Test Bank for Macroeconomics: Principles, Applications and Tools Brian Rosario
Macroeconomics: Principles, Applications and Tools Tenth Edition
Arthur O’Sullivan Steven M. Sheffrin Stephen J. Perez
Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 1 Introduction: What Is Economics? 1.1 What Is Economics? 1) Economics is best defined as the study of A) financial decision-making. B) how consumers make purchasing decisions. C) the choices made by people faced with scarcity. D) inflation, unemployment, and economic growth. Answer: C Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2) Economics is the study of A) how to invest in the stock market. B) how society uses limited resources. C) the role of money in markets. D) how government officials decide which goods and services are produced. Answer: B Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) Scarcity can best be defined as a situation in which A) there are no buyers willing to purchase what sellers have produced. B) there are not enough goods to satisfy all of the buyers' demand. C) the resources we use to produce goods and services are limited. D) there is more than enough money to satisfy consumers' wants. Answer: C Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
4) An arrangement that allows buyers and sellers to exchange things is called A) a contract. B) a market. C) money. D) efficient. Answer: B Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 5) Because resources are limited A) only the very wealthy can get everything they want. B) firms will be forced out of business. C) the availability of goods will be limited but the availability of services will not. D) people must make choices. Answer: D Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 6) A trade-off refers to A) allowing the government and other organizations to choose for us. B) sacrificing one thing for another. C) deciding who consumes the products produced in an economy. D) holding other variables fixed. Answer: B Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 7) Resources are all of the following EXCEPT A) unlimited and in abundance. B) the things we use to produce goods and services. C) limited in quantity and can be used in different ways. D) scarce and therefore require choices to be made. Answer: A Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how
to think like an economist 8) The knowledge and skills acquired by a worker through education and experience is a description of which factor of production? A) physical capital B) human capital C) labor D) entrepreneurship Answer: B Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 9) The physical and mental effort people use to produce goods and services is a description of which factor of production? A) physical capital B) human capital C) labor D) entrepreneurship Answer: C Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 10) The effort used to coordinate the factors of production is a description of A) physical capital. B) human capital. C) labor. D) entrepreneurship. Answer: D Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 11) All of the following are considered natural resources EXCEPT A) a coral reef. B) gold. C) labor. D) a redwood forest. Answer: C Diff: 1
Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 12) Normative economics A) is the focus of most modern economic reasoning. B) answers the question "What ought to be?" C) predicts the consequences of alternative actions. D) answers the question "What is?" Answer: B Diff: 1 Topic: Positive versus Normative Analysis Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 13) Which of the following is an example of a normative question? A) How will an increase in the inheritance tax affect tax revenues? B) What fraction of an income tax cut will be spent on imported goods? C) Should Florida implement a state income tax to reduce its deficit? D) How will an increase in unemployment benefits affect the unemployment rate? Answer: C Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 14) Which of the following is a question answered with positive economic analysis? A) Should the college reduce tuition for out-of-state residents? B) Should the college charge higher tuition for part-time students? C) If the college increased its eligibility requirements for enrollment, will class sizes decline? D) Should the college eliminate its athletic program to cut its costs? Answer: C Diff: 2 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 15) Which of the following is a question answered with normative economic reasoning? A) If the college offers free textbooks for students, will more students read their textbooks? B) If the college provided less financial aid for out-of-state students, would more in-state
students benefit? C) If the college increased its enrollment requirements, would class size decline? D) Should the college increase tuition to fund its athletic programs? Answer: D Diff: 2 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 16) The 3 key economic questions include all of the following EXCEPT A) "what products do we produce?" B) "how do we produce these products?" C) "where should these products be produced?" D) "who consumes the products?" Answer: C Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 17) Deciding how a society's products are distributed among its citizens answers the economic question of A) "who consumes the products produced?" B) "what products will be produced?" C) "where will the products be consumed?" D) "how will the products be produced?" Answer: A Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 18) Deciding if a company will produce automobiles by robotics or manual labor answers the economic question of A) "who consumes the products produced?" B) "what products will be produced?" C) "where will the products be consumed?" D) "how will the products be produced?" Answer: D Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking
Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 19) Deciding if a power company will generate electricity from wind power or coal answers the economic question of A) "who consumes the products produced?" B) "what products will be produced?" C) "where will the products be consumed?" D) "how will the products be produced?" Answer: D Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 20) An economic model is a A) realistic version of an economic environment. B) detailed version of an economic issue. C) fictional representation of an entire economy. D) simplified representation of an economic environment. Answer: D Diff: 1 Topic: Economic Models Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 21) Economic models are used to A) explain every detail of an economic theory. B) explore decision making by individuals, firms and other organizations. C) build physical renditions of government construction projects. D) represent the complexities of economic environments. Answer: B Diff: 1 Topic: Economic Models Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
22) Talking about alternatives is the first step in a process that helps us make better choices about how we use our resources. Answer: TRUE Diff: 1 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 23) In the past few centuries, choices have led to a substantial decline in the standards of living around the globe. Answer: FALSE Diff: 1 Topic: What Is Economics? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 24) Scarcity is a situation in which resources are unlimited in quantity and can be used in different ways. Answer: FALSE Diff: 1 Topic: What Is Economics? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 25) Positive economics answers the question, "What ought to be?" Normative economics predicts the consequences of alternative actions, answering the questions, "What is?" or "What will be?" Answer: FALSE Diff: 1 Topic: Positive versus Normative Analysis Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
26) Normative economics answers the question, "What ought to be?" Positive economics predicts the consequences of alternative actions, answering the questions, "What is?" or "What will be?" Answer: TRUE Diff: 1 Topic: Positive versus Normative Analysis Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 27) Most modern economic analysis is normative in nature, but involves questions with positive aspects. Answer: FALSE Diff: 1 Topic: Positive versus Normative Analysis Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 28) Economists will always reach the same conclusion in their positive analyses. Answer: FALSE Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 29) One of the key economic questions is "where should products be produced?" Answer: FALSE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 30) One of the key economic questions is "who consumes the products?" Answer: TRUE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 31) An economic model is a detailed version of an economic environment.
Answer: FALSE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 32) Economic models explore decision making by individuals, firms and other organizations. Answer: TRUE Diff: 1 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 33) Would an economist consider clean air a scarce resource? Explain. Answer: Yes, because the air has alternative uses. We can choose to use it to either breathe or to undertake activities that pollute it. The more we want to breathe clean air the more we must limit the production of pollutants. The more we pollute the air the less we can breathe clean air. Diff: 2 Topic: What Is Economics? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 34) List and briefly describe the five factors of production. Answer: Natural resources—those resources provided by nature. Labor—the physical and mental effort used by people to produce goods and services. Physical capital—the infrastructure, equipment, machines and structures used to produce goods and services. Human capital—the knowledge and skills obtained by workers through education and experience. Entrepreneurship—the organizing and coordination of the other four factors of production needed to produce and sell products. Diff: 2 Topic: What Is Economics? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
35) Give an example of something that is scarce in your life and explain the choices you've made because of scarcity. Answer: Responses are numerous and will vary by students. Diff: 1 Topic: What Is Economics? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 36) Positive economic analysis answers what question? Answer: Positive economic analysis answers the question "what is" or "what will be." Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 37) Normative economic analysis answers what question? Answer: Normative economic analysis answers the question "what ought to be." Diff: 1 Topic: Positive versus Normative Analysis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 38) Richard runs a pizza delivery restaurant. List the three basic types of decisions studied in economics and give an example from Richard's restaurant. Answer: How to produce? With what resources will the pizzas be produced? What to produce? What sorts of pizza do people order? Who consumes the products? Which people decided to come to the restaurant on a given day? Diff: 2 Topic: The Three Key Economic Questions: What, How, and Who? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
1.2 Economic Analysis and Modern Problems 1) According to the Texas Transportation Institute, the typical U.S. commuter wastes approximately how much time per year due to traffic congestion? A) 47 hours B) 22 hours C) 42 hours D) 96 hours Answer: C Diff: 1 Topic: Economic View of Traffic Congestion Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2) In the U.S., which of the following government programs assist workers find jobs when they lose their jobs due to trade? A) Trade Adjustment Assistance program B) Social Security C) workers' compensation D) Obamacare Answer: A Diff: 1 Topic: Trade-offs from International Trade Skill: Fact AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) When Canada buys lemons from Mexico instead of growing lemons in heated greenhouses A) Canadian consumers will gain because lemon prices will drop. B) Canadian lemon producers will gain because lemon prices will drop. C) Canadian consumers will gain because lemon prices will rise. D) Mexican lemon producers will lose because lemon prices in Canada will rise. Answer: A Diff: 1 Topic: Trade-offs from International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
4) When countries trade with each other, does it result in a gain for everybody? A) No. Producers of a good that is imported would be hurt. B) No. Consumers of a good that is imported would be hurt. C) No. Producers of a good that is exported would be hurt. D) Yes. All producers and consumers from both exporting and importing countries will gain. Answer: A Diff: 1 Topic: Trade-offs from International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 5) The financial crisis and recession which began in 2007 A) impacted only high-income countries. B) did not impact the United States. C) impacted many countries in the world. D) impacted only low-income countries. Answer: C Diff: 1 Topic: Economic View of the Managing the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 6) To combat the financial crisis and recession which began in 2007, governments worldwide made it A) easier for firms and households to borrow money for investment and consumer goods. B) easier for other countries to borrow money for infrastructure projects. C) easier for firms to pay their taxes by providing a tax amnesty. D) easier for workers to purchase health insurance through their employers. Answer: A Diff: 1 Topic: Economic View of the Managing the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 7) Congestion taxes tend to cause an increase in traffic volume during rush hours. Answer: FALSE Diff: 1 Topic: Economic View of Traffic Congestion Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
8) Economic expansion and growth are the only objectives that U.S. policymakers consider when they implement tax, spending and financial policies that affect the U.S. economy. Answer: FALSE Diff: 1 Topic: Economic View of the Managing the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 1.3 The Economic Way of Thinking 1) Who is associated with the following summary of the economic way of thinking: "The theory of economics does not furnish a body of settled conclusions immediately acceptable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its processer draw correct conclusions." A) John Maynard Keynes B) Alfred Marshall C) Adam Smith D) President Harry Truman Answer: A Diff: 1 Topic: The Economic Way of Thinking Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2) To make things simpler and focus attention on what really matters, economists A) use assumptions. B) ignore all variables. C) think at the margin. D) respond to incentives. Answer: A Diff: 1 Topic: Use Assumptions to Simplify Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
3) A variable measures A) something that always has the same value. B) something that can take on different values. C) factors that occur with high degrees of uncertainty. D) the degree to which something varies over time. Answer: B Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 4) The Latin phrase ceteris paribus means that when a relationship between two variables is being studied A) both are treated as unpredictable. B) neither of those two variables is allowed to change. C) all other variables are held fixed. D) we recognize that some factors are unknown. Answer: C Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 5) To think at the margin means to consider A) how nothing remains constant over time. B) how a small change in one variable affects another variable. C) how people behave in their own self-interest. D) how people will decide what to purchase. Answer: B Diff: 1 Topic: Think at the Margin Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 6) Jerome has a "C" average in his philosophy course and a "B" average in his economics course. He decides to study an extra hour for his philosophy exam. This is an example of A) thinking at the margin. B) using assumptions to simplify. C) ceteris paribus. D) caveat emptor. Answer: A Diff: 1 Topic: Think at the Margin Skill: Conceptual
AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 7) A small change in a variable is A) an average change. B) a ceteris paribus change. C) an efficient change. D) a marginal change. Answer: D Diff: 1 Topic: Think at the Margin Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 8) Adam Smith A) is considered the founder of economics. B) introduced the concept of ceteris paribus to the discussion of supply and demand. C) is responsible for refining the model of supply and demand. D) is the author of this text. Answer: A Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 9) When economists assume that people are rational and respond to incentives, they mean A) people act with kindness. B) people are altruistic. C) people act in their own self-interest. D) people are selfish. Answer: C Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 10) When deciding to implement a congestion tax, economists and the government would use the elements of the economic way of thinking to primarily determine A) if the tax would be allocated equitably. B) what congestion tax amount should be charged. C) who should be exempt from the tax. D) where to spend the revenue generated. Answer: B
Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) The book cites a result where after of the implementation of the congestion tax in Stockholm, Sweden of $1.50-$3.00, traffic volume was reduced and travel time for cars and buses was cut in half. This is an example of A) responding to incentives. B) the role of pricing in allocating resources. C) caveat emptor. D) comparative advantage. Answer: A Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 12) To reduce traffic congestion, the Southern California Council of Governments (SCAG) advocate the implementation of A) a congestion tax. B) a gas tax C) a bus subsidy D) a car sales tax. Answer: A Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about the incentives to install rooftop solar panels to answer the following question(s). 13) According to the Application, a 10 percent increase in the tax credits for solar panels results in an increase in the number of households that install solar panels by 7.6 percent. The increase in sales due to this subsidy is an example of which element of the economic way of thinking? A) responding to incentives B) isolating variables C) thinking at the margin D) using assumptions to simplify Answer: A Diff: 1 Topic: Application 1, Incentives to Install Rooftop Solar Panels
Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 14) According to the Application, another factor that was responsible for solar power deployment was the rising price of electricity. The increase in sales due to higher electricity prices describes the economic concept of A) using assumptions to simplify. B) ceteris paribus. C) rational self interest. D) marginal thinking. Answer: C Diff: 1 Topic: Application 1, Incentives to Install Rooftop Solar Panels Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 15) According to the Application, the value of the federal tax credits equaled 30 percent of solar panel installation costs. If you purchase a rooftop solar panel for $20,000, then on the year you installed your solar panels, you should expect a decrease in your liabilities to the federal taxes by A) $6,000. B) $12,000. C) $15,000. D) $1,500. Answer: A Diff: 1 Topic: Application 1, Incentives to Install Rooftop Solar Panels Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about housing prices in Cuba to answer the following question(s). 16) According to the Application, in 1960 the Cuban government A) confiscated most housing in the country. B) did not allow people to sell or rent their homes. C) caused a large shortage of housing as a result of its policies. D) all of the above. Answer: D Diff: 1 Topic: Application 2, Housing Prices in Cuba Skill: Fact AACSB: Reflective Thinking
Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 17) Recent housing reforms in Cuba should give homeowners ________ incentives to repair their homes and therefore ________ construction of new homes. A) more; decrease B) more; increase C) fewer; decrease D) fewer; increase Answer: B Diff: 2 Topic: Application 2, Housing Prices in Cuba Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18) Using assumptions to make things simpler and focus attention on what really matters is like using a road map to plan a trip. Answer: TRUE Diff: 1 Topic: Use Assumptions to Simplify Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 19) Ceteris paribus means "Let the buyer beware." Answer: FALSE Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 20) Ceteris paribus is the same as rise / run. Answer: FALSE Diff: 1 Topic: Isolate Variables - Ceteris Paribus Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 21) A small, one-unit change in value is called a marginal change. Answer: TRUE Diff: 1 Topic: Think at the Margin Skill: Definition
AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22) A key assumption of most economic analysis is that people act rationally, meaning they respond to incentives. Answer: TRUE Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 23) A key assumption of most economic analysis is that people are altruistic, meaning that they act in their own self-interest. Answer: FALSE Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 24) Economists assume that individuals make informed decisions and act in their own self-interest. Answer: TRUE Diff: 1 Topic: Rational People Respond to Incentives Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 25) The congestion tax implemented in Stockholm reduced traffic volume and cut travel time for cars and buses by 20%. Answer: TRUE Diff: 1 Topic: Example: Southern California addresses its Congestion Problem Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 26) To determine an appropriate congestion tax, an economist has to assume that people respond to incentives. Answer: TRUE Diff: 1 Topic: Example: Southern California addresses its Congestion Problem
Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about housing prices in Cuba to answer the following question(s). 27) According to the Application, recent reforms in Cuba have relied less on the free market in determining prices in the housing market. Answer: FALSE Diff: 1 Topic: Application 2, Housing Prices in Cuba Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 28) What is meant by the term "marginal change"? Answer: A marginal change is a small, one unit change in value. Diff: 1 Topic: Think at the Margin Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 1.4 Employability: Economic Logic on the Job 1) Which of the following occupations would a major in economics be useful for? A) management-analyst B) real estate appraiser C) financial analyst D) all of the above are correct. Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
2) Which of the following occupations would use economic analyses in their real world jobs? A) store manager B) teacher C) environmental regulator D) all of the above are correct. Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) Which of the following skills would the study of economics help promote? A) problem solving B) memorization C) critical thinking D) A and C only. Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 4) Which of the following occupations would a major in economics be least useful for? A) management-analyst B) real estate appraiser C) financial analyst D) medical doctor Answer: D Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
5) Why does economics fit well as a liberal arts education? Answer: A liberal arts education provides broad knowledge and thinking skills, so a worker is more flexible in responding to changes in the workplace. Economics fits naturally into the liberal arts because it provides a framework for problem-solving that can be applied everywhere, from making a personal decision about where to live, to a national decision about when to stimulate the economy with a tax cut, to a global decision about how to respond to climate change. Diff: 1 Topic: Employability: Economic Logic on the Job Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 1.5 Preview of Coming Attractions: Macroeconomics 1) Macroeconomics is best described as the study of A) very large issues. B) the choices made by individual households, firms, and governments. C) the nation's economy as a whole. D) the relationship between inflation and wage inequality. Answer: C Diff: 1 Topic: Preview of Coming Attractions: Macroeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 2) Which of the following is a macroeconomic question? A) Should we have a constitutional amendment requiring the government to implement a national consumption tax to replace the current income tax? B) Why did a leading computer manufacturer establish call centers in India? C) Why does a pharmaceutical manufacturer try to lower its production costs? D) Should the government put a tax on alcohol in an attempt to assist in the funding of support groups like Alcoholics Anonymous? Answer: A Diff: 2 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns
3) Which of the following is NOT a macroeconomic question? A) Should we have a constitutional amendment requiring the federal government to balance the budget each year? B) Should restaurants be required to list the number of calories for each product on their menus? C) How does a fiscal stimulus package affect gross domestic product? D) Should Congress enact tougher immigration laws to reduce unemployment? Answer: B Diff: 2 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 4) We can use macroeconomic analysis to A) learn how to balance a checkbook. B) study the choices made by households. C) understand marginal changes in the macroeconomy. D) understand why economies grow. Answer: D Diff: 2 Topic: Using Macroeconomics to Understand Why Economies Grow Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 5) Macroeconomics involves the study of the decision-making of individual firms or individuals. Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 6) Macroeconomics helps explain economic fluctuations, why the economy shrinks and expands and why some of the economy's resources are idle. Answer: TRUE Diff: 1 Topic: Using Macroeconomics to Understand Economic Fluctuations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns
7) Define the field of economics known as macroeconomics. Answer: Macroeconomics is the study of the nation's economy as a whole. Macroeconomics focuses on the issues of inflation, unemployment and economic growth. Diff: 1 Topic: Preview of Coming Attractions: Macroeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 8) Identify and explain the three ways we can use macroeconomic analysis. Answer: Macroeconomics explains why some resources increase over time and how an increase in these resources translates into a higher standard of living. In the fastestgrowing countries, citizens save a large fraction of the money they earn. Firms can then borrow the funds saved to purchase machinery and equipment that make their workers more productive. The fastest growing countries also have well-educated workforces, allowing firms to quickly adopt new technologies that increase worker productivity. All economies, including ones that experience a general trend of growth, are subject to economic fluctuations including periods when the economy shrinks. During an economic downturn, some of the economy's resources are idle. Many workers are unemployed, and many factories and stores are closed. By contrast, sometimes the economy grows too rapidly, causing inflation. Macroeconomics helps us understand why these fluctuations occur, why the economy sometimes cools and sometimes overheats and what we can do to moderate the fluctuations. A third reason for studying macroeconomics is to make informed business decisions. A manager who intends to borrow money for a new factory or store could use her knowledge of macroeconomics to predict the effects of current public policies on interest rates and then decide whether to borrow the money now or later. Diff: 2 Topic: Preview of Coming Attractions: Macroeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 1.6 Preview of Coming Attractions: Microeconomics 1) The study of the choices made by individual households, firms, and government is called A) macroeconomics. B) microeconomics. C) managerial economics. D) market economics. Answer: B Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
2) Microeconomics is best described as the study of A) the choices made by individual households, firms, and governments. B) inflation, unemployment, gross national product, and the nation's economy as a whole. C) how markets interact in the aggregate economy. D) marginal changes in the economy. Answer: A Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) Which of the following is a microeconomic question? A) Should companies pay for employees' health insurance? B) Why do some countries have higher economic growth rates than other countries? C) Should Congress and the president take action to reduce the unemployment rate? D) Should the Fed attempt to influence the interest rate to control potential inflation? Answer: A Diff: 1 Topic: Using Microeconomics to Evaluate Public Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 4) Which of the following is a microeconomic question? A) Should the government decrease unemployment benefits to reduce the unemployment rate? B) Why do some countries have higher inflation rates than other countries? C) Should the government subsidize corn farmers to encourage the production of ethanol? D) Should congress decrease taxes to help stimulate the economy? Answer: C Diff: 2 Topic: Using Microeconomics to Evaluate Public Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
5) Microeconomics helps explain economic fluctuations, why the economy shrinks and expands and why some of the economy's resources are idle. Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 6) Microeconomics is the study of aggregate behavior in the economy. Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 7) One example of a microeconomic question is, "How will prices in the clothing industry change if the government bans imports from China?" Answer: TRUE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 8) One example of a microeconomic question is, "Should unemployment benefits be increased?" Answer: FALSE Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 9) Describe the field of economics known as microeconomics. Answer: Microeconomics is the study of the choices made by individual households, firms and government and how these choices affect the markets for goods and services. Diff: 1 Topic: Preview of Coming Attractions: Microeconomics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
10) Identify and explain the three ways we can use microeconomic analysis. Answer: 1. To understand markets and predict changes: One reason for studying microeconomics is to better understand how markets work. Once you know how markets operate, you can use economic analysis to predict how various events affect product prices and quantities. 2. To make personal and managerial decisions: On the personal level, we use economic analysis to decide how to spend our time, what career to pursue, and how to spend and save the money we earn. As workers, we use economic analysis to decide how to produce goods and services, how much to produce, and how much to charge for them. 3. To evaluate public policies: While societies use markets to make the most of decisions concerning production and consumption, the government has several important roles in a market-based society. We can use economic analysis to determine how well the government performs its roles in the market economy. We can also explore the trade-offs associated with various public policies. Diff: 2 Topic: Preview of Coming Attractions: Microeconomics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 1.7 Appendix: Using Graphs and Percentages 1) There is a positive relationship between two variables if A) they move in opposite directions. B) they move in the same direction. C) one variable changes and the other does not. D) neither variable moves. Answer: B Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
2) There is a negative relationship between two variables if A) they move in opposite directions. B) they move in the same direction. C) one variable changes and the other does not. D) neither variable moves. Answer: A Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 3) The slope of a curve measures A) the change in the vertical variable in response to the change in the horizontal variable. B) the length of the curve. C) only the change in the horizontal variable. D) only the change in the vertical variable. Answer: A Diff: 1 Topic: Computing the Slope Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 4) Slope is calculated as the A) change in the vertical variable divided by the change in the horizontal variable. B) change in the horizontal variable divided by the change in the vertical variable. C) the vertical axis divided by the horizontal axis. D) change in the vertical variable. Answer: A Diff: 1 Topic: Computing the Slope Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
5) The slope of a straight line A) is constant. B) is negative. C) is zero. D) changes along the curve. Answer: A Diff: 1 Topic: Computing the Slope Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 6) If the variable on the vertical axis increases by 20 and the variable on the horizontal axis increases by 5, the slope of the line is A) 0.25. B) 4. C) 15. D) 100. Answer: B Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 7) If the variable on the vertical axis increases by 24 and the variable on the horizontal axis decreases by 3, the slope of the line is A) -24. B) -8. C) 3. D) 72. Answer: B Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
Figure 1A.1 8) Refer to Figure 1A.1. If the hours worked per week are 20, the income per week is A) 50. B) 100. C) 150. D) 200. Answer: C Diff: 1 Topic: Graphing Two Variables, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 9) Refer to Figure 1A.1. If the hours worked per week are 30, the income per week is A) 50. B) 100. C) 150. D) 200. Answer: D Diff: 1 Topic: Graphing Two Variables, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
10) Refer to Figure 1A.1. The slope of the line between the points where income equals 50 and income equals 200 is A) 0.2. B) 5. C) 10. D) 50. Answer: B Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 11) Refer to Figure 1A.1. The slope of the line between the points where hours worked per week are 20 and hours worked per week are 30 is A) 0.2. B) 5. C) 10. D) 50. Answer: B Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
Figure 1A.2 12) Refer to Figure 1A.2. If this consumer rents zero DVDs, how many movie tickets will she purchase? A) 0 B) 5 C) 10 D) 15 Answer: D Diff: 1 Topic: Graphing Negative Relationships, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 13) Refer to Figure 1A.2. If this consumer rents 60 DVDs, how many movie tickets will she purchase? A) 0 B) 5 C) 10 D) 15 Answer: B Diff: 1 Topic: Graphing Negative Relationships, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 14) Refer to Figure 1A.2. The slope of the curve
A) is negative. B) is positive. C) is zero. D) changes along the curve. Answer: A Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 15) Refer to Figure 1A.2. The slope between points a and c is A) -5. B) -6. C) 10. D) 30. Answer: B Diff: 1 Topic: Computing the Slope, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 16) The slope of a nonlinear curve A) is constant. B) is negative. C) is zero. D) changes along the curve. Answer: D Diff: 1 Topic: Graphing Nonlinear Relationships Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
17) If the price of monthly satellite TV service increases from $40 to $50, the percentage change is A) 5 percent. B) 20 percent. C) 25 percent. D) 45 percent. Answer: C Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 18) If the price of monthly satellite TV service increases from $50 to $60, the percentage change (using the average value (or the midpoint ) is A) 18.2% B) 16.7% C) 10% D) 60% Answer: A Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 19) If the price of a 32GB memory card decreases from $25 to $20, the percentage change is A) -20 percent. B) -33 percent. C) -50 percent. D) -60 percent. Answer: A Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
20) If the price of a 32GB memory card decreases from $25 to $20, the percentage change using the average value (or the midpoint) is A) -22.2% B) -20 percent. C) -25% D) -5% Answer: A Diff: 2 Topic: Computing Percentage Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs Recall the Application about the government of Mexico City repainting highway lane lines to transform a 4-lane highway into a 6-lane highway to answer the following question(s). 21) When the government converted the highway from 4 lanes into 6 lanes, they claimed the capacity had increased by 50 percent. When the government switched the highway back from 6 lanes to 4 lanes, they claimed the capacity had been decreased by 33 percent. Had the government used the midpoint method, the percentage increase would have been ________ percent and the percentage decrease would have been ________ percent. A) 33; 50 B) 33; 33 C) 40; 40 D) 50; 50 Answer: C Diff: 2 Topic: Application 3, The Perils of Percentages Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 22) When computing percentage changes, using the simple approach results in increases and decreases which are A) identical. B) symmetric. C) not symmetric. D) more accurate than using the midpoint method. Answer: C Diff: 1 Topic: Application 3, The Perils of Percentages Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
23) If you work 4 extra hours, and the slope of the curve showing the relationship between your income and work hours is 8, your income will increase by A) $2. B) $4. C) $12. D) $32. Answer: D Diff: 2 Topic: Using Equations to Compute Missing Values Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 24) To increase income by $120 when the slope of the curve showing the relationship between your income and work hours is 8, how many extra hours will you need to work? A) 8 B) 15 C) 112 D) 960 Answer: B Diff: 2 Topic: Using Equations to Compute Missing Values Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 25) Suppose you find that by studying one extra hour for your exam, you can increase your score by 4 points. How many hours of studying do you need it you want to increase your score from 60 to 80 points (assuming that the relationship is linear)? A) 5 hours B) 6 hours C) 20 hours D) 80 hours Answer: A Diff: 2 Topic: Using Equations to Compute Missing Values Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs
26) The origin of a graph is the intersection of the two axes, where the value of both variables is zero. Answer: TRUE Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 27) Positive relationships are also referred to as inverse relationships. Answer: FALSE Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 28) Negative relationships are also referred to as inverse relationships. Answer: TRUE Diff: 1 Topic: Graphing Two Variables Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 29) Slope is calculated as rise / run. Answer: TRUE Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 30) Slope is calculated as a change in the variable on the horizontal axis divided by a change in the variable on the vertical axis. Answer: FALSE Diff: 1 Topic: Computing the Slope Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs 31) The relationship between the number of hours you study and your economics score is linear.
