct in the long run, and therefore she believes that active fiscal and monetary policy is justified to smooth out the business cycle. Christina is best described as a: a. classical economist.
*b. Keynesian economist. c. supply-side economist. d. monetarist.
52. Which is FALSE? Keynesian economics: a. emphasizes that factors other than the money supply can affect aggregate demand. b. provides the rationale for macroeconomic policy activism. c. emphasizes short-run economic fluctuations. *d. emphasizes long-run fluctuations.
53. According to a Keynesian economist, a recessionary gap should be fixed with: a. a monetary rule. b. supply-side tax increases to balance the budget. c. decreases in government spending. *d. discretionary fiscal policy.
54. Macroeconomic policy activism: a. involves the use of political activism made popular by liberal economists. b. mandates a balanced government budget. *c. involves the use of monetary and fiscal policy to smooth out the business cycle. d. was the tool used by classical economists.
55. According to Keynes, the remedy for a recessionary gap was straightforward.
The solution was to: a. increase aggregate supply. *b. increase aggregate demand. c. control big business. d. decrease government involvement.
56. Keynes argued that the surest way to bring the economy out of the Great
Depression was to: a. keep the economy in a liquidity trap until antitrust policy could be enforced. *b. use expansionary fiscal policy. c. increase taxes and spend less. d. leave the economy alone, and flexible wages and prices would eventually lead to increases in income and employment.
57. Macroeconomic policy activism: *a. is the use of monetary and fiscal policy to smooth out the business cycle. b. is the primary theory of classical economics. c. gives the Federal Reserve the sole responsibility for economic policy. d. advocates that all of the people in a democracy should decide what type of economic policy is appropriate.
58. The main consequence of Keynesian economics is: a. the development of economic policy rules. *b. the rationale for macroeconomic policy activism. c. a consensus that fiscal policy is ineffective. d. a consensus that monetary policy is always effective.
59. Keynes's ideas were: a. quickly adopted in the 1930s to end the Great Depression. b. slowly but consistently used in the 1930s to end the Great Depression. *c. used somewhat to help reduce the Great Depression. d. ignored in the Great Depression.
60. The main reason that the Great Depression ended was: a. effective monetary policy by the Fed under the leadership of Paul Volcker. b. the defeat of Adolf Hitler in Germany in the 1930s. c. Winston Churchill's foreign policy. *d. deficit spending in the United States to finance World War II.
61. The historical validation of Keynes's theory came through the: a. expansion in aggregate demand resulting from drastic interest rate cuts in the early 1940s. b. successful application of his theories in the United States during the Great Depression. *c. expansion in aggregate demand resulting from massive military spending in the early 1940s. d. successful application of his theories in the United Kingdom during the mid 1930s.
62. The current consensus is that the Great Depression was ended by: a. imposing fiscal discipline and reducing budget deficits.
b. following Keynes's analysis regarding the “animal spirits.” c. increasing the money supply and lowering the interest rate. *d. applying expansionary fiscal policy on a large scale.
63. The Great Depression was ended in the United States by: a. the government running budget surpluses throughout the 1930s. b. the government increasing the money supply throughout the 1930s. c. central planning of the economy by the government. *d. the huge amounts of government spending required to fight WWII during the early 1940s.
64. Figure: Fiscal Policy and the End of the Great Depression
Reference: Ref 47-2
(Figure: Fiscal Policy and the End of the Great Depression) Refer to the information in the Figure: Fiscal Policy and the End of the Great Depression. The period from 1933 through 1936 would seem to indicate that in the short run a moderate level of government deficit spending can ______ the unemployment rate. *a. reduce b. increase c. not affect d. eliminate.
65. Figure: Fiscal Policy and the End of the Great Depression
Reference: Ref 47-2
(Figure: Fiscal Policy and the End of the Great Depression) Refer to the information in the Figure: Fiscal Policy and the End of the Great Depression. The period from 1936 to 1938 would seem to indicate that in the short run a decrease in government deficit spending can ______ the unemployment rate. a. reduce *b. increase c. not affect d. eliminate.
66. Figure: Fiscal Policy and the End of the Great Depression
Reference: Ref 47-2
(Figure: Fiscal Policy and the End of the Great Depression) Refer to the information in the Figure: Fiscal Policy and the End of the Great Depression. The period from 1939 through 1943 would seem to indicate that in the short run a large increase in government deficit spending can ______ the unemployment rate. *a. reduce b. increase c. not affect d. reduce or increase
67. Which is NOT a true statement concerning monetary policy? a. Early Keynesianism downplayed the effectiveness of monetary as opposed to fiscal policy. b. Monetarism argued that discretionary monetary policy does more harm than good. c. The natural rate hypothesis places sharp limits on what macroeconomic policy can achieve. *d. Concerns about a political business cycle suggest that the central bank should not be independent and argue for a strong discretionary fiscal and monetary policy.
68. Because Keynes's theory mostly stressed the short run, it: a. perceived the economy as being mostly self-adjusting. b. favored the use of monetary policy over fiscal policy. c. considered technological progress the answer to any economic slump. *d. favored the use of fiscal policy over monetary policy.
69. Keynesians argued that monetary policy would NOT be effective if: *a. there was a liquidity trap. b. the Fed was independent of political pressure. c. other countries did not follow monetary policy similar to that of the United States. d. no one bought bonds when the Fed conducted open-market operations.
70. In A Monetary History of the United States, 1867–1960, Milton Friedman and
Anna Schwartz argued that: a. only fiscal policy could be effective in managing the economy. b. the Depression was caused by irresponsible government spending. *c. monetary policy should play a key role in stabilizing the economy. d. the Federal Reserve should be abolished.
71. Friedman and Schwartz's work A Monetary History of the United States, 1867–
1960 showed that the business cycle had historically been associated with fluctuations in: a. prices. b. interest rates. *c. the money supply. d. business investment.
72. Keynes's theory did not endorse the use of monetary policy because: *a. at the time, the nominal interest rate was very close to zero. b. during WWII, the convertibility of the pound sterling into gold was suspended. c. under the gold standard, the zero-bound on nominal interest rates did not exist. d. monetary expansions were impossible under a gold standard.
73. Milton Friedman and Anna Schwartz wrote: a. The Great Depression. b. The General Theory of Employment, Interest, and Money. c. The Wealth of Nations. *d. A Monetary History of the United States, 1867–1960.
74. In a liquidity trap: a. fiscal policy becomes ineffective because of the high budget deficit. *b. monetary policy becomes ineffective because the nominal interest rate is close to the zero bound. c. the aggregate price level becomes downwardly sticky. d. increase in government spending drives out planned investment spending.
75. The main idea behind monetarism is that the: a. aggregate output will be even greater than equal potential output if the money supply grows at a constant rate. b. aggregate price level will increase proportionally if the money supply grows at a constant rate. c. government budget will have a deficit if the government spending grows at a constant rate. *d. aggregate output will grow steadily at a constant rate if the money supply also grows at a constant rate.
76. Scenario: The Velocity Equation
Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate price level equals 2. Reference: Ref 47-3
(Scenario: The Velocity Equation) Refer to the information in the Scenario: The Velocity Equation. If the money supply is $5 trillion, then the velocity of money is: a. 5. b. 8. *c. 4. d. 10.
77. Scenario: The Velocity Equation
Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate price level equals 2. Reference: Ref 47-3
(Scenario: The Velocity Equation) Refer to the information in the Scenario: The Velocity Equation. If the velocity of money is 2, the money supply is: a. $20 trillion. *b. $10 trillion. c. $5 trillion. d. $40 trillion.
78. Scenario: The Quantity Theory of Money
Suppose the money supply is equal to $10 billion and the velocity of money is 6.