Answer: FALSE Diff: 1 Topic: Graphing Nonlinear Relationships Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 2 The Key Principles of Economics 2.1 The Principle of Opportunity Cost 1) The opportunity cost of something is A) the cost of the labor used to produce it. B) what you sacrifice to get it. C) the price charged for it. D) the search cost required to find it. Answer: B Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2) The principle of opportunity cost A) is more relevant for firms than for individuals. B) only refers to monetary payments. C) is only relevant in economics. D) is applicable to all decision-making. Answer: D Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 3) The principle that the cost of something is equal to what is sacrificed to get it is known as the A) marginal principle. B) principle of opportunity cost. C) principle of diminishing returns. D) reality principle. Answer: B Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition
AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
4) The saying that "There's no such thing as a free lunch" refers to the A) marginal principle. B) spillover principle. C) principle of opportunity cost. D) reality principle. Answer: C Diff: 1 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 5) Jacinda quit her job as a blackjack dealer where she made $42,000 per year to start her own florist business. Her business expenses are $14,000 per year on rent, $21,000 per year on supplies, and $9,000 per year on part time help. As for her personal expenses, her apartment costs her $12,000 per year and her personal bills are an extra $6,000 per year. What is Jacinda's opportunity cost of running the business? A) $104,000 B) $86,000 C) $62,000 D) $44,000 Answer: B Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 6) An unemployed individual decides to spend the day fishing. The opportunity cost of fishing is A) the cost of bait and any other monetary expenses. B) zero, because the person doesn't have a job. C) the cost of bait, any other monetary expenses, and the value of the individual's wages while he was working. D) the cost of bait, any other monetary expenses, and the value of the best alternative use of the individual's time. Answer: D Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
7) Suppose that you own a house. What is the opportunity cost of living in the house? A) There is no opportunity cost because you own the house. B) There is no opportunity cost unless you could set up a business in the house. C) The opportunity cost is the rent you could have received from a tenant if you didn't live there. D) The opportunity cost is the cost of your monthly mortgage payment plus bills. Answer: C Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 8) Steven lives in a big city where there is a shortage of parking spots. He has a parking spot in his driveway where he parks his car. Which of the following statements is most correct? A) Steven has a lower opportunity cost of owning a car than his neighbor, who must rent a parking spot. B) The opportunity cost of using the spot is zero, because Steven owns the house. C) The opportunity cost of using the parking spot is the price he could charge someone else for using the spot. D) The opportunity cost depends on how much Steven's mortgage payment is. Answer: C Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 9) You rent a DVD of The Dark Knight Rises. The rental is for seven days and you watch the movie on the first day. You tell a friend about the film and your friend asks to come over and watch the movie with you before it is due back. What is your opportunity cost if you decide to watch the movie a second time instead of going to a football game? A) the entire cost of the movie rental, since you have already watched the movie B) one half the rental cost, because you have already watched the movie one time C) zero, because you already paid for the rental. D) the football game you forego by watching the movie again Answer: D Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
10) Angelina, age seven, decides to dress up like Princess Fiona for Halloween. What is the opportunity cost of her decision? A) the cost of the costume B) the fact that she can't dress up like Dora the Explorer, her second choice C) zero, because seven-year-olds don't have opportunity costs D) the cost of the Lady Gaga costume which she did not want Answer: B Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 11) Spending money on a new car instead of a used car when you are on a fixed budget is an example of A) the incursion of an opportunity cost. B) isolating variables. C) a bad thing to do because you run out of money. D) living on the edge. Answer: A Diff: 1 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 12) Suppose that your tuition to attend college is $24,000 per year and you spend $8,000 per year on room and board. If you were working full time, you could earn $30,000 per year. What is your opportunity cost of attending college for one year? A) $32,000 B) $38,000 C) $54,000 D) $62,000 Answer: C Diff: 1 Topic: The Cost of College Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
13) Suppose that your tuition to attend college is $14,000 per year and you spend $5,000 per year on room and board. If you were working full time, you could earn $26,000 per year. What is your opportunity cost of attending college? A) $19,000 B) $31,000 C) $40,000 D) $45,000 Answer: C Diff: 1 Topic: The Cost of College Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 14) The opportunity cost of going to college A) is zero if your parents pay your tuition. B) is equal to the cost of tuition, room and board, and other expenses. C) includes wages you lose by going to school instead of working. D) is the same for all students at a particular school who pay full tuition. Answer: C Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 15) You have an hour between your economics and math classes. What is the opportunity cost of that time if you use it to complete your math homework instead of your economics homework? A) the economics homework you could have completed B) the math homework you chose to complete C) the cost of your calculator and math textbook D) zero, because it doesn't cost any money to do your math homework Answer: A Diff: 2 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
16) The sacrifices made by societies in order to engage in military spending represent A) the nominal costs of military spending. B) the real costs of military spending. C) the opportunity costs of military spending. D) the excessive costs of military spending. Answer: C Diff: 1 Topic: The Cost of Military Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 17) The trade-offs made by the U.S. government to fund the war in Iraq A) prove that the government is spending too much on the war. B) show that the government is justified in its war spending. C) exceed the benefits derived from the war. D) represent what was potentially sacrificed to engage in the war. Answer: D Diff: 1 Topic: The Cost of Military Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 18) According to the possible trade-off example between warships and drinking water in the text, the policy question that should be considered in Malaysia is A) do the opportunity costs of the warships exceed their nominal costs? B) do the nominal costs of the warships exceed their real costs? C) do the benefits of the warships exceed their opportunity costs? D) do the real costs of the warships exceed their nominal costs? Answer: C Diff: 1 Topic: The Cost of Military Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
Bath 0 7 13 18 22 25 27
Groom 6 5 4 3 2 1 0
Table 2.1 19) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. The opportunity cost of grooming the first dog in a day is bathing ________ dog(s). A) 1 B) 2 C) 24 D) 25 Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 20) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. The opportunity cost of grooming the third dog in a day is bathing ________ dog(s). A) 3 B) 4 C) 5 D) 18 Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
21) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. The opportunity cost of grooming the sixth dog in a day is bathing ________ dog(s). A) 0 B) 5 C) 6 D) 7 Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. As they groom more dogs, the opportunity cost of grooming additional dogs A) falls. B) rises. C) remains constant. D) depends on the prices being charged. Answer: B Diff: 2 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 23) Kaitlyn and Larissa have formed a dog bathing and grooming business. The number of dogs they can bathe or groom in any given day is depicted in Table 2.1. As they groom more dogs, the opportunity cost of bathing additional dogs A) falls. B) rises. C) remains constant. D) depends on the prices being charged. Answer: A Diff: 2 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
Figure 2.1 24) Referring to Figure 2.1,if you increase the production of agricultural goods, what other area is affected? A) the price of produce B) the production of manufactured goods C) how much people can purchase D) the wages earned by agricultural workers Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 25) The production possibilities curve in Figure 2.1 illustrates the notion of A) increased factory goods production. B) increased agricultural production. C) diminishing resources. D) opportunity cost. Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
26) Refer to Figure 2.1. If you are producing 600 tons of agricultural products per year, what is the maximum amount of manufactured products you can produce per year? A) 300 tons B) 500 tons C) 600 tons D) 700 tons Answer: A Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 27) Refer to Figure 2.1. If you choose to produce only agricultural products, what is the maximum quantity you can produce per year? A) 200 tons B) 400 tons C) 600 tons D) > 600 tons Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 28) Refer to Figure 2.1. What is the opportunity cost of increasing production of manufactured products from 500 tons to 600 tons per year? A) 200 tons of agricultural products per year B) 400 tons of agricultural products per year C) 500 tons of agricultural products per year D) 600 tons of agricultural products per year Answer: A Diff: 2 Topic: Opportunity Cost and the Production Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
29) If an economy is fully utilizing its resources, it can produce more of one product only if it A) doubles manufacturing of the product. B) produces less of another product. C) adds more people to the labor force. D) reduces the prices of the most expensive products. Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 30) If you remove resources from factory production, the quantity of factory goods will A) increase. B) decrease. C) remain the same but their price will decrease. D) be diverted to other production. Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 31) If an economy is represented by a point inside its production possibilities curve A) it can produce more of one product even if it does not produce less of another product. B) it can produce more of one product only if it produces less of another product. C) it cannot produce more of one product unless it stops producing the other product entirely. D) it cannot possibly produce more of one product, even if it produces less of another product. Answer: A Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
32) If an economy is represented by a point along its production possibilities curve A) it can produce more of one product even if it does not produce less of another product. B) it can produce more of one product only if it produces less of another product. C) it cannot produce more of one product unless it stops producing the other product entirely. D) it cannot possibly produce more of one product, even if it produces less of another product. Answer: B Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 33) Points outside the production possibilities curve represent combinations of products that are A) attainable only if the economy's resources are fully employed. B) attainable only if the economy's resources are not fully employed. C) attainable if the economy's resources are either fully employed or not fully employed. D) unattainable. Answer: D Diff: 1 Topic: Opportunity Cost and the Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions Recall the Application about running a software programming business to answer the following question(s). 34) The time and invested funds involved in starting a software (app) development business addresses the economic concept of A) the marginal principle. B) opportunity cost. C) the real-nominal principle. D) the principle of diminishing returns. Answer: B Diff: 1 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
35) If by starting your own software development business you are forced give up your job as a janitor, then the income you could have earned as a janitor is A) part of the opportunity cost of operating your software business. B) not part of the opportunity cost of operating your software business. C) part of the benefit of operating your software business. D) is an example of the principle of diminishing returns. Answer: A Diff: 1 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 36) The current income you would sacrifice to start your own software development business is part of the A) opportunity cost of invested funds. B) opportunity cost of starting a business. C) cost of doing business. D) present value of your initial investment. Answer: B Diff: 1 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 37) If you have $10,000 to start a software development business, the interest rate is 4 percent, your cost of your computer is $5,000, and the earnings you sacrifice from working at another job are $32,000, your yearly cost of doing business would be A) $47,000. B) $47,400. C) $37,400. D) $37,000. Answer: C Diff: 2 Topic: Application 1, Don't Forget the Costs of Time and Invested Funds Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
38) A principle is a self-evident truth that most people readily understand and accept. Answer: TRUE Diff: 1 Topic: The Key Principles of Economics Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 39) Opportunity cost is the difference between the nominal and real cost of some action. Answer: FALSE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 40) The opportunity cost of something is the gain you receive as a result of your sacrifice. Answer: FALSE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 41) The opportunity cost of something is the nominal price paid for the product. Answer: FALSE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 42) Trade-offs involve an exchange of one thing for another because resources are limited and can be used in different ways. Answer: TRUE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
43) The notion of opportunity cost allows the measurement of trade-offs. Answer: TRUE Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 44) In order to get his bachelor's degree, Timothy gave up an offer for a full time job as a bartender. Therefore, Timothy incurred an opportunity cost. Answer: TRUE Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 45) The opportunity cost of going to a particular college is not the same for everyone. Answer: TRUE Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 46) The cost of a bachelor's degree in philosophy equals the tuition plus the cost of room and board. Answer: FALSE Diff: 1 Topic: The Cost of College Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 47) What is an opportunity cost? Answer: An opportunity cost is what you sacrifice to get something. Diff: 1 Topic: The Principle of Opportunity Cost Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 48) Suppose that you lend $5,000 to a friend who pays you back $5,400 the next year. Suppose that prices that year rose by six percent and the real rate of return in the stock
market was five percent. Your friend says that he or she was being more than fair by giving you more than the rate of inflation as a return. What do you think? Answer: The opportunity cost of that money was not just the six percent inflation, but also the real rate of return that would have been enjoyed had the money been put in the stock market. For you to have been indifferent between loaning your money versus keeping it, your friend should have reimbursed you by $5,550, or an 11% return. This is another example of considering all the costs, both the loss in purchasing power of the money due to inflation and the implicit cost of the return that could have been earned if the money was invested in the stock market. Diff: 2 Topic: The Principle of Opportunity Cost Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 49) What is the opportunity cost of investing $10,000 of your own money into a business you wish to start? Answer: The opportunity cost of your $10,000 is the monetary gain you forego because you cannot invest the money elsewhere. Diff: 1 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 50) What do economists mean when they say that "there is no such thing as a free lunch?" Answer: Everything has a cost, even when you do not pay money for it. Suppose that somebody bought you lunch. Resources from the economy were used to make that lunch, even though those resources may not belong to you. Consequently, the economy gave up anything else it could have made with the resources it used to make the lunch. The opportunity cost of that lunch is the lost opportunity to use those resources in some other way. Diff: 2 Topic: The Principle of Opportunity Cost Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
51) What is the opportunity cost of your college degree? Answer: A quick answer would be to say that the cost is the tuition, room and board, and books expenditures that are borne during the college years. But such a statement would be incorrect. First, it understates one aspect of costs: one is giving up income while a student. But it also overstates the costs in another dimension: people would eat and sleep somewhere regardless of their attendance in college. Therefore, one should not consider room and board to be part of the cost of college attendance. Diff: 1 Topic: The Cost of College Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2.2 The Marginal Principle 1) The extra benefit resulting from a small increase in an activity is called the A) opportunity cost. B) marginal benefit. C) marginal cost. D) diminishing returns of the activity. Answer: B Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2) The additional cost resulting from a small increase in some activity is called the A) opportunity cost. B) marginal benefit. C) marginal cost. D) diminishing returns of the activity. Answer: C Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
3) The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity is known as the A) marginal principle. B) principle of opportunity cost. C) principle of diminishing returns. D) spillover principle. Answer: A Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 4) The marginal principle implies that an individual should produce or consume where A) marginal benefit exceeds marginal cost. B) marginal benefit is less than marginal cost. C) marginal benefit equals marginal cost. D) total benefit equals total cost. Answer: C Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
5) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $24. How many hours should Joe stay open? A) 3 hours B) 4 hours C) 5 hours D) 6 hours Answer: D Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
6) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that Joe's marginal cost of staying open per hour is $32. How many hours should Joe stay open? A) 4 hours B) 5 hours C) 6 hours D) 7 hours Answer: B Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 7) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 5 hours per day. If he is following the marginal principle, what must his marginal cost per hour be? A) $16 B) $24 C) $32 D) $40 Answer: C Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 8) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 3 hours per day. If he is following the marginal principle, what must his marginal cost per hour be? A) $24 B) $32 C) $40 D) $48 Answer: D Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 9) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2
illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 6 hours per day. If he is following the marginal principle, what must his marginal cost per hour be? A) $16 B) $24 C) $32 D) $48 Answer: B Diff: 1 Topic: The Marginal Principle, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions Hours of Operation Marginal Cost 1 6 2 12 3 18 4 24 5 30 6 36 7 42 Table 2.2 10) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Krystal's marginal benefit of staying open per hour is $30. If she is following the marginal principle, how many hours should Krystal stay open? A) 4 hours B) 5 hours C) 6 hours D) 7 hours Answer: B Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
11) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that Krystal's marginal benefit of staying open per hour is $18. If she is following the marginal principle, how many hours should Krystal stay open? A) 3 hours B) 4 hours C) 6 hours D) 7 hours Answer: A Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 12) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 4 hours per day. If she is following the marginal principle, what must her marginal benefit be? A) $12 B) $18 C) $24 D) $30 Answer: C Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 13) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 2 hours per day. If she is following the marginal principle, what must her marginal benefit be? A) $6 B) $12 C) $15 D) $18 Answer: B Diff: 1 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 14) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2
illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 5 hours and her marginal benefit of staying open per hour is $18. If she is following the marginal principle, Krystal should A) stay open 2 more hours. B) stay open 3 more hours. C) stay open 2 fewer hours. D) stay open 3 fewer hours. Answer: C Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 15) Krystal runs a nail salon and needs to decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying open for each additional hour. Suppose that we observe Krystal staying open 5 hours and her marginal benefit of staying open per hour is $36. If she is following the marginal principle, Krystal should A) stay open 1 more hour. B) stay open 2 more hours. C) stay open 1 fewer hour. D) stay open 2 fewer hours. Answer: A Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 16) Considering how a change in one variable affects the value of another variable is called A) the Peter Principle. B) the marginal principle. C) the principle of supply and demand. D) functional decision making. Answer: B Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