Reference: Ref 47-4
(Scenario: The Quantity Theory of Money) Refer to the information in the Scenario: The Quantity Theory of Money. If the aggregate price level is 4, then the real GDP is: a. $60 billion. b. $30 billion. c. $20 billion. *d. $15 billion.
79. Scenario: The Quantity Theory of Money
Suppose the money supply is equal to $10 billion and the velocity of money is 6. Reference: Ref 47-4
(Scenario: The Quantity Theory of Money) Refer to the information in the Scen: The Quantity Theory of Money. If the aggregate price level is 4, then the nominal GDP is: a. $15 billion. *b. $60 billion. c. $20 billion. d. $10 billion.
80. The velocity of money is equal to: *a. nominal GDP divided by the money supply. b. real GDP divided by the aggregate price level. c. nominal wages divided by the aggregate price level. d. real GDP divided by the money supply.
81. Milton Friedman's argument was that the Fed should follow a monetary policy
rule so that the money supply would: *a. grow at a slow and steady rate. b. remain constant. c. grow proportionally with the price level. d. grow at the same rate as the GDP growth rate.
82. According to monetarism: a. Congress and the president should be responsible for controlling the money supply. *b. output will grow steadily if the money supply grows at a steady rate. c. the Fed should vary the growth rate of the money supply on a monthly basis. d. changes in the money supply affect the real output only in the long run.
83. Monetarism asserted that GDP will grow steadily if the: a. government keeps the deficit low. b. government runs a small budget surplus. *c. money supply grows steadily. d. money supply grows faster than the growth rate of the economy.
84. If the money supply is growing at a constant rate of 2 percent and the economy
undergoes a negative demand shock, the theory of monetarism would recommend: a. coordinating a monetary expansion with a fiscal expansion to increase aggregate demand. b. raising the growth rate of money supply to 3 percent in order to lower the interest rate. c. lowering the growth rate of money supply to 1 percent in order to increase saving. *d. maintaining the growth rate of money supply at 2 percent and letting the aggregate price level fall.
85. Milton Friedman was the leading figure in the movement called: a. Keynesianism. b. fiscalism. *c. monetarism. d. big government.
86. If crowding out occurs: a. increases in consumption are offset by decreases in government spending. b. increases in the money supply are offset by dollar outflows in foreign trade. *c. increases in government spending cause higher interest rates and decreased investment spending. d. decreases in government spending cause lower interest rates and decreased investment spending.
87. Crowding out is MOST likely to occur when expansionary fiscal policy is
accompanied by: a. expansionary monetary policy. b. open-market purchases. *c. slow growth of the money supply. d. an investment tax credit.
88. Monetarism suggests that: a. money should be backed by gold. b. the economy is unstable. c. monetary policy should be used to offset economic fluctuations. *d. discretionary monetary policy does more harm than good.
89. Figure: Fiscal Policy with a Fixed Money Supply
Reference: Ref 47-5
(Figure: Fiscal Policy with a Fixed Money Supply) Refer to the information in the Figure: Fiscal Policy with a Fixed Money Supply. Assume that this economy is at E1. Now government deficit spending is increased, but the Federal Reserve does NOT expand the money supply. According to this model: a. real GDP will expand just as much as if the Federal Reserve had expanded the money supply. b. real GDP will decrease because the Federal Reserve did not expand the money supply. *c. real GDP will expand, but not as much as if the Federal Reserve had expanded the money supply. d. interest rates will decrease.
90. Figure: Fiscal Policy with a Fixed Money Supply
Reference: Ref 47-5
(Figure: Fiscal Policy with a Fixed Money Supply) Refer to the information in the Figure: Fiscal Policy with a Fixed Money Supply. Assume that this economy is at E2. Now government deficit spending is decreased, but the Federal Reserve expands the money supply. According to this model:
a. real GDP will decrease just as much as it would if the Federal Reserve had not expanded the money supply. *b. real GDP will decrease, but not as much as it would if the Federal Reserve had failed to expand the money supply. c. real GDP will expand, but not as much as it would if the Federal Reserve had not expanded the money supply. d. interest rates will increase.
91. Figure: Fiscal Policy with a Fixed Money Supply
Reference: Ref 47-5
(Figure: Fiscal Policy with a Fixed Money Supply) Refer to the information in the Figure: Fiscal Policy with a Fixed Money Supply. Assume that this economy is at E1. Now government deficit spending is increased and the Federal Reserve expands the money supply. According to this model: *a. real GDP might increase in the short run, but inflation can lead to a return to the original level of real GDP in the long run. b. real GDP will decrease because the government expanded deficit spending. c. real GDP will decrease, but not as much as if the Federal Reserve had contracted the money supply. d. interest rates will decrease.
92. Friedman argued that with a ______ money supply, velocity is so ______ that
there's not much point in using monetary policy. a. steady increase in the; large b. constant; small *c. steady increase in the; constant d. constant; large
93. Friedman favored: a. activist monetary policy to stabilize the economy. b. activist fiscal policy coupled with a neutral monetary policy. *c. a monetary policy rule. d. interest rate targeting.
94. During the 1960s and 1970s, most monetarists believed that the: *a. velocity of money was stable. b. velocity of money was inversely related to the money stock. c. velocity of money moved in tandem with the money stock. d. price level was relatively stable and monetary intervention was not necessary.
95. In the late 1970s and early 1980s, the velocity of money began to: a. stabilize. b. drift upward. c. drift downward. *d. shift erratically.
96. The concept of the monetary policy rule is based on the assumption that: a. discretionary fiscal policy crowds out investment spending. b. the natural rate of unemployment is constant in the long run. c. monetary policy lags are shorter than fiscal policy lags. *d. the velocity of money is constant in the short run.
97. Challenges to Keynesian economics were based on the: *a. fact that lags in fiscal policy make it relatively ineffective. b. liquidity trap, which makes fiscal policy ineffective. c. possibility of a trade-off between inflation and unemployment. d. usefulness of discretionary fiscal policy.
98. The monetary policy rule suggests that: a. we should follow the rules set by the Fed. b. the Fed should follow the rules set by Congress. c. the interest rate should grow at a slow and steady pace. *d. the money supply should grow at a slow and steady pace.
99. The Fed moved away from a monetary growth rule because: a. the economy was unstable. b. the money supply was unstable. *c. the velocity of money was unstable. d. interest rates were unstable.
100. Monetarists argue that: a. the impact lag for monetary policy is short and predictable. *b. stabilization policies may actually be destabilizing. c. the Federal Reserve System should use active monetary policy. d. active monetary policy should be used to reinforce active fiscal policy.
101. Milton Friedman was a leader and major proponent of: *a. monetarism. b. classical economics. c. Keynesian economics. d. rational expectations theory.
102. A policy implication of monetarism is that: a. full employment will always be maintained. b. countercyclical policies have no effect on the economy. c. the growth of the money supply is caused by economic fluctuations. *d. constant growth of the money supply is better than discretionary policies.
103. Monetarists argue that: *a. the Federal Reserve System should allow the money supply to increase at a slow, steady annual rate. b. since the velocity of money is unstable, a fixed annual increase in the money supply will exacerbate inflation in the long run. c. self-correction is less effective than activist monetary policy. d. fiscal policy should always be used before monetary policy.
104. Monetarists believe that: a. full employment is the norm. b. countercyclical policies do not affect the economy. *c. a fixed increase in the rate of growth of the money supply is better than discretionary policies. d. discretionary monetary policy is better than a fixed growth rate of the money supply.
105. The velocity equation is stated as: *a. M × V = P × Y. b. M × P = V × Y. c. M × Y = V × P. d. M × Y × P = V.
106. The _____ hypothesis has been almost universally accepted amongst modern
economists. This hypothesis is that macroeconomic policy should be to stabilize the economy rather than attempt to permanently decrease the unemployment rate.