17) When referring to "marginal" changes, the economic focus is on A) changes which affect only a few people or products. B) large changes on the low end. C) graduated changes on the high end. D) small or incremental changes. Answer: D Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 18) When deciding whether to engage in an activity or how much to do, people should follow A) the principle of microeconomics. B) the principle of macroeconomics. C) the marginal principle. D) the law of supply and demand. Answer: C Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions Recall the Application about the best speed at which to sail an ocean cargo ship to answer the following question(s). 19) Weighing the benefits and costs of the different speeds at which to sail an ocean cargo ship addresses the economic concept known as A) the principle of opportunity cost. B) the marginal principle. C) the principle of voluntary exchange. D) the principle of diminishing returns. Answer: B Diff: 1 Topic: Application 2, How Fast to Sail? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
20) Sailing an ocean cargo ship slower to save on the expense of fuel as opposed to sailing it faster to save time and therefore allow it to make more deliveries makes sense if the ________ of sailing slower is less than the ________ of sailing slower. A) marginal benefit; marginal cost B) marginal cost; marginal benefit C) marginal benefit; opportunity cost D) marginal cost; opportunity cost Answer: B Diff: 1 Topic: Application 2, How Fast to Sail? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 21) The use of seat belts and other automobile safety features making bicycling more hazardous can be explained by the economic concept known as A) the real-nominal principle. B) the marginal principle. C) the principle of voluntary exchange. D) the principle of diminishing returns. Answer: B Diff: 1 Topic: Driving Speed and Safety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 22) Saving time by driving faster is an example of a ________ of driving faster. Increasing the severity of injuries from a potential accident due to driving faster is a(n) ________ of driving faster. A) nominal cost; real cost B) marginal cost; nominal cost C) marginal benefit; marginal cost D) normative benefit; opportunity cost Answer: C Diff: 1 Topic: Driving Speed and Safety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
23) When applying the marginal principle, you should pick the level at which the activity's marginal benefit equals its marginal cost. Answer: TRUE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 24) When applying the marginal principle, you should pick the level at which the activity's marginal benefit is less than its marginal cost. Answer: FALSE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 25) Basically, the marginal principle helps us to evaluate the factors involved in taking an action or if doing something is worth the effort. Answer: TRUE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 26) When Lonnie produces 1 pair of cowboy boots his costs total $300. When he produces 2 pairs of cowboy boots his total costs are $500. This means that Lonnie's marginal cost of producing the second pair of cowboy boots is $200. Answer: TRUE Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
27) Economists argue that individuals should continue to consume until total benefit equals total cost. Answer: FALSE Diff: 1 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 28) If a company's total costs per day increase from $200 to $400 by adding another worker, but its additional benefits are $300, it is sensible to add that additional worker. Answer: TRUE Diff: 2 Topic: The Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 29) What is a marginal cost? Answer: A marginal cost is the additional cost resulting from a small increase in the production of a good. Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 30) What is a marginal benefit? Answer: A marginal benefit is the additional benefit resulting from a small increase in the production of a good. Diff: 1 Topic: The Marginal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
31) When a firm hired its tenth worker, its factory output increased by four units per month. Would you expect the firm's output to increase by eight more units per month if the firm hired two more workers? Answer: No. The principle of diminishing marginal returns suggests that after some point of increasing returns, each incremental worker should have a progressively lower level of marginal productivity. Diff: 2 Topic: Marginal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 32) Consider a firm that is trying to determine how many hours to remain open in a day. How would the firm make this decision? Answer: The firm would continue to stay open as long as the marginal benefit of staying open (say, the increased revenues) each extra hour exceeds (or at least equals) the incremental, or marginal, costs (e.g., electricity, wages, etc.) incurred from staying open that hour. Diff: 2 Topic: Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 33) Different people eat different amounts of food when they go to buffet restaurants, even though they all pay the same price. Explain how this relates to the marginal principle. Answer: The marginal monetary cost of eating more is zero, so people will eat until they would not enjoy eating another bite. There is an implicit cost of eating more once you are full (such as extra weight gain and physical discomfort). Therefore, people will eat until the marginal benefit equals the marginal cost, and this will occur at different amounts of food for different people. Diff: 2 Topic: The Marginal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
34) Use the marginal principle to explain why government mandated safety features in automobiles during the 1960s and 1970s resulted in an increase in collisions between automobiles and bicycles. Answer: The mandated safety features decreased the marginal cost of speed: People who wear seat belts suffer less severe injuries in a collision, so every additional unit of speed is less costly to the driver. Drivers felt more secure because they were better insulated from harm in the event of a collision, and so they drove faster. As a result, the number of collisions between cars and bicycles increased, meaning that a safer environment for drivers led to a more hazardous environment for bicyclists. Diff: 2 Topic: Driving Speed and Safety Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 2.3 The Principle of Voluntary Exchange 1) People acting in their own self interest is the basis of the A) principle of supply and demand. B) principle of voluntary exchange. C) real-nominal principle. D) principle of scarcity. Answer: B Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 2) The principle of voluntary exchange is based on the idea of A) making assumptions. B) isolating variables. C) thinking at the margin. D) rational self-interest. Answer: D Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
3) Who among the following stressed the importance the voluntary exchange as a distinctly human trait? A) Adam Smith B) Alfred Marshall C) John Keynes D) Karl Marx Answer: A Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 4) The alternative to voluntary exchange is A) self-sufficiency B) dependency C) cooperation D) marginal analysis. Answer: A Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade Recall the Application about Rory McIlroy and weed-whacking to answer the following question(s). The Application assumes that Rory McIlroy could whack down all the weeds on his estate in one hour at an opportunity cost of $1,000, but it would take 20 hours for a gardener to do it at a price of $10 per hour. 5) This Application addresses the economic concept of A) the marginal principle. B) diminishing returns. C) specialization and exchange. D) real versus nominal costs. Answer: C Diff: 1 Topic: Application 3, Rory McIlroy and Weed-Whacking Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
6) Based on the assumptions in the Application, should Rory hire a gardener or cut the weeds himself? A) He should hire the gardener because he would save $1,000. B) He should hire the gardener because he would save $800. C) He should cut the weeds himself because he would save $200. D) He should cut the weeds himself because he would save $1,000. Answer: B Diff: 2 Topic: Application 3, Rory McIlroy and Weed-Whacking Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 7) If Rory McIlroy only earned $500 per hour playing golf instead of $1,000 per hour, what should he do? A) He should still hire the gardener. B) He should do the weed-whacking himself. C) He should hire a less-productive gardener. D) He should be indifferent as to who does the weed-whacking, for the difference in hourly earnings would now be insignificant. Answer: A Diff: 2 Topic: Application 3, Rory McIlroy and Weed-Whacking Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 8) When you have a job and your employer compensates you for your time with money, resulting in both of you being better off, it is an example of a voluntary exchange. Answer: TRUE Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
9) The principle of voluntary exchange is the concept that a voluntary exchange between two people makes both people better off. Answer: TRUE Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 10) A "market" is an arrangement that allows people to exchange things. Answer: TRUE Diff: 1 Topic: Exchange and Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 11) The alternative to voluntary exchange is self-sufficiency. Answer: TRUE Diff: 1 Topic: The Principle of Voluntary Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 2.4 The Principle of Diminishing Returns 1) The principle of diminishing returns implies that as one input increases while the other inputs are held fixed, output A) increases at an increasing rate. B) increases at a decreasing rate. C) decreases at a decreasing rate. D) decreases at an increasing rate. Answer: B Diff: 1 Topic: The Principle of Diminishing Returns Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
2) The principle that "as one input increases while the other inputs are held fixed, output increases at a decreasing rate" is known as the A) marginal principle. B) principle of opportunity cost. C) principle of diminishing returns. D) spillover principle. Answer: C Diff: 1 Topic: The Principle of Diminishing Returns Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 3) According to the principle of diminishing returns, if all factors of production but one are held constant and if that one factor is doubled, then eventually output will most likely A) double too. B) less than double. C) more than double. D) remain unchanged. Answer: B Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 4) A firm produces its product using both capital and labor. When it does not change its capital usage, but doubles its labor input, its output increases by less than 50 percent. Which of the following is the most likely explanation of this finding? A) the principle of opportunity cost B) the principle of diminishing returns C) the marginal principle D) the spillover principle Answer: B Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
5) According to the principle of diminishing returns, if the number of workers is increased beyond the point of diminishing returns, then the additional worker A) increases total output by the same amount as previous workers. B) increases total output by more than the amount of previous workers. C) increases total output by less than the amount of previous workers. D) decreases total output. Answer: C Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist Units of Capital 5 5 5 5 5 5
Number of Workers Output/Day 0 0 1 40 2 90 3 150 4 200 5 235 Table 2.3
6) Refer to Table 2.3. What can be observed about the given resources? A) Capital and labor are both fixed. B) Capital is variable. C) Capital is fixed. D) Labor is fixed. Answer: C Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
7) Refer to Table 2.3. Increasing the number of workers from 2 to 3 will increase output per day by A) 60 units. B) 90 units. C) 150 units. D) 240 units. Answer: A Diff: 1 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 8) Refer to Table 2.3. The principle of diminishing returns first occurs when how many workers are hired? A) 2 B) 3 C) 4 D) 5 Answer: C Diff: 2 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
Acres of Land Tanks of Fertilizer 20 0 20 1 20 2 20 3 20 4 20 5
Truckloads of Potatoes 28 70 105 135 152 141
Table 2.4 9) Refer to Table 2.4. What can be observed about the given resources? A) Land is variable but fertilizer is fixed. B) Land and fertilizer are both fixed. C) Land and fertilizer are both variable. D) Land is fixed but fertilizer is variable. Answer: D Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 10) Refer to Table 2.4. Increasing the tanks of fertilizer from 3 to 4 will increase the truckloads of potatoes by A) 152. B) 35. C) 17. D) 11. Answer: C Diff: 1 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
11) Refer to Table 2.4. Increasing the tanks of fertilizer from 4 to 5 will A) increase truckloads of potatoes. B) decrease truckloads of potatoes. C) have no effect on truckloads of potatoes. D) require more acres of land. Answer: B Diff: 1 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 12) Refer to Table 2.4. The principle of diminishing returns sets in with the addition of the ________ tank of fertilizer. A) second B) third C) fourth D) fifth Answer: A Diff: 2 Topic: The Principle of Diminishing Returns Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 13) Diminishing returns occurs because A) not enough people have jobs. B) one of the inputs in the production process is fixed. C) consumers don't buy enough of the products produced. D) two people have not satisfied their self-interests. Answer: B Diff: 1 Topic: The Principle of Diminishing Returns Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
Recall the Application about the use of fertilizer and its impact on crop yields to answer the following question(s). The table is taken from this Application. Fertilizer and Corn Yield Bags of Fertilizer Bushels of Corn 0 85 1 120 2 135 3 144 4 147 14) Based on the data in the table, this Application addresses the economic concept of A) the marginal principle. B) the principle of voluntary exchange. C) the principle of diminishing returns. D) the real-nominal principle. Answer: C Diff: 1 Topic: Application 4, Fertilizer and Crop Yields Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 15) Refer to the table above. After applying the second bag of fertilizer, the farmer experienced A) increasing returns. B) diminishing returns. C) constant returns. D) negative returns. Answer: B Diff: 1 Topic: Application 4, Fertilizer and Crop Yields Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
16) Refer to the table above. The farmer increased his total production of corn by 9 bushels per acre after applying A) the first bag of fertilizer. B) the second bag of fertilizer. C) the third bag of fertilizer. D) the fourth bag of fertilizer. Answer: C Diff: 2 Topic: Application 4, Fertilizer and Crop Yields Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 17) Refer to the table above. The farmer began to experience diminishing returns after applying how many bags of fertilizer? A) 1 B) 2 C) 3 D) 4 Answer: A Diff: 2 Topic: Application 4, Fertilizer and Crop Yields Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 18) According to the principle of diminishing returns, an additional worker decreases total output. Answer: FALSE Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist
19) Explain the concept of diminishing returns. Answer: The principle of diminishing returns shows that in the short run, beyond some point, output will increase at a decreasing rate. For example, producing more output in an existing production facility by increasing the number of workers sharing the facility will bring into effect the principle of diminishing returns, as output will eventually increase but at a decreasing rate. Diff: 1 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 20) You are running a small yard maintenance business for the summer. What do you expect to happen to the number of yards you can maintain in a day as you add workers if you don't purchase more capital equipment (like mowers and leaf blowers)? Answer: It is likely that as you add workers, you will get incrementally less output out of each additional worker. Holding constant your materials, such as trucks, lawnmowers, etc., you'll almost surely be able to maintain more yards per day. But as you hire more workers, there might be waits for use of the tools, or for transportation to the next job. This is the prediction of the principle of diminishing returns. Diff: 2 Topic: The Principle of Diminishing Returns Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist 2.5 The Real-Nominal Principle 1) The real-nominal principle states that A) people respond more to explicit, or real, costs than to implicit costs. B) people respond more to implicit costs than to explicit costs. C) what matters to people is the face value of money or income. D) what matters to people is the purchasing power of money or income. Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
2) The principle that states that what matters to people is the real value or purchasing power of money is the A) marginal principle. B) principle of diminishing returns. C) spillover principle. D) real-nominal principle. Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 3) The face value of money or income is called its ________ value. A) real B) marginal C) nominal D) external Answer: C Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) The value of money or income in terms of the quantity of goods the money can buy is called its A) real value. B) marginal value. C) nominal value. D) implicit value. Answer: A Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
5) The real value of money A) is another word for the face value. B) reflects the purchasing power of money. C) matters less to people than its nominal value. D) is the same as its nominal value. Answer: B Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6) If real salaries increase but nominal salaries do not, this means that A) the purchasing power of money has decreased. B) prices have not changed. C) prices have risen. D) prices have fallen. Answer: D Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) If real salaries decrease but nominal salaries do not, this means that A) the purchasing power of money has increased. B) prices have not changed. C) prices have risen. D) prices have fallen. Answer: C Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
8) A Major League Baseball player signs a contract that pays $27 million over 5 years. The $27 million is the contract's ________ value. A) real B) implicit C) external D) nominal Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) Suppose your bank pays you 4 percent interest per year on your savings account, so that $1,000 grows to $1,040 over a one-year period. If prices increase by 1 percent per year over that time, approximately how much real value do you gain by keeping $1000 in the bank for a year? A) $0 B) $10 C) $30 D) $50 Answer: C Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) Suppose your bank pays you 5 percent interest per year on your savings account. If prices increase by 5 percent per year over that time, approximately how much real value do you gain by keeping $100 in the bank for a year? A) $0 B) $1 C) $3 D) $6 Answer: A Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
11) Suppose that you lend $1,000 to a friend and he or she pays you back one year later. What is the opportunity cost of lending the money? A) There is no cost. B) the real interest rate that would have been earned on the money C) the nominal interest rate that would have been earned on the money D) the implicit cost of the money Answer: B Diff: 3 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) You borrow money to buy a house in 2009 at a fixed interest rate of 5.5 percent. By 2012, the inflation rate has steadily fallen to 1.5 percent from the recent high of 3.0 percent in 2009. Considering only your mortgage, is inflation good news or bad news for you? A) bad news, because inflation hurts everyone B) bad news, because it makes the real value of your mortgage payments increase C) good news, because it makes the real value of your mortgage payments decrease D) bad news, because it makes the nominal value of your mortgage payments increase Answer: B Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 13) What is the nominal value of money? A) what can be purchased with the money B) discounts taken by multiple purchases C) savings by shopping on specific days of the week D) its actual face value Answer: D Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
14) What is the real value of money? A) its face value B) its compounded earnings in banks C) the quantity of goods it can buy D) the ability of shop at market prices Answer: C Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
Minimum wage per hour Weekly income from minimum wage Cost of a standard basket of goods Number of baskets per week
1974 $ 2.00 $80.00 $47.00 1.70
2015 $ 7.25 $290.00 $236 1.23
Table 2.5 15) Use Table 2.5 above to answer the question. Comparing the minimum wages between 1974 and 2015 addresses the economic concept of A) the marginal principle. B) the principle of voluntary exchange. C) the principle of diminishing returns. D) the real-nominal principle. Answer: D Diff: 1 Topic: The Value of the Minimum Wage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
16) Use Table 2.5 above to answer the question. The nominal value of the minimum wage in 2015 was A) $2.00 per hour. B) $3.63 per hour. C) $5.62 per hour. D) $7.25 per hour. Answer: D Diff: 1 Topic: The Value of the Minimum Wage Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 17) Use Table 2.5 above to answer the question. What happened to the real value of the minimum wage between 1974 and 2015? A) It remained the same. B) It increased. C) It decreased. D) It could not be determined from the given information. Answer: C Diff: 2 Topic: The Value of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 18) Use Table 2.5 above to answer the question. By what percentage did the federal minimum wage increase between 1974 to 2015? A) 72.41 percent B) 262.5 percent C) 362.5 percent D) 525.0 percent Answer: B Diff: 2 Topic: The Value of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