*a. natural rate b. political business cycle c. rational expectations d. real business cycle
107. Under which conditions do some macroeconomists believe the natural rate
hypothesis does NOT work? a. periods of rapidly rising inflation b. high but constant inflation *c. low or negative inflation d. high economic growth
108. The Friedman–Phelps hypothesis claimed that the apparent trade-off between
unemployment and inflation would NOT survive an extended period of: a. rising unemployment. *b. rising prices. c. rising interest rates. d. increases in the money supply.
109. The natural rate hypothesis: a. is now generally discredited. *b. implies sharp limits on what macroeconomic policy can achieve. c. implies there is a long-run trade-off between inflation and unemployment. d. implies that there is no liquidity trap.
110. The Friedman–Phelps (natural rate) hypothesis made the strong prediction
that: a. once inflation gets embedded in people's expectation, the unemployment and inflation will have a trade-off. *b. the unemployment and inflation trade-off will not exist once inflation gets embedded in people's expectation. c. there will always be an unemployment and inflation trade-off. d. the unemployment and inflation trade-off is a myth.
111. The political business cycle implies all EXCEPT: a. central banks should be independent of politics. b. discretionary fiscal policy should be avoided. c. politicians pumping up the economy in an election year make the economy less stable. *d. monetary policy is ineffective if inflation is high.
112. The political business cycle refers to policies that: a. slow down the economy in election years. b. keep the economy on a constant growth path. *c. speed the economy up in election years. d. run surpluses in election years.
113. Use of activist fiscal and monetary policy can bring rapid growth in an
economy, as was the case in the United States before the 1972 election. One consequence of an activist policy is: a. activism in macroeconomic policy that is stabilizing for the economy. *b. a political business cycle caused by the use of macroeconomic policy to serve political ends. c. counter cyclical macroeconomic policy designed to help the economy. d. crowding out as increases in government spending push out the private business spending.
114. Since fiscal policy can be manipulated by partisan political interests: *a. the political business cycle may drive the actual economic business cycle. b. we may see lower interest rates before elections and higher interest rates after elections. c. the economic business cycle may lead the political business cycle. d. we may see lower inflation and higher unemployment before elections.
115. Fiscal policy can: *a. be more political than monetary policy. b. be less political than monetary policy. c. be neutral like monetary policy. d. have the same impact on all citizens.
116. Which is NOT true about new classical macroeconomics? a. It returned to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output. b. It challenged traditional arguments about the slope of the short-run aggregate supply curve based on the concept of rational expectations.
c. It suggested that changes in productivity cause economic fluctuations. *d. It embraced the Keynesian notion that changes in aggregate demand may affect aggregate output in the short run.
117. According to the theory of new classical economics, if business sentiment and
investment spending decrease, the aggregate demand curve _________ and the price level falls, while aggregate output _________. a. shifts right; increases *b. shifts left; remains constant c. shifts right; decreases d. shifts left; decreases
118. New classical economics: a. focuses on short-run economic fluctuations. *b. returns to the view that shifts in aggregate demand affect only the price level. c. argues that the business cycle is caused by “animal spirits.” d. focuses on the trade-off between unemployment and inflation.
119. New classical macroeconomists believe that the short-run aggregate: *a. supply curve is vertical. b. demand curve is vertical. c. demand curve is rising. d. supply curve is horizontal.
120. Under rational expectations, government policy can be effective: a. if it is rationally thought out before implementation. b. if it is anticipated, so people can make realistic preparations. *c. if it surprises people when it occurs. d. whenever the economy reacts rationally to the decision.
121. The set of ideas known as the new Keynesian economics states that: a. markets clear in the short run because prices adjust whenever there are surpluses or shortages. *b. market imperfections tend to make prices sticky in the short run. c. markets tend to be in equilibrium because of the inherent forces in the economy. d. wage-price inflation is the main problem that most economies face in the short run.
122. The rational expectations theory states that individuals and firms make
decisions by taking everything into account. Thus: a. if it's clear that the government intends to trade off higher inflation for lower unemployment, the public will understand this and help the government achieve its goal. *b. if it's clear that the government intends to trade off higher inflation for lower unemployment, the public will understand this and inflation expectations will immediately rise. c. a government attempt to trade off higher inflation for lower unemployment would not work in the short run but would be fine in the long run. d. if people are not expecting inflation and are unaware of government policies, inflation expectations are not going to be embedded.
123. According to rational expectations, monetary policy is: a. always effective. *b. effective only if it is unexpected. c. ineffective compared to fiscal policy. d. effective only when fiscal policy accommodates it.
124. The theory of rational expectations is consistent with which statement? a. It takes into account only current inflation information. b. It takes into account only past inflation information. *c. It takes into account past rates of inflation and available information about monetary and fiscal policy. d. A government attempt to trade off higher inflation for lower unemployment would work in the short run but would eventually fail because higher inflation would get built into expectations.
125. The theory of rational expectations states that: a. people make decisions optimally as often as they make decisions less than optimally. b. expectations about future real wages are often irrational. *c. people make decisions using all available information. d. designing effective economic policy is very difficult because of the lack of sufficient information.
126. Rational expectations suggest people and firms: a. base their expectations on the recent past. b. base their expectations on government announcements. c. base their expectations on “animal spirits.”
*d. take all available information into account when forming their expectations.
127. According to the theory of rational expectations, individuals will respond to
expansionary monetary policy by: a. predicting a lower rate of inflation. *b. predicting a higher rate of inflation. c. predicting no change in the rate of inflation. d. incorrectly forecasting what will happen to the price level and employment.
128. The theory of rational expectations contends that policy activism is: a. not warranted, because we don't know enough about the workings of the economy to stabilize it. *b. not warranted; the public defeats discretionary policies because everyone expects them and therefore their effectiveness is thwarted. c. warranted, because discretionary policies have a strong effect on real output. d. warranted, because expectations are rational only in the short run.
129. An hypothesis that assumes that individuals form expectations about the future
based on available information and that individuals act on that information is called the: a. irrational forecasts hypothesis. b. rational information theory hypothesis. *c. rational expectations hypothesis. d. rational abstention hypothesis.
130. Rational expectations theory asserts that because people have rational
expectations, if a policy of reducing the money supply is used: a. it might affect both AD and potential real GDP. *b. consumers and firms observe that the money supply has fallen, anticipate the eventual reduction in the price level, and adjust their expectations accordingly. c. participants in economic activity react in such a way that shifts in aggregate supply will reinforce shifts in aggregate demand, and real GDP will shift inevitably into inflationary or recessionary gaps. d. periods of unemployment will be very short.
131. Proponents of the theory of rational expectations contend that:
*a. people make rational forecasts using existing information. b. business cycles are generally caused by shifts in aggregate demand. c. full employment is rarely achieved. d. stickiness of prices is the primary cause of inflation.
132. Proponents of rational expectations believe that: a. changes in AD cause business cycles. *b. people will not be surprised by systematic monetary and fiscal policies. c. the economy will have to undergo long periods of unemployment during recessions. d. the velocity of money does not exist.
133. According to the theory of new classical economics, if productivity decreases,
the aggregate supply curve _________ and the price level rises, while aggregate output _________. a. shifts right; increases b. shifts left; remains constant c. shifts right; decreases *d. shifts left; decreases
134. The real business cycle theorists say that changes in total factor productivity
are totally the result of: a. depressions. b. shifts in aggregate supply. c. shifts in aggregate demand. *d. uneven technological progress.
135. According to the real business cycle theory, fluctuations in output are caused
by: *a. fluctuations in the growth rate of total factor productivity. b. changes in aggregate demand. c. changes in the money supply. d. discretionary fiscal policy.
136. Real business cycle theory argues that: a. changes in inventories are the cause of the business cycle. *b. fluctuations in the rate of growth of total factor productivity cause the business cycle.
c. aggregate demand is more important than aggregate supply in identifying the causes of the business cycle. d. changes in the money supply are the primary cause of the business cycle.