19) Use Table 2.5 above to answer the question. By what percentage did the real value of the federal minimum wage change between 1974 to 2015? A) -38.5% B) 38.5% C) 262.5% D) -262.5% Answer: A Diff: 2 Topic: The Value of the Minimum Wage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Recall the Application about the impact inflation has on your potential future salary and the repayment of student loans to answer the following question(s). 20) In analyzing the costs involved for student loans in the face of rising prices, this Application is addressing the economic concept of A) the marginal principle. B) the principle of voluntary exchange. C) the principle of diminishing returns. D) the real-nominal principle. Answer: D Diff: 1 Topic: Application 5, Repaying Student Loans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) According to this Application, more years of work would be required to pay off a student loan if all prices (including your salary) A) remained stable. B) increased by 20 percent. C) decreased by 10 percent. D) increased by 40 percent. Answer: C Diff: 1 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
22) According to this Application, if you earn a salary of $80,000 in the first year and all prices (including your salary)decrease by half in the next 5 years, what will your nominal annual salary be in 5 years? A) $8,000 B) $10,000 C) $20,000 D) $40,000 Answer: D Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 23) According to this Application, if you earn a salary of $40,000 in the first year and all prices (including your salary) triple in the next 10 years, what will your nominal annual salary be in 10 years? A) $20,000 B) $60,000 C) $120,000 D) $180,000 Answer: C Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 24) According to this Application, if you earn a salary of $40,000 in the first year and all prices triple in the next year. How will this affect the time it takes to pay off your school loans, assuming that you put all your earnings into paying it off? Assume that your debt is $40,000. A) It will cut the payoff time to 1/3 of the original time. B) It will cut the payoff time to 1/2 of the original time. C) It will cut the payoff time to 2/3 of the original time. D) It will triple your payoff time. Answer: A Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
25) According to this Application, if you earn a salary of $40,000 in the first year and all prices are cut in half in the next year. How will this affect the time it takes to pay off your school loans, assuming that you put all your earnings into paying it off? Assume that your debt is $40,000. A) It will cut the payoff time to 1/3 of the original time. B) It will cut the payoff time to 1/2 of the original time. C) It will cut the payoff time to 2/3 of the original time. D) It will double your payoff time. Answer: B Diff: 2 Topic: Application 5, Repaying Student Loans Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 26) If product prices increase slower than nominal wages increase, then the real value of wages decreases. Answer: FALSE Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 27) If product prices decrease more than nominal wages decrease, then the real value of wages will increase. Answer: TRUE Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 28) What matters to people is the face value of money or income. Answer: FALSE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
29) What matters to people is the real value of money or income. Answer: TRUE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 30) The government uses the buying power of wages rather than face value or nominal value in reporting changes in "real wages" in the economy. Answer: TRUE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 31) The government uses the buying power of wages in reporting changes in "nominal wages" in the economy. Answer: FALSE Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 32) Is it possible for nominal wages to decrease while real wages increase? Answer: Yes, though unlikely. This would imply that prices have fallen, and that the decrease is sufficiently negative to offset any losses in nominal wages. Diff: 2 Topic: The Real-Nominal Principle Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
33) Explain the real-nominal principle. Answer: The real-nominal principle explains that what matters to people is the real value of money or income, its purchasing power and not the face value of money or income. Diff: 1 Topic: The Real-Nominal Principle Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 34) How would an increase in prices in retail stores change the real value of the money you earn as wages? Answer: The real value would decrease. Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 35) If your salary increases at a slower rate than prices are increasing, what would happen to your buying power? Answer: Your money would have less buying power. Diff: 1 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 36) Explain why an increase in a person in debt who experiences a wage increase that is exactly equal to the inflation rate may make him or her better off. Answer: If prices and wages increase at the same rate, a person may end up being able to afford exactly what they could buy before the price increase. However, a person in debt will see their nominal wages increase but have their debt (measured also in nominal terms) not change. This will make it easier for the debtor to pay their debts off when they experience inflation. Diff: 2 Topic: The Real-Nominal Principle Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 3 Exchange and Markets 3.1 Comparative Advantage and Exchange
1) Markets exist A) so people can buy and sell things. B) because people are self-sufficient. C) because each person specializes in the production of many products. D) as an arrangement where buyers do not interact with sellers. Answer: A Diff: 1 Topic: Comparative Advantage and Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 2) To explore the rationale for specialization, economists use the A) marginal principle. B) principle of opportunity cost. C) real-nominal principle. D) principle of marginal exchange. Answer: B Diff: 1 Topic: Comparative Advantage and Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
Jesse April
Kites /hour 8 12
Snowboards /hour 1 3
Table 3.1 3) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.1 shows how much of each good Jesse and April can paint in one hour. Jesse's opportunity cost of painting one kite is painting A) 1/12 of a snowboard. B) 1/8 of a snowboard. C) 1/3 of a snowboard. D) 3 snowboards. Answer: B Diff: 1 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 4) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.1 shows how much of each good Jesse and April can paint in one hour. Jesse's opportunity cost of painting one snowboard is painting A) 1/8 of a kite. B) 1.5 kites. C) 8 kites. D) 12 kites. Answer: C Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
5) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.1 shows how much of each good Jesse and April can paint in one hour. April's opportunity cost of painting one kite is painting A) 1/12 of a snowboard. B) 1/4 of a snowboard. C) 3 snowboards. D) 4 snowboards. Answer: B Diff: 1 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 6) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.1 shows how much of each good Jesse and April can paint in one hour. April's opportunity cost of painting one snowboard is painting A) 1.5 kites. B) 3 kites. C) 4 kites. D) 12 kites. Answer: C Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 7) Based on the data in Table 3.1 A) Jesse should specialize in painting kites and trade for snowboards. B) Jesse should specialize in painting snowboards and trade for kites. C) April should specialize in both goods. D) Jesse should specialize in both goods. Answer: A Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
8) Based on the data in Table 3.1 A) April should specialize in painting kites and trade for snowboards. B) April should specialize in painting snowboards and trade for kites. C) Jesse should specialize in both goods. D) April should specialize in both goods. Answer: B Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 9) Based on the data in Table 3.1, if Jesse and April choose to specialize and trade, then A) April will specialize in painting kites and trade kites for snowboards. B) April will specialize in painting snowboards and trade snowboards for kites. C) Jesse will specialize in painting snowboards and trade snowboards for kites. D) None of the above; specialization and trade are not beneficial for Jesse and April. Answer: B Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 10) The ability of one person or nation to produce a good at a lower absolute cost than another is called a(n) A) market advantage. B) comparative advantage. C) absolute advantage. D) specialization advantage. Answer: C Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
11) The ability of one person or nation to produce a good at a lower opportunity cost than another is called a(n) A) market advantage. B) comparative advantage. C) absolute advantage. D) specialization advantage. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 12) An individual or country that has a comparative advantage in the production of one good A) must have an absolute advantage in the good's production. B) must not have an absolute advantage in the good's production. C) may or may not have an absolute advantage in the good's production. D) must not have an absolute advantage in the production of the other good. Answer: C Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
Jesse April
Kites /hour 8 12
Snowboards /hour 1 3
Table 3.2 13) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) April has an absolute advantage in painting kites but not snowboards. B) April has an absolute advantage in painting snowboards but not kites. C) April has an absolute advantage in painting both goods. D) April does not have an absolute advantage in painting either good. Answer: C Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 14) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) April has a comparative advantage in painting kites but not snowboards. B) April has a comparative advantage in painting snowboards but not kites. C) April has a comparative advantage in painting both goods. D) April does not have a comparative advantage in painting either good. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
15) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) April has both an absolute and comparative advantage in painting kites. B) April has both an absolute and comparative advantage in painting snowboards. C) April has neither an absolute nor comparative advantage in painting kites. D) April has neither an absolute nor a comparative advantage in painting snowboards. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 16) Consider two individuals, Jesse and April, who hand paint kites and snowboards. Table 3.2 shows how much of each good Jesse and April can paint in one hour. Which of the following is TRUE? A) Jesse has an absolute advantage in painting kites but not snowboards. B) Jesse has an absolute advantage in painting snowboards but not kites. C) Jesse has an absolute advantage in painting both goods. D) Jesse has an absolute advantage in painting neither good. Answer: D Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
Nigel Mia
Hair Pins /hour 4 9
Bandanas /hour 10 3
Table 3.3 17) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Nigel's opportunity cost of producing one bandana is A) 1/4 of a hair pin. B) 2/5 of a hair pin. C) 2.5 hair pins. D) 4 hair pins. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 18) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Nigel's opportunity cost of producing one hair pin is A) 1/3 of a bandana. B) 2.5 bandanas. C) 3 bandanas. D) 10 bandanas. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
19) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Mia's opportunity cost of producing one bandana is A) 1/3 of a hair pin. B) 2.5 hair pins. C) 3 hair pins. D) 9 hair pins. Answer: C Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 20) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Mia's opportunity cost of producing one hair pin is A) 1/3 of a bandana. B) 2.5 bandanas. C) 3 bandanas. D) 10 bandanas. Answer: A Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions 21) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Which of the following is TRUE? A) Nigel has an absolute advantage in producing hair pins but not bandanas. B) Nigel has an absolute advantage in producing bandanas but not hair pins. C) Nigel has an absolute advantage in producing both goods. D) Nigel does not have an absolute advantage in producing either good. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
22) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Which of the following is TRUE? A) Nigel has a comparative advantage in producing hair pins but not bandanas. B) Nigel has a comparative advantage in producing bandanas but not hair pins. C) Nigel has a comparative advantage in producing both goods. D) Nigel does not have a comparative advantage in producing either good. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 23) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Which of the following is TRUE? A) Nigel has both an absolute and comparative advantage in producing hair pins B) Nigel has both an absolute and comparative advantage in producing bandanas C) Nigel has neither an absolute nor comparative advantage in producing hair pins. D) Nigel has neither an absolute nor a comparative advantage in producing bandanas. Answer: B Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 24) Consider two individuals, Nigel and Mia, who produce hair pins and bandanas. Nigel's and Mia's hourly productivity are shown in Table 3.3. Which of the following is TRUE? A) Mia has an absolute advantage in producing hair pins but not bandanas. B) Mia has an absolute advantage in producing bandanas but not hair pins. C) Mia has an absolute advantage in producing both goods. D) Mia does not have an absolute advantage in producing either good. Answer: A Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
25) Jimbo has a comparative advantage over Ned in producing a good if A) Jimbo can produce more of the good than Ned can in a given time period. B) Jimbo has a lower opportunity cost of producing the good than does Ned. C) Jimbo has to trade off more than Ned does to produce the good. D) Jimbo has a higher opportunity cost of producing the good than does Ned. Answer: B Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade Wind Chimes Deena 9 Artie 6
Sun Dials 12 8
Table 3.4 26) Consider two individuals, Artie and Deena, who produce wind chimes and sun dials. Artie's and Deena's weekly productivity are shown in Table 3.4. Which of the following is TRUE? A) Artie has a comparative advantage in producing wind chimes but not sun dials. B) Artie has a comparative advantage in producing sun dials but not wind chimes. C) Artie has a comparative advantage in producing both goods. D) Artie does not have a comparative advantage in producing either good. Answer: D Diff: 3 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
27) Consider two individuals, Artie and Deena, who produce wind chimes and sun dials. Artie's and Deena's weekly productivity are shown in Table 3.4. Which of the following is TRUE? A) Deena has an absolute advantage in producing both goods, and a comparative advantage in producing wind chimes. B) Deena has an absolute advantage in producing both goods, and a comparative advantage in producing sun dials. C) Deena has an absolute and a comparative advantage in producing both goods. D) Deena has an absolute advantage in producing both goods, but no one has a comparative advantage in producing either good. Answer: D Diff: 3 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 28) The more times a worker performs a particular task, the more proficient the worker becomes at that task. This source of productivity increase is called A) continuity. B) innovation. C) specialization. D) repetition. Answer: D Diff: 1 Topic: The Division of Labor and Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 29) A specialized worker doesn't spend time switching from one task to another. This source of productivity increase is called A) continuity. B) innovation. C) functionality. D) repetition. Answer: A Diff: 1 Topic: The Division of Labor and Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
30) When a specialized worker gains insights into a particular task that leads to better production methods, this is called A) continuity. B) innovation. C) specialization. D) repetition. Answer: B Diff: 1 Topic: The Division of Labor and Exchange Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 31) Specialization and trade exploit differences in productivity across workers and A) only benefit the exporter. B) only benefit the importer. C) make everyone better off. D) make everyone worse off. Answer: C Diff: 1 Topic: The Division of Labor and Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 32) Specialization and exchange result from differences in productivity that lead to A) opportunity cost. B) comparative advantage. C) absolute advantage. D) self-sufficiency. Answer: B Diff: 1 Topic: The Division of Labor and Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
33) Differences in innate skills and the benefits associated with the division of labor result in A) differences in productivity. B) absolute advantage. C) self-sufficiency. D) diminishing returns. Answer: A Diff: 1 Topic: The Division of Labor and Exchange Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 34) Trade results from A) comparative advantage. B) absolute advantage. C) self-sufficiency. D) diminishing returns. Answer: A Diff: 2 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 35) An import is a product A) produced in and purchased by residents of the home country. B) produced in and sold to the residents of a foreign country. C) produced in the home country and sold in another country. D) produced in a foreign country and purchased by the residents of the home country. Answer: D Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
36) An export is a product A) produced in and purchased by residents of the home country. B) produced in and sold to the residents of a foreign country. C) produced in the home country and sold in another country. D) produced in a foreign country and purchased by the residents of the home country. Answer: C Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 37) A rich nation will trade with a poor nation because the A) rich nation has the absolute advantage in producing all products. B) poor nation has the absolute advantage in producing all products. C) poor nation has the comparative advantage in producing a product. D) rich nation has the comparative advantage in producing all products. Answer: C Diff: 2 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 38) For country A, an export is a good produced in A) country B and purchased by residents of country B. B) country B and purchased by residents of country A. C) country A and purchased by residents of country B. D) country A and purchased by residents of country A. Answer: C Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
39) For country A, an import is a good produced in A) country B and purchased by residents of country B. B) country B and purchased by residents of country A. C) country A and purchased by residents of country B. D) country A and purchased by residents of country A. Answer: B Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 40) Outsourcing allows a company to take advantage of the ________ of other countries, and in doing so it can produce its products at a lower cost. A) comparative advantages B) diminishing returns C) trade imbalances D) market failures Answer: A Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 41) The cost savings from outsourcing often lead to ________ for consumers and ________ for the outsourcing company. A) lower prices; less output B) lower prices; more output C) higher prices; less output D) higher prices; more output Answer: B Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
42) Jobs lost to outsourcing can be partially offset by jobs gained from A) higher production costs. B) higher opportunity costs. C) greater trade imbalances. D) increased output from another industry. Answer: D Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 43) When a U.S. company shifts some of its production to Mexico, it is engaging in A) outsourcing. B) insourcing. C) self-sufficiency. D) involuntary exchange. Answer: A Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 44) A U.S. company is attempting to cut costs by shifting some of its services to Thailand. This process of shifting production of products or services overseas to cut costs often results in A) greater potential for market failure for those products and services. B) greater economic uncertainty in the market for those products and services. C) lower consumer prices on those products or services. D) lower production quantities of those products or services. Answer: C Diff: 1 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
45) When a U.S. company shifts its call-center operations overseas to reduce costs, it is applying the economic concept of A) thinking at the margin. B) comparative advantage. C) diminishing returns. D) using assumptions to simplify. Answer: B Diff: 2 Topic: Outsourcing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade Recall the Application about productivity in the nation of Latvia in the 1990s to answer the following question(s). 46) According to this Application, in the 1990s the European Community had ________ in the production of all products compared to Latvia. A) an absolute advantage and a comparative advantage B) an absolute advantage but not a comparative advantage C) a comparative advantage but not an absolute advantage D) neither an absolute advantage nor a comparative advantage Answer: B Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 47) According to this Application, workers in the European Community were more productive than workers in Latvia in the 1990s, yet the European Community still purchased products from Latvia. This is because Latvia ________ in the production of the products it sold to the European Community. A) had an absolute advantage B) had a comparative advantage C) used fewer resources D) had a higher opportunity cost Answer: B Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 48) According to this Application, workers in the European Community were more productive than workers in Latvia in the 1990s, yet despite this, the European