137. According to the real business cycle theory, the only source of fluctuations in
real output are changes in the: a. level of investment spending by manufacturing firms. *b. rate of growth of total factor productivity c. rate of growth of the aggregate price level. d. level of spending on durable goods by households.
138. Real business cycle theory suggests the business cycle is caused by: a. discretionary monetary policy. *b. fluctuations in the rate of productivity. c. “animal spirits.” d. protectionism.
139. Real business cycle theory suggests that changes in: a. aggregate demand cause business cycles. *b. the growth of factor productivity cause business cycles. c. fiscal policy cause business cycles. d. monetary policy cause business cycles.
140. If real business cycle theory uses an upward-sloping aggregate: a. demand curve, then aggregate supply is an important consideration. b. demand curve, then aggregate supply is irrelevant. c. supply curve, then aggregate demand is irrelevant. *d. supply curve, then aggregate demand is relevant.
141. Real business cycle theory contends that the aggregate: *a. supply curve is vertical, and it shifts to left when there is a recession. b. demand curve is vertical, and it is the main factor that causes the business cycles. c. supply curve is horizontal, indicating that the business cycles have been stabilized. d. demand curve is downward sloping, which shows that productivity growth is slowing down causing the business cycles.
142. According to the classical economists, the short-run aggregate supply curve is
_________, while according to the Keynesian economists, the short-run aggregate supply curve is _________. *a. vertical; upward sloping b. downward sloping; vertical c. vertical; horizontal d. upward sloping; horizontal
143. Which is TRUE? a. Keynesian macroeconomists focused on the long-run effects of monetary policy on the aggregate price level, ignoring any shortrun effects on aggregate output. b. Classical macroeconomists focused on the short-run effects of monetary policy on the aggregate price level, ignoring any longrun effects on aggregate output. *c. Classical macroeconomists focused on the long-run effects of monetary policy on the aggregate price level, ignoring any shortrun effects on aggregate output. d. Keynesian macroeconomists focused on the long-run effects of fiscal policy on the aggregate price level, ignoring any shortrun effects on aggregate output.
144. The aggregate supply curve is: *a. vertical in the short run, according to the classical economists, but according to Keynes it is upward sloping in the short run. b. upward sloping in the short run, according to the classical economists, but according to Keynes it is vertical in the short run. c. horizontal in the short run, according to Keynes, but according to classical economists it is upward sloping in the short run. d. always vertical, according to the Keynesian theory, but the classical economists believed it to be downward sloping in the long run.
145. Which group of economists disagrees with discretionary monetary policy in
favor of a monetary rule that prescribes a slow increase in the money supply? a. Keynesians *b. monetarists c. supply-side economists d. classical economists
146. Which theory is consistent with the notion that the short-run aggregate supply
curve may be vertical after all?
a. Keynesian theory *b. new classical economics c. new Keynesian theory d. real business cycle theory
147. “A consistent countercyclical policy has no effect on employment and output,
since individuals will recognize those policies as systematic and will anticipate them correctly.” This statement is most closely associated with: a. classical theory. b. Keynesian theory. *c. rational expectations theory. d. monetarist theory.
148. The macroeconomic theory that because workers and firms take all
information into account, only unexpected changes in the money supply affect aggregate output is called: a. real business cycle theory. *b. rational expectations theory. c. new classical theory. d. supply-side theory.
149. Joseph is an economist who believes that changes in the business cycle can
be attributed to shifts in the vertical aggregate supply curve. These shifts are caused by faster or slower increases in economic productivity. Joseph is best described as an economist who supports the _____ theory. a. rational expectations b. supply-side *c. real business cycle d. new Keynesian
150. Nancy is an economist who believes that the best way to grow the economy is
through tax cuts to increase the incentive to work and invest. Though these tax cuts might initially increase the budget deficit, Nancy is convinced that the economic growth that results will actually increase government tax revenue. Nancy is best described as a: a. monetarist. b. classical economist. c. new Keynesian economist. *d. supply-side economist.
151. Classical economists focused on short-run effects of monetary policy. a. True *b. False
152. Classical macroeconomists focused on the long-run effects of monetary policy on the aggregate price level and ignored any short-run effects on aggregate output. *a. True b. False
153. Classical economics is based primarily on the works of John Maynard Keynes. a. True *b. False
154. If the unemployment rate rose, a classical economist would counsel the government to do nothing. *a. True b. False
155. The experience of the Great Depression led to the widespread acceptance of classical economics. a. True *b. False
156. Keynes emphasized short-run effects of aggregate demand on aggregate output. *a. True b. False
157. According to Keynes, changes in business confidence are often responsible for business cycles. *a. True b. False
158. Keynesian economics was mostly concerned with the short run. *a. True b. False
159. Keynesian theory argued that monetary policy could be very effective during a depression. a. True *b. False
160. Monetarists argue that discretionary monetary policy does more harm than good. *a. True b. False
161. Monetarism asserts that GDP will grow steadily if the money supply grows steadily. *a. True b. False
162. A monetarist rule would be to vary the money growth rate between set limits like 3 percent to 5 percent annual growth. a. True *b. False
163. Most economists favor discretionary monetary policy because the velocity of money has been very stable since the 1980s. a. True *b. False
164. The natural rate hypothesis suggests there are limits to what macroeconomic policy can achieve. *a. True b. False
165. According to the natural rate hypothesis, attempts to keep unemployment below the natural rate will lead to increasing inflation. *a. True b. False
166. Prior to the 1930s, classical economics was the predominant theory about the behavior of the aggregate price level, aggregate output, and the appropriate role of monetary policy. Describe how classical
economists believed the economy would be affected by an increase in the money supply. Correct Answer:
The classical economists believed that the aggregate supply curve was vertical in the long run and that the economy tended to be at potential output. If the money supply increased, interest rates would fall and aggregate demand would increase. The classical economist might agree that in the short run output (GDP) would increase along the upward sloping SRAS, but in the long run, the SRAS would shift to the left until the economy was back to potential output. However, this increase in AD and subsequent decrease in SRAS would lead to inflation. Thus the classical economists believed that increasing the money supply would not increase long-run output, it would only cause inflation. 167. Why does the adoption of Keynesian economics come out of the Great Depression? Correct Answer:
Prior to the Great Depression, the predominant view of the economy was the classical view. This view stressed that in the long run, the economy would tend toward full employment or potential GDP. The economic slowdown of the Depression should have, according to the classical economists, self-corrected. In reality, the Great Depression, in terms of both its length and its severity, demonstrated that such a dramatic decrease in aggregate demand necessitated government intervention. Keynes argued that the government should and could actively shift the aggregate demand curve to the right to fight recessions rather than let them turn into something like the Great Depression. 168. Explain the rational expectations theory and how it predicts the usefulness of fiscal and monetary policy. Correct Answer:
The rational expectations theory says that individuals and firms use all available information to make optimal decisions. If people hear that the government is going to increase AD to stimulate the economy and lower the unemployment rate, people will expect some inflation. This inflation expectation will immediately affect wages, interest rates, and other input prices, shifting the SRAS to the left, and thus fulfilling the inflation expectation. The decrease in SRAS will negate the expansionary policy, making it ineffective. Robert Lucas argued that monetary policy would be effective only if it was a surprise to the public rather than announced in advance. 169. The economy is in a recession. The head economist for the president is an ardent proponent of the real business cycle theory. What will this real business cycle economist recommend or not recommend? Explain. Correct Answer:
This economist believes that the source of fluctuations in the business cycle is changes in productivity. So a recession is due to a decrease in productivity that has shifted the vertical AS curve to the left. This economist will therefore advocate policies to increase productivity. He or she will not recommend discretionary fiscal or monetary policy because those would cause inflation without increasing GDP.