Community chose to trade with Latvia. Engaging in trade with Latvia allowed ________ to become more productive. A) workers in the European Community but not workers in Latvia B) workers in Latvia but not workers in the European Community C) neither workers in the European Community nor in Latvia D) workers in both the European Community and in Latvia Answer: D Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 49) According to this Application, workers in the European Community were more productive than workers in Latvia in the 1990s, yet despite this, the European Community chose to buy timber from Latvia. If EU governments decide to buy timber only from the European Community, then A) its citizens will be better off while their producers may be worse off. B) its citizens and producers will be worse off. C) its citizens and producers will be better off. D) its citizens will be worse off and producers will be better off. Answer: D Diff: 1 Topic: Application 1, Absolute Disadvantage and Comparative Advantage in Latvia Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 50) If Libby can produce 20 gallons of beer or 5 gallons of wine per hour, her opportunity cost of one gallon of beer is 4 gallons of wine. Answer: FALSE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions
51) A comparative advantage is the ability of one person or nation to produce a good at an opportunity cost that is lower than that of another person or nation. Answer: TRUE Diff: 1 Topic: Specialization and the Gains from Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 52) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Eddie has a comparative advantage in producing milk shakes. Answer: TRUE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 53) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Eddie has a comparative advantage in producing banana splits. Answer: FALSE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 54) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Tina has a comparative advantage in producing milk shakes. Answer: FALSE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
55) If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can produce 30 milk shakes or 16 banana splits in an hour, then Tina has a comparative advantage in producing banana splits. Answer: TRUE Diff: 2 Topic: Specialization and the Gains from Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 56) If a person has an absolute advantage in some activity, she must have a comparative advantage in that activity as well. Answer: FALSE Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 57) A person or a country can have comparative advantage in all activities. Answer: FALSE Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 58) If a person has a comparative advantage in some activity, she must have an absolute advantage in that activity as well. Answer: FALSE Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
59) Absolute advantage occurs when one producer has greater productivity compared to another producing the same product. Answer: TRUE Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 60) The principles of comparative advantage and specialization only apply to trade between different nations. Answer: FALSE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 61) Imports are products produced in the home country and sold in another country. Answer: FALSE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 62) Exports are products produced in the home country and sold in another country. Answer: TRUE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 63) Trade will be beneficial for a nation with a comparative advantage in producing a certain product. Answer: TRUE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 64) Trade is only beneficial if a nation has an absolute advantage in producing all
products. Answer: FALSE Diff: 1 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 65) What does it mean for a person or nation to have a comparative advantage in producing a product? Answer: Having a comparative advantage means the person or nation has the ability to produce the product at a lower opportunity cost than another person or nation. Diff: 1 Topic: Specialization and the Gains from Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 66) Explain what is meant by the economic principle of voluntary exchange. Answer: If two people both produce goods and each has a comparative advantage, and they exchange goods with each other for mutual benefit, it is called a voluntary exchange. Diff: 1 Topic: Specialization and the Gains from Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
67) Consider two individuals, Ozzy and Sharon, who produce toy boats and yoyos. Ozzy's and Sharon's hourly productivity are as follows:
Ozzy Sharon
Yoyos /hour 12 10
Toy boats /hour 4 5
Who has the absolute advantage or comparative advantage in the production of yoyos or boats? Answer: Sharon has the absolute advantage in boats and Ozzy has the absolute advantage in yoyos. Sharon also has the comparative advantage in boats while Ozzy has it in yoyos, because Sharon's opportunity cost of producing one boat per hour is 2 yoyos, and Ozzy's opportunity cost of producing one boat per hour is 3 yoyos. Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 68) What does it mean for a nation to have an absolute advantage in producing a product? Answer: If a country has the ability to produce a product at a lower resource cost than anyone else, the country is said to have an absolute advantage. Diff: 1 Topic: Comparative Advantage versus Absolute Advantage Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
69) Consider two individuals, Celia and Sondra, who produce bracelets and pendants. Celia's and Sondra's hourly productivity are as follows:
Celia Sondra
Bracelets /hour 4 10
Pendants /hour 1 2
Who has the absolute advantage or comparative advantage in the production of bracelets or pendants? Answer: Sondra has the absolute advantage in producing both goods, but Sondra only has comparative advantage in the production of bracelets, not pendants. Celia has a comparative advantage in the production of pendants. Sondra's opportunity cost of a bracelet is 1/5 of a pendant, and her opportunity cost of a pendant is 5 bracelets. Celia's opportunity cost of a bracelet is 1/4 of a pendant, and her opportunity cost of a pendant is 4 bracelets. Diff: 2 Topic: Comparative Advantage versus Absolute Advantage Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 70) In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith listed three reasons for productivity to increase with specialization. What are these three reasons? Answer: repetition, continuity, innovation Diff: 1 Topic: The Division of Labor and Exchange Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 71) Define the term "import." Answer: An import is a product produced in a foreign country and purchased by residents of the home country. Diff: 2 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
72) Define the term "export." Answer: An export is a product produced in the home country and sold in another country. Diff: 2 Topic: Comparative Advantage and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 73) Imagine two countries, Zorba and Anduluvia. Zorba is producing everything at a lower resource cost than Anduluvia. If the two countries trade what is the reason? Answer: Just because Zorba has an absolute advantage in the production of all goods does not mean that it's not beneficial for the two countries to trade. Suppose there are only two goods. Zorba may have a comparative advantage in only one of the two goods, while Anduluvia may have a comparative advantage in the other. So Zorba could be made better off by specializing in the good in which it has the comparative advantage and trading with Anduluvia for the other good. Diff: 2 Topic: Comparative Advantage and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 3.2 Markets 1) An economy in which people exchange goods and services in a market is called a A) socialist economy. B) market economy. C) centrally planned economy. D) command economy. Answer: B Diff: 1 Topic: Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
2) In a market economy, what specifies the terms of exchange, facilitating exchange between strangers? A) contracts B) insurance C) patents D) accounting rules Answer: A Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 3) In a market economy, what encourages firms to develop new products and production processes? A) contracts B) insurance C) patents D) accounting rules Answer: C Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 4) In a market economy, what provides potential investors with reliable information about the financial performance of a firm? A) contracts B) insurance C) patents D) accounting rules Answer: D Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
5) In which system are decisions made by thousands of people who have information about resources, production technology and consumer desires? A) market system B) centrally planned system C) command system D) socialist system Answer: A Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 6) In a market system, self-interest motivates most people to A) avoid paying insurance premiums. B) remain self-sufficient. C) provide products for other people. D) rely on government central planning. Answer: C Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 7) An economy in which government bureaucracy decides how much of a good to produce, how to produce the good, and who gets the good is known as a A) mixed economy. B) centrally planned economy. C) laissez-faire economy. D) market economy. Answer: B Diff: 1 Topic: Virtues of Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
8) A centrally planned economy has a planning authority that decides A) what products to produce. B) how the products are produced. C) who receives the products. D) all of the above. Answer: D Diff: 1 Topic: Virtues of Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 9) In a market system, what provides individuals the information needed to make decisions? A) insurance B) prices C) patents D) government Answer: B Diff: 1 Topic: Virtues of Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 10) Entrepreneurs play a key role in which type of economy? A) centrally planned economy B) market economy C) command economy D) all of the above Answer: B Diff: 1 Topic: Virtues of Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
11) One of the most obvious clues to the relative scarcity of a product is A) the variations in available sizes. B) its current market price. C) the limited selection of colors. D) the quality of the product. Answer: B Diff: 1 Topic: Virtues of Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 12) Adam Smith used the metaphor of the "invisible hand" to explain how A) markets mismatch buyers and sellers. B) business owners are benevolent. C) people acting in their own self-interest promote the interest of society as a whole. D) the production possibilities frontier illustrates efficient outcomes. Answer: C Diff: 1 Topic: Virtues of Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade Recall the Application about weather-linked crop insurance to answer the following question(s). 13) According to the Application, farmers in poor countries hesitate to increase their investments in fertilizer and seeds due to A) unpredictable weather patterns. B) very predictable weather patterns. C) lack of property rights. D) government regulation. Answer: A Diff: 1 Topic: Application 2, Weather-Linked Crop Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
14) According to the Application, how does weather-linked crop insurance increase agricultural yields? A) It makes the farmers more willing to take risks by providing insurance payouts to cover weather-related revenue loss. B) It makes the farmers more willing to take risks by providing additional insurance payouts when farmers receive bumper crops. C) It makes the farmers less willing to take risks by providing insurance payouts to cover weather-related revenue loss. D) It makes the farmers employees of the government. Answer: A Diff: 1 Topic: Application 2, Weather-Linked Crop Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 15) According to the Application, why were farmers unwilling to invest in seeds and fertilizer? A) Farmers may lose its seed and fertilizer investments in the event of unfavorable weather. B) Farmers may lose its seed and fertilizer investments in the event of favorable weather C) Unfavorable weather is usually caused by increased seed and fertilizer investment. D) Governments raise taxes when farmers invest in seed and fertilizer. Answer: A Diff: 1 Topic: Application 2, Weather-Linked Crop Insurance Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 16) By engaging in trade and acting in their own self interest, World War II POWs were following the economic principle of A) comparative advantage. B) division of labor. C) international trade. D) voluntary exchange. Answer: D Diff: 1 Topic: Example of the Emergence of Markets: POW Camps Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
17) Prisoners in World War II POW camps traded products for other products, a process referred to as A) barter. B) rationing. C) central planning. D) advantage exchange. Answer: A Diff: 1 Topic: Example of the Emergence of Markets: POW Camps Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 18) The prices of the products in the World War II POW camps, measured in terms of cigarettes, reflected the products' A) costs of production. B) retail prices. C) practicality. D) scarcity. Answer: D Diff: 1 Topic: Example of the Emergence of Markets: POW Camps Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 19) Markets exist to facilitate exchange between people. Answer: TRUE Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 20) Under a market system, the people with information about buyers' desires, production technology and resources make the decisions. Answer: TRUE Diff: 1 Topic: Virtues of Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 21) The market system works by getting each person, motivated by his or her own selfinterest, to produce products for other people.
Answer: TRUE Diff: 1 Topic: Virtues of Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 22) What is a market economy? Answer: A market economy is an economy in which people exchange goods and services in markets. Diff: 1 Topic: Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 23) Identify markets in which there is an exchange. Answer: financial capital markets, labor markets, and consumer markets Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 24) Explain why contracts are beneficial to markets. Answer: Contracts specify the terms of trade, facilitating exchange between strangers. Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 25) Explain why insurance has been beneficial to markets. Answer: Insurance reduces the risk to the entrepreneurs. Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 26) Explain how patents have been beneficial for markets. Answer: Patents increase the profitability of inventions, encouraging firms to develop new products and production processes. Diff: 1
Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 27) Explain how accounting rules have been beneficial for markets. Answer: Accounting rules provide potential investors with reliable information about the financial performance of firms. Diff: 1 Topic: Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 28) What is a centrally planned economy? Answer: A centrally planned economy is an economy in which a government bureaucracy decides what products to produce, how to produce the products, and who gets the products. Diff: 1 Topic: Virtues of Markets Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 3.3 Market Failure and the Role of Government 1) How can governments intervene in trade? A) by producing cheaper products B) by helping reduce economic uncertainty C) by not buying products from competing countries D) all of the above Answer: B Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
2) In a market-based economy, the government A) allocates production. B) decides how much to produce. C) encourages insurance risk. D) enforces property rights. Answer: D Diff: 1 Topic: Market Failure and the Role of Government Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) Market failure occurs when A) markets have perfect information. B) markets do not produce the most efficient outcome. C) companies merge to increase efficiency. D) companies are too efficient. Answer: B Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 4) The phenomenon which occurs when markets do NOT produce the most efficient outcome on their own is known as A) public goods. B) imperfect information. C) market failure. D) economic certainty. Answer: C Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
5) One common source of market failure is A) perfect competition. B) pollution. C) perfect information. D) private goods. Answer: B Diff: 1 Topic: Market Failure and the Role of Government Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 6) Which of the following is NOT an example of a public good? A) space exploration B) levees C) parks D) a Big Mac Answer: D Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 7) Which of the following is an example of a public good? A) space exploration B) airline travel C) a U2 concert D) a Big Mac Answer: A Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
8) One role government can play in addressing market failure is to A) enforce the rules of exchange. B) increase economic uncertainty. C) promote imperfect competition. D) facilitate decision making for private goods. Answer: A Diff: 1 Topic: Market Failure and the Role of Government Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 9) Providing unemployment insurance is one way a government can A) break up monopolies. B) enforce rules of exchange. C) create public-works programs. D) reduce economic uncertainty. Answer: D Diff: 1 Topic: Market Failure and the Role of Government Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about property rights, urban slums, and the role of government in a market economy to answer the following question(s). 10) According to the Application, what percentage of the world's population currently lives in urban squatter settlements and therefore has very little housing security? A) 1% B) 10% C) 30% D) 50% Answer: B Diff: 1 Topic: Application 3, Property Rights and Urban Slums Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
11) According to the Application, what advantages occur as a result of granting ownership of a dwelling to its occupant? A) increased investment in housing repairs B) potential increase in the market value of the property C) increased incentives for property maintenance D) all of the above Answer: D Diff: 1 Topic: Application 3, Property Rights and Urban Slums Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 12) According to the Application, why would granting property rights improve property values in urban slums around the world? A) granting ownership increases investment in non-movable structures. B) granting property rights encourage housing repairs. C) granting property rights encourage regular maintenance D) All of the above are correct. Answer: D Diff: 1 Topic: Application 3, Property Rights and Urban Slums Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 13) Market failure happens when a market does not generate the most efficient outcome. Answer: TRUE Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 14) Pollution is an example of a source of a market failure. Answer: TRUE Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
15) In the used car market, there is perfect information when the seller knows that the car overheats after 30 minutes, but the buyer does not. Answer: FALSE Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 16) In the used car market, there is imperfect information when the seller knows that the car overheats after 30 minutes, but the buyer does not. Answer: TRUE Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 17) In a market-based economy, only the government can reduce economic uncertainty. Answer: FALSE Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18) The government plays no role in a market-based economy. Answer: FALSE Diff: 1 Topic: Market Failure and the Role of Government Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
Recall the Application about property rights, urban slums, and the role of government in a market economy to answer the following question(s). 19) Why would an individual living in the slums not spend on regular repairs on maintenance on his/her home? Answer: Because the house is usually on public land and an occupant in the slums can be removed or relocated. If this happens, any money the slum occupant spent on the house will be lost, including any of his or her immobile possessions. Diff: 1 Topic: Application 3, Property Rights and Urban Slums Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 20) Why would property values rise when slum occupants are given ownership of the houses that they dwell in? Answer: An occupant in the slums who now owns his/her home will have more security in their housing situation. They no longer face the possibility of losing their immovable property when they are relocated. As a result, the homeowner can increase their housing repair and maintenance spending because they now are able to reap the full benefits of their housing investment. Diff: 1 Topic: Application 3, Property Rights and Urban Slums Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 4 Demand, Supply, and Market Equilibrium 4.1 The Demand Curve 1) If a competitive market operates perfectly, it relies on A) the number of people buying goods. B) the laws of supply and demand. C) how many products can be produced for sale. D) how much people are willing to pay for the products. Answer: B Diff: 1 Topic: Demand, Supply and Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 2) A change in the quantity demanded of a product is the result of a change in A) the price of the product.