170. Classical economists believed that wages and prices were: a. inflexible, and as a result, the aggregate supply curve was vertical. b. inflexible, and as a result, the aggregate demand curve was vertical. c. flexible, and as a result, the aggregate demand curve was vertical. *d. flexible, and as a result, the aggregate supply curve was vertical.
171. Prior to the Great Depression, many policy makers: a. believed activist policies were important to the well-being of an economy. b. focused on short-run economic problems. *c. believed that long-run economic performance was the most important goal. d. believed economies always performed below their potential output level.
172. Classical economists believe that: a. the long-run aggregate supply curve is vertical, but the short-run aggregate supply curve is horizontal. b. fiscal policy changes are best at controlling the business cycle. c. increases in the money supply will increase output. *d. prices are flexible.
173. Classical economists believe that: *a. monetary policy is not useful in fighting recessions. b. discretionary fiscal policies are useful for dampening business cycle fluctuations. c. rational expectations are held by most of the public. d. short-run goals are more important than long-run goals.
174. Those who believe in the classical model suggest that expansionary policies
would result in increases in:
a. output and the aggregate price level. b. output with no change in the aggregate price level. *c. the aggregate price level with no change in output. d. unemployment and the output level.
175. Keynes believed that: a. monetary policies had the greatest impact on the economy. b. long-run effects were most important and activist policies were most likely to be detrimental. c. business decisions could be understood if policy makers did not use activist policies. *d. short-run effects were important and that changes in aggregate demand could affect output and price levels.
176. For Keynes, changes in aggregate demand had their greatest impact: a. on the aggregate price level. b. in the long run. *c. on the aggregate output level. d. equally on the aggregate output level and the aggregate price level.
177. Keynes believed that “animal spirits,” or confidence levels had their greatest
impact on: *a. investment. b. government. c. monetary policy officials. d. the foreign sector.
178. Someone who believes in macroeconomic policy activism is likely to suggest
that: a. changes in the money supply or changes in fiscal policy will most likely destabilize the economy. b. balancing the government deficit is more important than current economic problems. c. keeping the money supply growing at a constant rate would help the economy. *d. changes in monetary or fiscal policy would smooth out the business cycle.
179. Keynesians believed that the economy could get out of the Great Depression
if: a. monetary policy was focused on the use of a monetary rule. b. fiscal authorities worked at balancing the budget.
*c. government spent enough to offset the drop in spending in both the consumption and investment sectors. d. expansionary monetary policy was used.
180. For the most part, Keynesians believe that: a. monetary policy is best at fighting recessions. *b. fiscal policy is best at fighting recessions. c. a monetary rule is best for evening out the business cycle. d. balancing the budget is the best policy for fighting a recession.
181. Monetary policy: a. can be made more effective with the presence of a liquidity trap. *b. is less hampered by the political process than fiscal policy. c. has been proven to be an ineffective tool in controlling business cycles. d. works well only if it is well coordinated with fiscal policy efforts.
182. Monetarists believe that: a. short-run problems are not likely to occur. b. GDP fluctuations will be less pronounced if the Federal Reserve uses discretionary monetary policy. c. price fluctuations are likely to occur in the short or long run. *d. GDP will grow steadily if the money supply grows steadily.
183. A monetary policy rule: *a. occurs when the central bank pursues a formula that determines its actions. b. brings politics into the monetary policy process. c. is the same as discretionary monetary policy. d. is likely to be advocated by Keynesians.
184. The belief that government spending will crowd out private spending is part of: a. new Keynesian economics. b. Keynesian economics. c. monetary policy. *d. monetarism.
185. According to the natural rate hypothesis:
*a. once inflation is built into expectations, a policy aimed at lowering unemployment below the natural rate would lead to accelerating inflation. b. the natural rate of unemployment is above the NAIRU. c. once inflation is embedded in the public's expectations, it will stop accelerating. d. changes in discretionary policy aimed at increasing GDP will have no impact on inflation expectations.
186. A policy maker who aims at maintaining unemployment at 5 percent while the
NAIRU for this economy is 4 percent will most likely find the economy running into: *a. deflation. b. inflation. c. a much higher output level. d. a much lower unemployment level.
187. The political business cycle is MOST often found when: a. monetary policy is used. b. monetary rule is implemented. *c. activist macroeconomic policy is followed. d. macroeconomic policies are based on technical findings such as those reported by Friedman and Schwartz.
188. The belief that individuals and firms make their decisions optimally using all
available information: a. is an assumption made by Keynesian economists. *b. is referred to as rational expectations. c. leads to the conclusion by some new classical economists that discretionary policies work best. d. is known as the real business cycle.
189. Rational expectations theory suggests that: a. monetary policy that is expected will have the greatest impact on changing output levels. *b. policies that are expected will have no effect on output or unemployment. c. economic agents take into account past actions in order to make their current decisions. d. discretionary policies are best at bringing about changes in output.
190. The belief that fluctuations in the rate of growth of factor productivity cause the
business cycle is:
a. new classicalism. b. monetarism. c. Keynesianism. *d. the real business cycle theory.
1. Which statement is broadly agreed upon by modern macroeconomists? a. A monetary rule can effectively increase real GDP. b. Discretionary fiscal policy is typically more effective than monetary policy in fighting recessions. c. A nation's central bank should be managed by elected officials. *d. Discretionary monetary and fiscal policy cannot affect the long-run level of unemployment.
2. Which statement is broadly agreed upon by modern macroeconomists? *a. Monetary and fiscal policy can both be effective at decreasing unemployment in the short run but not in the long run. b. Discretionary fiscal policy is typically an effective remedy for a recessionary gap except in special circumstances. c. The central bank should pursue a policy of a specific target rate of inflation. d. A monetary rule should be pursued by the central bank.
3. Which school of economic thought answered NO to all five key questions about
whether macroeconomic policy, either monetary or fiscal, can help fight recession, reduce unemployment, or should be used in a discretionary way? *a. classical macroeconomics b. Keynesian c. rational expectations d. monetarism
4. Which school of thought is the MOST likely to advocate the use of fiscal policy in
fighting recessions? a. classical macroeconomics *b. Keynesian c. rational expectations d. monetarism
5. Nearly all economists agree that increases in money supply can ______
aggregate ______. a. increase; supply b. decrease; supply c. decrease; demand *d. increase; demand
6. Nearly all economists agree that decreases in money supply can ______
aggregate ______.
a. increase; supply b. decrease; supply *c. decrease; demand d. increase; demand
7. Nearly all economists agree that increases in government spending can ______
aggregate ______. a. increase; supply b. decrease; supply c. decrease; demand *d. increase; demand
8. Nearly all economists agree that expansionary fiscal policy can ______
aggregate ______. a. increase; supply b. decrease; supply *c. increase; demand d. decrease; demand
9. The belief that expansionary monetary policy is NOT at all helpful to the economy
in fighting recessions is attributed to: *a. classical macroeconomics. b. Keynesian macroeconomics. c. monetarism. d. Great Moderation consensus.
10. Using increased government spending and tax cuts to fight a recession is
consistent with which school(s) of thought? a. classical b. classical and monetarist c. classical and Keynesian *d. Keynesian and Great Moderation consensus
11. The belief that neither monetary nor fiscal policy can reduce unemployment is
consistent with which school of thought? a. Keynesian *b. classical c. rational expectations d. Great Moderation consensus
12. If a contraction in aggregate demand creates a recession, the Great Moderation
consensus on macroeconomics suggests that: a. fiscal discipline and a balanced budget eventually stimulates aggregate demand. b. fiscal policy should take the leading role in economic stabilization. *c. the use of discretionary fiscal policy is counterproductive except in special circumstances. d. monetary discipline and a reduction in the money supply eventually stimulates aggregate demand.