B) the price of related goods. C) consumer income. D) the cost of producing the product. Answer: A Diff: 1 Topic: The Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) A demand curve is defined as the relationship between A) the price of a good and the quantity of that good that consumers are willing to buy. B) the price of a good and the quantity of that good that producers are willing to sell. C) the income of consumers and the quantity of a good that consumers are willing to buy. D) the income of consumers and the quantity of a good that producers are willing to sell. Answer: A Diff: 1 Topic: The Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
4) The quantity demanded of a product increases as A) consumer income rises. B) the prices of other products fall. C) the price of the product rises. D) the price of the product falls. Answer: D Diff: 1 Topic: The Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 5) The law of demand can be explained as A) a lot of people wanting the same thing. B) the higher the price, the smaller the quantity demanded, ceteris paribus. C) people are willing to make limited sacrifices to acquire products. D) legal reasons people make purchases in the marketplace. Answer: B Diff: 2 Topic: The Individual Demand Curve and the Law of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) In considering the relationships between price and quantity demanded, ceteris paribus directs the economist to assume that A) price increases affect quantity. B) quantity increases affect prices. C) neither price nor quantity affect demand. D) all other variables remain unchanged. Answer: D Diff: 2 Topic: The Individual Demand Curve and the Law of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
7) When there is a change in the quantity demanded it means that A) the hours the customer can buy products each day have increased. B) the number of products in inventory have increased. C) the quantity a consumer is willing to buy changes when the price changes. D) the selling price of the products has not changed. Answer: C Diff: 2 Topic: The Individual Demand Curve and the Law of Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 8) The market demand curve A) shows the relationship between the price of a good and the quantity that all consumers together are willing to buy. B) is drawn assuming that variables such as income and tastes are variable. C) is drawn assuming that the number of consumers is variable. D) is drawn assuming that the selling price is fixed. Answer: A Diff: 1 Topic: From Individual Demand to Market Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 9) Suppose that there are only three consumers of a product. At a price of $6 per unit, the first consumer would buy 12 units of the product, the second consumer would buy 8 units of the product, and the third consumer would buy 3 units of the product. If you drew a market demand curve for this product, the quantity demanded at a price of $6 would be A) 23 units. B) 20 units. C) 12 units. D) 11 units. Answer: A Diff: 1 Topic: From Individual Demand to Market Demand Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
10) Refer to Figure 4.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, what is the market quantity demanded at a price of $3? A) 6 B) 9 C) 15 D) 20 Answer: D Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) Refer to Figure 4.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, what is the market quantity demanded at a price of $9? A) 2 B) 4 C) 6 D) 10 Answer: D Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
12) Refer to Figure 4.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, if the market quantity demanded is 15, the price must be A) $0. B) $6. C) $9. D) $15. Answer: B Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) Refer to Figure 4.1, which shows Molly's and Ryan's individual demand curves for compact discs per month. Assuming Molly and Ryan are the only consumers in the market, if the market quantity demanded is 5, the price must be A) $3. B) $6. C) $9. D) $12. Answer: D Diff: 1 Topic: From Individual Demand to Market Demand, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about the decrease in taxes on cigarettes in several Canadian provinces in 1994 to answer the following question(s). 14) According to this Application, after the government deceased cigarette taxes in several Canadian provinces, demand for cigarettes ________ in these provinces, shifting the demand curve to the ________. A) increased; right B) increased; left C) decreased; right D) decreased; left Answer: A Diff: 1 Topic: Application 1, The Law of Demand for Young Smokers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
15) Recall the Application. The change in demand for cigarettes resulting from the decrease in taxes would normally create, ceteris paribus A) an increase in their supply. B) a decrease in their supply. C) an increase in their quantity supplied. D) a decrease in their quantity supplied. Answer: C Diff: 2 Topic: Application 1, The Law of Demand for Young Smokers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) According to this Application, after the government deceased cigarette taxes in several Canadian provinces in 1994, the price of cigarettes in these provinces decreased by roughly ________ percent. A) 8 B) 17 C) 50 D) 88 Answer: C Diff: 1 Topic: Application 1, The Law of Demand for Young Smokers Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) According to this Application, after the government deceased cigarette taxes in several Canadian provinces in 1994, the decrease in the price of cigarettes in these provinces A) more than doubled the smoking rate. B) created no noticeable change in the smoking rate. C) increased the smoking rate by roughly 17 percent. D) was accompanied by a slight decrease in the rate of smoking. Answer: C Diff: 1 Topic: Application 1, The Law of Demand for Young Smokers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) As the price of a product falls, the demand for the product increases, ceteris paribus. Answer: FALSE Diff: 1 Topic: The Demand Curve Skill: Conceptual
AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) On the "demand side" of a market, consumers indicate what they are willing to buy, in what quantity and at what price. Answer: TRUE Diff: 1 Topic: The Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) The law of demand states that there is a negative relationship between price and quantity demanded, ceteris paribus. Answer: TRUE Diff: 1 Topic: The Individual Demand Curve and the Law of Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 21) The market demand curve shows the relationship between the price and the quantity demanded by all consumers, everything else being equal. Answer: TRUE Diff: 2 Topic: From Individual Demand to Market Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4.2 The Supply Curve 1) A supply curve is defined as the relationship between A) the price of a good and the quantity that consumers are willing to buy. B) the price of a good and the quantity that producers are willing to sell. C) the income of consumers and the quantity of a product that consumers are willing to buy. D) the income of consumers and the quantity of a product that producers are willing to sell. Answer: B Diff: 1 Topic: The Supply Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive
markets
2) A change in quantity supplied of a product is the result of a change in A) consumer income. B) the state of production technology. C) the cost of producing the product. D) the price of the product. Answer: D Diff: 1 Topic: The Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) The law of supply states that A) producers should only produce what they can sell. B) producers should only sell the items when the price is right. C) there is a positive relationship between price and quantity supplied, ceteris paribus. D) producers are legally required to make necessary items available in the marketplace. Answer: C Diff: 1 Topic: The Individual Supply Curve and the Law of Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Quantity of Frozen Latte-On-A-Stick Supplied Price Flo's Supply Rita's Supply 1 0 0 2 0 3 3 4 6 4 9 9 5 15 12 Table 4.1 4) Refer to Table 4.1, which shows Flo's and Rita's individual supply schedules for frozen latte-on-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the market quantity supplied at a price of $2? A) 0 B) 2 C) 3 D) 5 Answer: C Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive
markets 5) Refer to Table 4.1, which shows Flo's and Rita's individual supply schedules for frozen latte-on-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the market quantity supplied at a price of $5? A) 3 B) 12 C) 15 D) 27 Answer: D Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) Refer to Table 4.1, which shows Flo's and Rita's individual supply schedules for frozen latte-on-a-stick. Assuming Flo and Rita are the only suppliers in the market, what is the market quantity supplied at a price of $1? A) 0 B) 1 C) 3 D) 5 Answer: A Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) Refer to Table 4.1, which shows Flo's and Rita's individual supply schedules for frozen latte-on-a-stick. Assuming Flo and Rita are the only suppliers in the market, if the market quantity supplied is 18, the price must be A) $2. B) $3. C) $4. D) $5. Answer: C Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
8) Refer to Table 4.1, which shows Flo's and Rita's individual supply schedules for frozen latte-on-a-stick. Assuming Flo and Rita are the only suppliers in the market, if the market quantity supplied is 3, the price must be A) $0. B) $2. C) $4. D) $5. Answer: B Diff: 1 Topic: From Individual Supply to Market Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Figure 4.6
David's Supply Schedule
Celeste's Supply Schedule
9) Refer to Figure 4.6, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, what is the market quantity supplied at a price of $30? A) 200 B) 250 C) 300 D) 350 Answer: B Diff: 1 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
10) Refer to Figure 4.6, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, what is the market quantity supplied at a price of $20? A) 0 B) 100 C) 150 D) 200 Answer: B Diff: 1 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) Refer to Figure 4.6, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, if the market quantity supplied is 350, the price must be A) $10. B) $20. C) $30. D) $40. Answer: D Diff: 1 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 12) Refer to Figure 4.6, which shows David's and Celeste's individual supply curves for flower arrangements per week. Assuming David and Celeste are the only producers in the market, if the market quantity supplied is 50, the price must be A) $0. B) $10. C) between $10 and $20. D) $30. Answer: C Diff: 2 Topic: From Individual Supply to Market Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
Recall the Application about the decrease in the price of wool in the 1990s to answer the following question(s). In the 1990s, the world price of wool decreased by about 30 percent and prices have remained relatively low since then. In 2012, an organization in New Zealand proposed that sheep shearing be added to the Commonwealth Games and the Olympics as a spectator sport in an effort to increase the awareness and the demand for wool. 13) Recall the Application. As the world price of wool decreased, the quantity of wool supplied by individual ranchers would ________, and the quantity supplied in the world market would ________. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Diff: 1 Topic: Application 2, Law of Supply and Woolympics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 14) Recall the Application. The decrease in the price of wool would be reflected by a movement ________ on the market supply curve for wool. A) down and to the right B) down and to the left C) up and to the right D) up and to the left Answer: B Diff: 1 Topic: Application 2, Law of Supply and Woolympics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
15) Recall the Application. If the organization in New Zealand was successful in getting the Olympics to include sheep shearing as a spectator sport, and this helped to raise the world price of wool, the quantity of wool supplied would ________ because the market supply curve for wool is ________ sloped. A) increase; positively B) increase; negatively C) decrease; positively D) decrease; negatively Answer: A Diff: 1 Topic: Application 2, Law of Supply and Woolympics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) As the price of a product rises, the quantity supplied decreases. Answer: FALSE Diff: 1 Topic: The Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) On the "supply side" of a market, producers indicate to consumers what they are willing to sell, in what quantity and at what price. Answer: TRUE Diff: 1 Topic: The Supply Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) The law of supply states that there is a positive relationship between price and quantity supplied, ceteris paribus. Answer: TRUE Diff: 1 Topic: The Individual Supply Curve and the Law of Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
4.3 Market Equilibrium: Bringing Demand and Supply Together
1) Figure 4.2 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $7, there is an A) excess demand of 8 t-shirts. B) excess supply of 8 t-shirts. C) excess demand of 10 t-shirts. D) excess supply of 10 t-shirts. Answer: A Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 2) Figure 4.2 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $15, there is an A) excess demand of 8 t-shirts. B) excess supply of 8 t-shirts. C) excess demand of 10 t-shirts. D) excess supply of 10 t-shirts. Answer: B Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
3) Figure 4.2 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $7, we would expect that A) demand will decrease until quantity demanded equals quantity supplied. B) supply will increase until quantity demanded equals quantity supplied. C) price will increase until quantity demanded equals quantity supplied. D) there will be no change in the price since the market is in equilibrium. Answer: C Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) Figure 4.2 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $15, we would expect that A) demand will decrease until quantity demanded equals quantity supplied. B) supply will increase until quantity demanded equals quantity supplied. C) price will decrease until quantity demanded equals quantity supplied. D) there will be no change in the price since the market is in equilibrium. Answer: C Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 5) Figure 4.2 illustrates the supply and demand for t-shirts. If the actual price of t-shirts is $10, we would expect that A) demand will decrease until quantity demanded equals quantity supplied. B) supply will increase until quantity demanded equals quantity supplied. C) price will increase until quantity demanded equals quantity supplied. D) there will be no change in the price since the market is in equilibrium. Answer: D Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
6) What happens if the price of a product is below the equilibrium price? A) The buyers will stop purchasing a "cheap" product. B) The producer will lower the price to sell more product. C) There will be an excess demand for the product. D) There will be a surplus of the product. Answer: C Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) In the event of excess supply in the coffee market A) the price of coffee will increase. B) the price of coffee will decrease. C) the supply of coffee will decrease (supply will shift to the left) to meet the demand. D) the demand for coffee will increase (demand will shift to the right) to meet the supply. Answer: B Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 8) When consumers are willing to buy more than producers are willing to sell A) there is excess supply of the product in the market. B) there is excess demand for the product in the market. C) the market is in equilibrium. D) the demand curve will shift until the quantity supplied equals the quantity demanded. Answer: B Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
9) Suppose that the quantity of cars demanded exceeds the quantity of cars supplied. We would expect that A) the price of cars will increase. B) the price of cars will decrease. C) the supply will increase (supply will shift to the right) to meet the demand. D) the demand will decrease (demand will shift to the left) to meet the supply. Answer: A Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) Suppose that a market for a product is in equilibrium at a price of $5 per unit. At any price above $5 per unit A) there will be an excess demand for the product. B) there will be an excess supply of the product. C) the quantity supplied of the product will be less than the quantity demanded of that product. D) there will be a shortage of that product. Answer: B Diff: 2 Topic: Excess Demand Causes the Price to Rise Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) The government sometimes creates an excess demand for a product by setting a maximum price at which the product may be sold to consumers. This is sometimes called a A) price ceiling. B) price floor. C) tax. D) subsidy. Answer: A Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
12) Suppose that the quantity of cars supplied exceeds the quantity of cars demanded. We would expect that A) the price of cars will increase. B) the price of cars will decrease. C) the supply will increase (supply will shift to the right) to meet the demand. D) the demand will decrease (demand will shift to the left) to meet the supply. Answer: B Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) Suppose that a market for a product is in equilibrium at a price of $3 per unit. At any price below $3 per unit A) there will be an excess demand for the product. B) there will be an excess supply of the product. C) the quantity demanded of the product will be less than the quantity supplied of that product. D) there will be a surplus of that product. Answer: A Diff: 2 Topic: Excess Supply Causes the Price to Drop Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 14) A government sometimes creates an excess supply of a product by setting a minimum price at which the product may be sold to consumers. This is sometimes called a A) price ceiling. B) price floor. C) tax. D) subsidy. Answer: B Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
Recall the Application about the policies used by the European Union to support the agricultural sectors of is member countries to answer the following question(s). 15) According to this Application, the policies used by the European Union to support the agricultural sectors of its member countries created excess supply. This would occur if these policies set a ________ price which was ________ the market equilibrium price. A) maximum; above B) maximum; below C) minimum; above D) minimum; below Answer: C Diff: 2 Topic: Application 3, Shrinking Wine Lakes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) According to this Application, the policies used by the European Union to support the agricultural sectors of its member countries created excess supply. Excess supply can be generated if a government establishes a A) price ceiling below the market equilibrium price. B) price ceiling above the market equilibrium price. C) price floor below the market equilibrium price. D) price floor above the market equilibrium price. Answer: D Diff: 2 Topic: Application 3, Shrinking Wine Lakes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) According to this Application, in recent years the European Union has reformed its agriculture policies by reducing or eliminating minimum prices. Ceteris paribus, these policy reforms would ________ excess supply by ________ prices. A) reduce; raising B) reduce; lowering C) increase; raising D) increase; lowering Answer: B Diff: 2 Topic: Application 3, Shrinking Wine Lakes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
18) If the quantity of a product demanded is greater than the quantity of a product supplied, there is pressure in the market to push the price downward. Answer: FALSE Diff: 1 Topic: Market Equilibrium: Bringing Demand and Supply Together Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) Governments sometime create an excess demand for a product by setting a maximum price that is less than the equilibrium price, resulting in a permanent excess demand for the product. This is known as a price floor. Answer: FALSE Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) Excess demand in an unregulated market will cause the price of a product to fall. Answer: FALSE Diff: 1 Topic: Excess Demand Causes the Price to Rise Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 21) Excess supply in an unregulated market will cause the price of a product to fall. Answer: TRUE Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 22) Governments sometime create an excess supply of a product by setting a minimum price that is greater than the equilibrium price, resulting in a permanent excess supply of the product. This is known as a price ceiling. Answer: FALSE Diff: 1 Topic: Excess Supply Causes the Price to Drop Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