13. To close an inflationary gap, the Great Moderation consensus on
macroeconomics suggests that: a. a close coordination of fiscal and monetary policy is crucial. b. the automatic fiscal stabilizers are powerful enough to bring the economy back to equilibrium. c. policy makers should wait until a negative productivity shock brings the economy back to equilibrium. *d. monetary policy should take the leading role in economic stabilization.
14. The Great Moderation consensus about macroeconomic policy was that
monetary policy: *a. is effective. b. can reduce the unemployment rate. c. makes the economy unstable. d. should follow a policy rule.
15. Which view of the macro economy holds that since the long-run growth of real
GDP is 3 percent, the money supply should grow at 3 percent? a. classical b. Keynesian *c. monetarist d. Great Moderation consensus
16. Which view of macroeconomics holds that a decrease in the money supply will
reduce inflationary pressure? a. classical *b. Keynesian c. monetarist d. rational expectations
17. The recommendation that a decrease in taxes will alleviate a recessionary gap
is consistent with which view of macroeconomics? a. classical *b. Keynesian c. monetarist d. Great Moderation consensus
18. The recommendation that the government should avoid deficit spending
because of the crowding-out effect on investment spending is consistent with which view of macroeconomics? a. classical b. Keynesian *c. monetarist d. Great Moderation consensus
19. The recommendation to use monetary policy to stabilize the economy and use
fiscal policy only when monetary policy is ineffective is consistent with which view of macroeconomics? a. classical b. Keynesian c. monetarist *d. Great Moderation consensus
20. The Great Moderation consensus about macroeconomic policy is that: a. only monetary policy works against recessions, but fiscal policy is effective only in the long run. b. expansionary monetary and fiscal policies can both reduce unemployment in the long run. *c. expansionary monetary and fiscal policies are both effective in the short run but not in the long run. d. discretionary monetary and fiscal policies are effective in the short run and in the long run.
21. The Great Moderation consensus is that: a. fiscal policy should play the main role in stabilization policy. *b. monetary policy should play the main role in stabilization policy. c. automatic stabilizers should be the only type of policy used. d. government budgets should always be balanced.
22. Which statement describes the view of most macroeconomists in the Great
Moderation consensus? *a. Monetary policy can be used to shift aggregate demand to the right and fight recessions. b. Fiscal policy is ineffective when the money supply is held constant. c. The government should seek to balance the budget regardless of the state of the economy. d. Discretionary fiscal policy should play the main role in stabilization policy.
23. Which statement describes the view of most macroeconomists in the Great
Moderation consensus? a. Expansionary fiscal policy is ineffective at fighting recessions. b. Expansionary monetary policy is ineffective at fighting recessions. c. Monetary policy cannot be used to shift aggregate demand to the right. *d. Monetary policy will be ineffective at keeping unemployment permanently below the natural rate.
24. Which statement describes the view of most macroeconomists in the Great
Moderation consensus? a. Fiscal policy is ineffective at shifting aggregate demand. *b. Monetary policy should play the main role in stabilization policy. c. Decisions at the central bank should be made by popularly elected officials, so that the decisions of monetary policy will be subject to political influence. d. Changes in the money supply have no effect on aggregate output.
25. In the 1970s and first half of the 1980s the U.S. economy experienced ______
inflation and ______ unemployment. *a. high; high b. high; low c. low; high d. low; low
26. The period of relative calm in the economy between 1985 and 2007 is called
the: a. Great Depression. *b. Great Moderation.
c. Great Recession. d. Great Modernization.
27. The economic slump that followed the 2008 financial crisis is called the: a. Great Depression b. Great Moderation. *c. Great Recession. d. Great Modernization.
28. The school of thought that believes that monetary policy should be the main tool
of stabilization, is skeptical about the use of fiscal policy, and recognizes constraints on policy imposed by the natural rate of unemployment and the political business cycle is: a. classical macroeconomics. b. Keynesian macroeconomics. c. monetarism. *d. the Great Moderation consensus.
29. According to the Great Moderation consensus:
I. monetary policy should be the main stabilization tool II. the natural rate of unemployment doesn't actually exist *a. I only b. II only c. I and II d. neither I nor II
30. According to the Great Moderation consensus:
I. fiscal policy should be the main stabilization tool II. the effectiveness of economic policy is limited by the political business cycle a. I only *b. II only c. I and II d. neither I nor II
31. The Great Moderation consensus regarding the use of monetary policy to fight
recessions is that expansionary monetary policy: a. is ineffective because the public expects it. b. is harmful because it only increases the aggregate price level.
c. has little impact on aggregate demand because of liquidity traps. *d. can be used to increase aggregate demand but at the cost of higher aggregate prices.
32. Which school of thought believes that expansionary monetary policy is effective
in fighting recessions? I. classical macroeconomics II. Great Moderation consensus a. I only *b. II only c. I and II d. Neither I nor II
33. Which school of thought believes that expansionary monetary policy only affects
prices and not output? I. classical macroeconomics II. Great Moderation consensus *a. I only b. II only c. I and II d. neither I nor II
34. Which school of thought believe that expansionary monetary policy has very
little, if any, effect on output? I. Keynesian macroeconomics II. Great Moderation consensus *a. I only b. II only c. I and II d. neither I nor II
35. Most economists now agree that: a. the government should seek to balance its budget. *b. fiscal policy can shift aggregate demand. c. fiscal policy can change the natural rate of unemployment. d. fiscal policy should be conducted by the Federal Reserve.
36. Which school of thought believes that fiscal policy should have the central role
in fighting recessions? I. classical macroeconomics II. Keynesian macroeconomics III. monetarism a. I only *b. II only c. III only d. I, II, and III
37. Most economists today believe that: a. the Federal Reserve should be abolished. b. fiscal policy can permanently keep the unemployment rate below the natural rate of unemployment. c. the federal government should always balance its budget. *d. the federal government should not seek to balance the budget annually, but let it function as an automatic stabilizer.
38. Which represents the consensus among most economists today with respect to
the management of unemployment? a. Government can't do anything about it. b. Expansionary policy can be used to achieve permanently low unemployment. *c. Unemployment cannot be kept below the natural rate. d. Unemployment cannot be kept anywhere near the natural rate.
39. The Great Moderation consensus regarding the use of monetary or fiscal policy
to reduce unemployment in the long run is that: a. unemployment can be constantly decreased as long as expectations of inflation are kept low. *b. the natural rate of unemployment limits what monetary and fiscal policy can accomplish. c. the concept of the nonaccelerating inflation rate of unemployment, or NAIRU, was a mistake. d. the only effective policy is to maintain a constant growth rate of the money supply.
40. Nearly all economists agree that fiscal policy: *a. cannot keep the economy below the natural rate of unemployment. b. cannot keep the economy above the natural rate of unemployment.
c. can be used to keep the economy right at the natural rate of unemployment. d. can be used to keep the economy on the production possibility curve.
41. Which does NOT represent the broad consensus among macroeconomists? a. Monetary policy should play the main role in stabilization policy. b. The central bank should be independent, insulated from political pressures, to avoid a political business cycle. c. Discretionary fiscal policy should be used sparingly because of policy lags and the risks of the political business cycle. *d. Discretionary fiscal policy can lower the natural rate of unemployment.
42. Most economists believe that discretionary fiscal policy should be used
sparingly because of the risk of: a. budget deficits. *b. lags in adjusting policy, so that policies designed to fight a recession may end up intensifying an inflationary gap. c. budget surpluses. d. sacrificing equity for efficiency.
43. The Great Moderation consensus among macroeconomists is that fiscal policy
should be used sparingly because: a. it cannot be effective. *b. of policy lags. c. it always destabilizes the economy. d. of the risk of government waste.
44. The Great Moderation consensus among macroeconomists is that fiscal policy
should be used sparingly because: a. monetary policy is always more effective. b. it always requires higher taxes. *c. lags in adjusting to fiscal policy can make it counterproductive. d. of the risk of government waste.
45. Discretionary fiscal policy may be counterproductive because: a. the countercyclical nature of such policies sometimes reduces their effectiveness. b. in the short run, only monetary policy is effective.
c. increases in the government budget deficit affect economic growth in the long run. *d. the various lags in fiscal policy mean that it may take effect when the economy has already recovered.
46. According to the Great Moderation consensus today, an unemployment rate of
6 percent when the natural rate is 4.5 percent should be countered by: a. decreases in government spending. b. increases in tax rates. *c. increases in the rate of growth of the money supply. d. decreases in the rate of growth of the money supply.
47. The Great Moderation consensus among macroeconomists is described by all
EXCEPT that: a. monetary policy should play the main role in stabilization policy. b. the central bank should be independent of politics. c. discretionary fiscal policy should be used sparingly. *d. monetary policy is the only way to get out of the liquidity trap.
48. Which are tenets of the Great Moderation consensus?
I. Monetary policy should be the main stabilization policy. II. The central bank should be independent of political influence. III. Discretionary fiscal policy should be used sparingly. a. I only b. II only c. III only *d. I, II, and III
49. Nearly all economists agree that central banks should: a. be subject to political control. b. be elected by voters. *c. be independent. d. play a minor role in the economy.
50. Which statement is TRUE of the state of modern macroeconomics? a. There is much more consensus than disagreement among economists. b. Inflation targeting and asset price management are incompatible duties for a central bank.
c. Congress indirectly controls the Fed and monetary policy through its annual budget allocations. *d. The Great Recession heightened the areas of disagreement among macroeconomists over key policy questions.
51. A very low rate of inflation during a recession can lead to: *a. a liquidity trap, which makes monetary policy ineffective. b. a liquidity trap, which makes monetary policy effective. c. government budget deficits. d. government budget surpluses.
52. If the Fed funds rate is only 1 percent, the economy is dangerously close to: a. an inflationary spiral. *b. a liquidity trap. c. very high unemployment. d. another recession.
53. The Great Moderation consensus was shattered by: *a. the Great Recession. b. the Great Depression. c. World War II. d. the Panic of 1907.
54. The Great Moderation consensus agreement that a decrease in the interest rate
was the best policy for fighting a recession was ineffective in the Great Recession because: *a. the Fed bought government securities, but interest rates did not fall. b. interest rates were already close to zero. c. financial institutions were engaging in maturity transformation. d. Congress increased taxes.
55. Reduction of interest rates was ineffective in fighting the Great Recession
because: a. Congress decreased government spending in order to balance the budget. b. crowding-out occurred. *c. the economy was dangerously close to a liquidity trap. d. businesses and consumers borrowed and spent so much that it caused an inflationary gap.
56. A policy of fiscal stimulus involves: a. increasing taxes and decreasing government spending. b. increasing taxes and government spending. c. decreasing taxes and decreasing government spending. *d. decreasing taxes and increasing government spending.
57. Which was an argument in favor of using discretionary fiscal policy in fighting
the Great Recession? *a. Monetary policy could not be effective, since interest rates were near zero. b. If taxes were increased, the budget could be balanced. c. If government spending decreased, the budget surplus would increase. d. The lags associated with monetary policy would be destabilizing.
58. Which was a justification for breaking with the normal presumption against using
discretionary fiscal policy during the Great Recession? a. Monetary policy would not be effective because interest rates were so high. *b. Crowding-out was not likely to be a problem in a very depressed economy with interest rates near zero. c. The economy was so depressed that a political business cycle was not likely to be a problem. d. Ricardian equivalence was likely to occur if monetary policy was used alone.
59. During the Great Recession policy makers were not as worried as usual about
the lags associated with discretionary fiscal policy because: a. the severity of the recession led Congress to pledge to pass a bipartisan spending package immediately. b. businesses had pledged to respond quickly to the lower interest rates. *c. the economy was likely to depressed for a long time, so the lags were not likely to be as destabilizing as usual. d. the financial sector of the economy was not affected by the recession and was ready to make loans to consumers and businesses.
60. The argument that households and firms view an increase in government
spending as a sign that taxes will rise in the future and decrease current spending in anticipation of higher future taxes is called:
a. debt overhang. b. the natural rate hypothesis. c. supply-side economics. *d. Ricardian equivalence.
61. Cutting government spending in order to increase private-sector confidence,
which would lead to increases in output and employment is called: *a. expansionary austerity. b. expansionary monetary policy. c. Ricardian equivalence. d. new Keynesian economics.
62. One of the impacts of the budget deficits that resulted from the fiscal stimulus of
2009 was that: a. the public debt decreased. *b. interest rates remained very low. c. interest rates increased to record high levels. d. crowding-out occurred.
63. The monetary policy in which the Fed purchased assets other than short-term
government securities is called: a. maturity transformation. b. shadow banking. *c. quantitative easing. d. debt overhang.
64. When the Fed pursues a policy of quantitative easing, it: a. is trying to increase interest rates. b. is trying to decrease inflation. c. purchases short-term government securities. *d. purchases long-term debt whose interest rates are significantly above zero.
65. One argument in favor of quantitative easing is that: *a. long-term interest rates have more influence over private spending than short-term interest rates. b. short-term interest rates have more influence over private spending than long-term rates. c. the private sector, not the Federal Reserve, should determine interest rates. d. it decreases the budget deficit.
66. Opponents of quantitative easing argued that the: a. contractionary monetary policy would cause unemployment. *b. expansionary monetary policy would cause inflation. c. contractionary monetary policy would cause inflation. d. expansionary monetary policy would cause unemployment.
67. In response to the financial crisis of 2008, the Federal Reserve: a. only followed a conventional monetary policy. b. reduced the scale of its operations. c. ceased providing liquidity to banks. *d. made large-scale purchases of private assets.
68. The claim that reducing deficits in an economy with high rates of unemployment
will help the economy even in the short run by improving confidence is called: a. quantitative easing. b. fiscal stimulus. *c. expansionary austerity. d. a credit crunch.
69. Proponents of expansionary austerity cite the experience of _________ in the
late 1980s as proof of its effectiveness. a. Japan b. China c. the United States *d. Ireland
70. In the late 1980s, Ireland: *a. cut government spending and increased taxes and experienced a sharp increase in economic growth. b. increased government spending and decreased taxes and experienced a sharp increase in economic growth. c. cut government spending and taxes and experienced a sharp decrease in economic growth. d. increased government spending and taxes and experience a sharp decrease in economic growth.
71. Expansionary austerity worked well in Ireland in the late 1980s because: a. interest rates in Ireland were very low initially, and they were able to decrease their exports.
*b. interest rates in Ireland were initially high, and they were able to increase their exports. c. the Irish increased government spending as part of their expansionary austerity policy. d. they abandoned the euro.
72. In the 1970s and first half of the 1980s the U.S. economy experienced high inflation and high unemployment. *a. True b. False
73. In the 1970s and first half of the 1980s the U.S. economy experienced low inflation and low unemployment. a. True *b. False
74. The period of relative calm in the economy between 1985 and 2007 is called the Great Moderation. *a. True b. False
75. The economic slump that followed the 2008 financial crisis is called the Great Modernization. a. True *b. False
76. The school of thought that believes that monetary policy should be the main tool of stabilization policy and is skeptical about the use of discretionary fiscal policy is the Great Moderation consensus. *a. True b. False
77. According to the Great Moderation consensus fiscal policy should be the economy's main stabilization tool. a. True *b. False
78. According to the Great Moderation consensus the effectiveness of economic policy is limited by the political business cycle. *a. True
b. False
79. Economists that agree with the Great Moderation consensus believe that monetary policy is able to permanently keep unemployment below the natural rate. a. True *b. False
80. The Great Moderation consensus believes that expansionary monetary policy is effective in fighting recessions. *a. True b. False
81. The Great Moderation consensus includes the belief that expansionary monetary policy only affects prices and not output. a. True *b. False
82. The Keynesian school of thought believes that expansionary monetary policy has very little, if any, effect on output. *a. True b. False
83. Classical macroeconomists believed that fiscal policy was even less effective than monetary policy in fighting recessions. *a. True b. False
84. Monetarists argued that fiscal policy was ineffective if the money supply increased simultaneously. a. True *b. False
85. Most economists believe that the budget should not be balanced annually, but should be allowed to function as an automatic stabilizer. *a. True b. False
86. Classical macroeconomists believed that government could reduce the unemployment rate to a permanently low rate. a. True *b. False
87. Some Keynesian economists believed that the government could reduce the unemployment rate to a permanently low rate at the cost of some inflation. *a. True b. False
88. Most economists today believe that the appropriate monetary and/or fiscal policy can permanently reduce the unemployment rate to below the natural rate. a. True *b. False
89. Most economists today believe that effective monetary and fiscal policy can limit fluctuations of the actual unemployment rate around the natural rate, but they are unable to keep unemployment permanently below the natural rate. *a. True b. False
90. Monetary and fiscal policy can be used to reduce the natural rate of unemployment. a. True *b. False
91. The Great Moderation consensus includes the belief that fiscal policy has no effect on aggregate demand. a. True *b. False
92. The Great Moderation consensus includes the belief that discretionary fiscal policy can be destabilizing because of lags in adjusting policy. *a. True b. False
93. The Great Moderation consensus includes the belief that discretionary fiscal policy can be destabilizing because of the political business cycle. *a. True b. False
94. Discretionary fiscal policy may destabilize the economy because of lags in implementing policy and lags in the effect of fiscal policy on the economy. *a. True b. False
95. The Great Moderation consensus on macroeconomics includes the idea that the central bank should be independent of politics. *a. True b. False
96. Most economists agree that the Federal Reserve should remain independent so that it is insulated from political pressure. *a. True b. False
97. Classical macroeconomists believed that monetary policy should be used to fight recessions. a. True *b. False
98. Keynesian economists didn't oppose the use of discretionary monetary policy, but they felt that it was ineffective in fighting recessions. *a. True b. False
99. The Great Moderation consensus includes the belief that the policy makers of the central bank should be elected so that they are responsible to the voters. a. True *b. False
100. Economists generally believe that fiscal policy should be the primary tool for stabilizing the economy. a. True *b. False
101. Economists generally believe that monetary policy can stabilize the economy but not reduce unemployment below its natural rate. *a. True b. False
102. When interest rates are very high, the economy is in a liquidity trap, and monetary policy may be ineffective in fighting a recession. a. True *b. False
103. The policies that seemed to be effective during the Great Moderation seemed to be inadequate to fight the severe economic impacts of the Great Recession. *a. True b. False
104. Stimulus refers to expansionary fiscal policy. *a. True b. False
105. Many economists argued against using discretionary fiscal policy during the Great Recession because interest rates were very low, and fiscal policy is ineffective when interest rates are near zero. a. True *b. False
106. Many economists favored using discretionary fiscal policy during the Great Recession because traditional monetary policy could not be used when interest rates were near zero. *a. True b. False
107. A policy of expansionary austerity involves increasing government spending in order to increase private-sector confidence, leading to an increase in output and employment.
a. True *b. False
108. The Ricardian equivalence argument says that households and businesses view any increase in government spending as a sign that tax burdens will increase in the future, which will cause a decrease in private spending in anticipation of higher future taxes. *a. True b. False
109. Purchases and sales of short-term Treasury bills by the Fed are called quantitative easing. a. True *b. False
110. The purpose of quantitative easing was to drive down long-term interest rates, which are usually more important for private investment spending than short-term rates. *a. True b. False
111. The economy is in a recession. The head economist for the president is a student of economic history, and his economic philosophy tends to follow the Great Moderation consensus of what we have learned about the business cycle. What will this economist recommend or not recommend? Explain. Correct Answer:
This economist will likely recommend both discretionary fiscal and discretionary monetary policy to stimulate the economy. This economist believes that aggregate demand can be shifted to the right through active fiscal and/or monetary policy and that real GDP can be increased. If there is a chance of a liquidity trap, the monetary policy would be ineffective and would not be recommended. 112. The economy is booming and under inflationary pressure. There is also a budget surplus. The head economist for the president is a proponent of classical economics. What will this classical economist recommend or not recommend? Will she advocate balancing the budget? Explain. Correct Answer:
First and foremost, this economist believes that this booming economy is a short-run event and the economy will eventually slow down to the NAIRU. Thus she will advocate a stay-the-course policy, not a discretionary policy to slow down the economy. She will not advocate balancing the budget. With a surplus, this would
involve either lower taxes or more government spending. These policies would only shift AD further to the right, worsening the inflation and lengthening the time that it would take for the economy to adjust back to the NAIRU. In time, as the economy slows down, the budget surplus will return to being nearly balanced on its own. 113. The economy is in a recession. The head economist for the president is an ardent proponent of classical economics. What would this classical economist recommend or not recommend? Explain. Correct Answer:
This economist would probably not recommend any action, fiscal or monetary. He or she believes that this is just a short-run problem and that this recessionary gap will not exist in the long run. In other words, the economy will self-correct. 114. The economy is in a recession. The head economist at the central bank is concerned about the growing possibility of a liquidity trap. The head economist for the president is an ardent Keynesian. What will this Keynesian economist recommend or not recommend? Explain. Correct Answer:
A Keynesian will recommend direct expansionary fiscal and monetary policy. However, if there is a chance of a liquidity trap, expansion of the money supply will be ineffective. Therefore this economist is likely to suggest lower taxes, more government spending, or both. 115. The economy is under inflationary pressure. The head economist for the president is a staunch Keynesian. What will this Keynesian recommend or not recommend? Explain. Correct Answer:
This Keynesian will likely recommend discretionary fiscal policy to relieve the inflation. This might include a decrease in government spending or an increase in taxes to shift AD to the left. This economist might also be in favor of a discretionary decrease in the money supply to fight the inflation. He or she would certainly not advocate a hands-off classical or monetarist approach. 116. The economy is in a recession. The head economist for the president is an ardent monetarist. What will this monetarist recommend or not recommend? Explain. Correct Answer:
As a monetarist, the economist believes that output will rise if the money supply is slowly and predictably increased at a fixed rate of growth. The economist will not recommend expansionary fiscal or discretionary monetary policy.
117. Many economists believe that:
a. fiscal policy can be used effectively to reduce unemployment below its natural rate. b. monetary policy can be used effectively to reduce unemployment below its natural rate. *c. discretionary fiscal policy should be used sparingly because political influence may manipulate its implementation and use. d. monetary rules are best.
118. Discretionary fiscal policy: a. is not subject to lags and therefore is effective at controlling business cycles. b. refers to changes in the money supply used to smooth out the economy's ups and downs. c. is favored by monetarists. *d. is favored by Keynesians.
119. According to the Great Moderation consensus, expansionary fiscal policy will
shift the aggregate demand curve to the: *a. right and lead to higher levels of output and employment in the short run. b. left and lead to lower levels of output and employment in the short run. c. right and lead to a higher level of output and lower level of employment in the short run. d. left and lead to a lower level of output and higher level of employment in the short run.
120. The Great Moderation consensus in macroeconomics is that: a. prices are sticky in the long run but flexible in the short run. b. decreases in aggregate output can be traced to poor monetary policy. *c. in the long run, neither monetary nor fiscal policy can reduce unemployment below the natural rate. d. monetary and fiscal policies are equally effective at curing recessions.