4.4 Market Effects of Changes in Demand
1) Figure 4.3 illustrates the demand for tacos. An increase in the demand for tacos is represented by the movement from A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: D Diff: 1 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 2) Figure 4.3 illustrates the demand for tacos. A decrease in the demand for tacos is represented by the movement from A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: C Diff: 1 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
3) Figure 4.3 illustrates the demand for tacos. Assume that tacos are normal goods. An increase in income would bring about a movement from A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) Figure 4.3 illustrates the demand for tacos. Assume that tacos are inferior goods. An increase in income would bring about a movement from A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 5) Figure 4.3 illustrates the demand for tacos. Assume that tacos and beer are complements. An increase in the price of beer would bring about a movement from A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D2. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
6) Figure 4.3 illustrates the demand for tacos. Assume that tacos and beer are complements. A decrease in the price of beer would bring about a movement from A) point a to point c. B) point c to point a. C) D2 to D0. D) D0 to D2. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) Figure 4.3 illustrates the demand for tacos. Assume that tacos and burritos are substitutes. A decrease in the price of burritos would bring about a movement from A) point a to point c. B) point c to point b. C) D2 to D0. D) D1 to D2. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 8) Figure 4.3 illustrates the demand for tacos. An increase in the number of consumers in the market would bring about a movement from A) point a to point b. B) point c to point a. C) D2 to D1. D) D0 to D2. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
9) the Figure 4.3 illustrates the demand for tacos. An increase in price of tacos would bring about a movement from A) point a to point c. B) point c to point a. C) D2 to D0. D) D0 to D1. Answer: B Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) Figure 4.3 illustrates the demand for tacos. A decrease in the price of tacos would bring about a movement from A) point a to point c. B) point c to point a. C) D2 to D0. D) D0 to D2. Answer: A Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) Figure 4.3 illustrates the demand for tacos. A successful advertising campaign to sell tacos would bring about a movement from A) point a to point b. B) point c to point b. C) D2 to D1. D) D0 to D1. Answer: D Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
12) Figure 4.3 illustrates the demand for tacos. If people expect the price of tacos to decrease in the near future, this would most likely bring about a movement from A) point a to point b. B) point c to point a. C) D2 to D0. D) D0 to D1. Answer: C Diff: 2 Topic: Market Effects of Changes in Demand, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) When the price of apples goes up A) the demand for apples will decrease, ceteris paribus. B) the demand for apples will increase, ceteris paribus. C) the quantity of apples demanded will decrease, ceteris paribus. D) the quantity of apples demanded will increase, ceteris paribus. Answer: C Diff: 1 Topic: Change in Quantity Demanded versus Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 14) When the price of almonds falls A) the demand for almonds decreases, ceteris paribus. B) the demand for almonds increases, ceteris paribus. C) the quantity of almonds demanded decreases, ceteris paribus. D) the quantity of almonds demanded increases, ceteris paribus. Answer: D Diff: 1 Topic: Change in Quantity Demanded versus Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
15) Landon demands more sushi as his income increases. From this we can conclude that, for Landon A) sushi is a normal good. B) sushi is an inferior good. C) sushi is a complementary good. D) sushi is a substitute good. Answer: A Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) Assume that coffee and tea are substitutes. When the price of coffee increases A) the demand for tea decreases. B) the demand for tea increases. C) the supply of tea increases. D) the supply of tea decreases. Answer: B Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) Suppose that a product benefits from a successful advertising campaign. The result is that A) the demand for the product increases. B) the demand for the product decreases. C) the supply of the product increases. D) the supply of the product decreases. Answer: A Diff: 3 Topic: Increases in Demand Shift the Demand Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
18) Suppose that consumers expect that the price of a product will increase in the future. The result is that A) the current demand for the product increases. B) the current demand for the product decreases. C) the current supply of the product increases. D) the current supply of the product decreases. Answer: A Diff: 2 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) Assume that tortilla chips and salsa are complements. When the price of tortilla chips decreases A) the demand for salsa increases. B) the demand for salsa decreases. C) the supply of salsa decreases. D) the demand for tortilla chips decreases. Answer: A Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) If the population increases, the market demand for most products will A) not change. B) decrease. C) increase. D) depend on supply. Answer: C Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
21) Suppose that in October the price of a cup of cafe latte was $2.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 300 lattes were consumed. What might have caused this change? A) The price of tea (a substitute for cafe lattes) fell. B) The price of tea (a substitute for cafe lattes) rose. C) The price of coffee beans (an input of production of cafe lattes) rose. D) The price of coffee beans (an input of production of cafe lattes) fell. Answer: A Diff: 3 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 22) If demand for a product increases, ceteris paribus, the equilibrium A) price increases. B) price decreases. C) price remains unchanged. D) quantity decreases. Answer: A Diff: 1 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 23) A good for which demand decreases when income decreases is known as a(n) ________ good. A) normal B) inferior C) complementary D) substitute Answer: A Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
24) If the demand for one good decreases when the price of another good decreases, the two goods are ________ goods. A) normal B) inferior C) complementary D) substitute Answer: D Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 25) If the demand for one good decreases when the price of another good increases, the two goods are ________ goods. A) normal B) inferior C) complementary D) substitute Answer: C Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 26) Suppose that consumers expect the price of a product to decrease in the future. The result is that A) the current demand for the product increases. B) the current demand for the product decreases. C) the current supply of the product increases. D) the current supply of the product decreases. Answer: B Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
27) A good for which demand decreases when income increases is known as a(n) ________ good. A) normal B) inferior C) complementary D) substitute Answer: B Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 28) Suppose that in 2011, 4 million plasma TVs were purchased at $950 each, while in 2012, 3 million plasma TVs were purchased at $800 each. What might have caused this change? A) The price of LCD TVs (a substitute for plasma TVs) fell. B) The price of LCD TVs (a substitute for plasma TVs) rose. C) Plasma TV manufacturing technology increased. D) Plasma TV manufacturing technology decreased. Answer: A Diff: 3 Topic: A Decrease in Demand Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 29) If the equilibrium price of a good decreases and the equilibrium quantity of the good decreases, we can conclude that A) demand increased. B) demand decreased. C) supply increased. D) supply decreased. Answer: B Diff: 2 Topic: A Decrease in Demand Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
Recall the Application about craft beer and the increase in the price of hops to answer the following question(s). 30) Recall the Application. An increase in the production of beer resulted in the demand for hops because hops are ________ to beer. A) inputs B) completely unrelated C) complements D) substitutes Answer: A Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 31) Recall the Application. Because hops are inputs in the production of beer, an increase in the production of beer resulted in A) an increase in the demand for hops. B) a decrease in the demand for hops. C) an increase in the quantity demanded for hops. D) a decrease in the quantity demanded for hops. Answer: A Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 32) According to this Application, between 2012 and 2017, the increase in craft beer production increased the price of hops A) from $3.17 to $3.92 per pound. B) from $3.17 to $5.92 per pound. C) from $3.92 to $5.17 per pound. D) from $4.17 to $5.92 per pound. Answer: B Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
33) According to this Application, between 2012 and 2017, the increase in craft beer production increased the price of hops A) by about 118 percent. B) by about 87 percent. C) by about 18 percent. D) by about 78 percent Answer: B Diff: 2 Topic: Application 4, Craft Beer and the Price of Hops Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 34) Based this Application, between 2012 and 2017, a decrease in craft beer production will ________the demand for hops and ________ the price of hops. A) decrease; increase B) decrease; decrease C) increase; increase D) increase; decrease Answer: B Diff: 2 Topic: Application 4, Craft Beer and the Price of Hops Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 35) Two goods are complements if an increase in the price of one good leads to an increase in demand for the other. Answer: FALSE Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 36) People will buy more of an inferior good when their income decreases. Answer: TRUE Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
37) Two goods are substitutes if an increase in the price of one good leads to a decrease in demand for the other. Answer: FALSE Diff: 1 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 38) An increase in demand will cause the equilibrium price and quantity to rise, ceteris paribus. Answer: TRUE Diff: 1 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 39) If consumer preference for a product increases, this will cause the equilibrium price of the product to go down, and the equilibrium quantity of the product to go up. Answer: FALSE Diff: 2 Topic: An Increase in Demand Increases the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 40) People will buy more of a normal good when their income decreases. Answer: FALSE Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 41) A decrease in population would shift the demand curve to the left. Answer: TRUE Diff: 1 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
42) A decrease in demand will cause the equilibrium price and quantity of a good to fall, ceteris paribus. Answer: TRUE Diff: 1 Topic: A Decrease in Demand Decreases the Equilibrium Price Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about craft beer and the increase in the price of hops to answer the following question(s). 43) Hops are substitutes in the production of beer. Answer: FALSE Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 44) The reason why the demand for hops increased is because hops are inputs to the production of beer, and beer demand was rising. Answer: FALSE Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 45) Explain the difference between a change in quantity demanded and a change in demand. Answer: A change in quantity demanded of a product is caused by a change in the price of the product. It is represented by a movement along the product's demand curve. A change in demand for a product is caused by a change in a variable other than the price of the product. It is represented by a shift of the demand curve. Diff: 2 Topic: Change in Quantity Demanded versus Change in Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
46) Describe the changes in the variables that will cause the demand for a product to increase, shifting the demand curve to the right. Answer: an increase in income if the product is a normal good; a decrease in income if the product is an inferior good; an increase in the price of a substitute good; a decrease in the price of a complementary good; an increase in population; an increase in consumer preference for the good; an increase in the expected future price of the good Diff: 2 Topic: Increases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 47) Describe the changes in the variables that will cause the demand for a product to decrease, shifting the demand curve to the left. Answer: a decrease in income if the product is a normal good; an increase in income if the product is an inferior good; a decrease in the price of a substitute good; an increase in the price of a complementary good; a decrease in population; a decrease in consumer preference for the good; a decrease in the expected future price of the good Diff: 2 Topic: Decreases in Demand Shift the Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 48) Draw a graph to illustrate the effect of an increase in demand on the price and quantity in a market. Answer:
As illustrated in the graph, an increase in demand causes the price and quantity sold of the product to increase. Diff: 2 Topic: An Increase in Demand Increases the Equilibrium Price, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
49) Draw a graph to illustrate the effect of higher gasoline prices on the demand for large SUVs. What is the relationship between gasoline and SUVs? Answer:
Gasoline and SUVs are complements. When the price of gasoline rises it becomes more expensive to drive an SUV, and so the demand for SUVs is likely to decrease (people may switch to smaller, more fuel-efficient vehicles). Note that as a result of the decrease in demand for SUVs their price should decrease and so should the quantity of SUVs sold. Diff: 1 Topic: A Decrease in Demand Decreases the Equilibrium Price, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about craft beer and the increase in the price of hops to answer the following question(s). 50) According to the Application, why did the price of hops increase? Answer: Since 2017, craft beer production has increased. This, coupled with the fact that craft beer requires more hops, resulted in a large increase in the demand for hops. Holding the supply of hops constant, an increase in the demand for hops will result in a higher equilibrium price for hops. Diff: 1 Topic: Application 4, Craft Beer and the Price of Hops Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
4.5 Market Effects of Changes in Supply
1) Figure 4.4 illustrates the supply of tacos. An increase in the supply of tacos is represented by a movement from A) point a to point b. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: D Diff: 1 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 2) Figure 4.4 illustrates the supply of tacos. A decrease in the supply of tacos is represented by a movement from A) point a to point b. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: C Diff: 1 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
3) Figure 4.4 illustrates the supply of tacos. An increase in the price of ground beef, which is used to make tacos, would most likely cause a movement from A) point a to point b. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: C Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) Figure 4.4 illustrates the supply of tacos. A technological advancement which makes tacos cheaper to produce would most likely cause a movement from A) point a to point c. B) point c to point a. C) S2 to S0. D) S0 to S2. Answer: D Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 5) Figure 4.4 illustrates the supply of tacos. An increase in the number of Mexican food producers would most likely cause a movement from A) point a to point c. B) point c to point a. C) S2 to S0. D) S0 to S2. Answer: D Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
6) Figure 4.4 illustrates the supply of tacos. If the government offered a subsidy to Mexican restaurants for each taco they produce, this would most likely cause a movement from A) point a to point c. B) point c to point b. C) S2 to S1. D) S0 to S1. Answer: D Diff: 2 Topic: Market Effects of Changes in Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) The price of pineapples has risen dramatically. Which of the following is likely to happen? A) The quantity of pineapples supplied will increase. B) The quantity of pineapples supplied will decrease. C) The supply of pineapples will decrease. D) The supply of pineapples will increase. Answer: A Diff: 1 Topic: Change in Quantity Supplied versus Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 8) The price of iPhones has fallen dramatically. Which of the following is likely to happen? A) The quantity of iPhones supplied will decrease. B) The quantity of iPhones supplied will increase. C) The supply of iPhones will decrease. D) The supply of iPhones will increase. Answer: A Diff: 1 Topic: Change in Quantity Supplied versus Change in Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
9) Olives are used to produce olive oil. If the price of olives increases A) the demand for olive oil increases. B) the demand for olive oil decreases. C) the supply of olive oil increases. D) the supply of olive oil decreases. Answer: D Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) If a technological advance makes it possible to produce computers at a lower cost A) the demand for computers increases. B) the demand for computers decreases. C) the supply of computers increases. D) the supply of computers decreases. Answer: C Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 11) If the number of automobile manufacturers decreases A) the demand for automobiles increases. B) the demand for automobiles decreases. C) the supply of automobiles increases. D) the supply of automobiles decreases. Answer: D Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
12) If there is an advancement in the technology used to produce a product, what is the likely effect it may have on the supply? A) The company would not change its manufacturing. B) More people would be needed to produce the product. C) It would decrease the supply. D) It would increase the supply. Answer: D Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 13) An increase in supply of a product results when A) taxes on the product are increased. B) the companies that produce the product have higher materials costs. C) technological innovations are introduced in the manufacturing process. D) the government reduces subsidies on the product. Answer: C Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 14) Suppose that in 2011, 3 million plasma TVs were purchased at $950 each, while in 2012, 4 million plasma TVs were purchased at $800 each. What might have caused this change? A) The price of LCD TVs (a substitute for plasma TVs) fell. B) The price of LCD TVs (a substitute for plasma TVs) rose. C) There was an advance in plasma TV manufacturing technology. D) There were fewer workers in plasma TV manufacturing. Answer: C Diff: 3 Topic: An Increase in Supply Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
15) Suppose that a technological advancement substantially reduces the cost of laser eye surgery. This would cause the equilibrium A) price of technology to increase. B) quantity of technology to decrease. C) quantity of laser eye surgery to increase. D) quantity of laser eye surgery to decrease. Answer: C Diff: 2 Topic: An Increase in Supply Decreases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) If the number of wine producers decreases A) the demand for wine increases. B) the demand for wine decreases. C) the supply of wine increases. D) the supply of wine decreases. Answer: D Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 17) Corn is used to produce tortillas. If the price of corn increases A) the demand for tortillas increases. B) the demand for tortillas decreases. C) the supply of tortillas increases. D) the supply of tortillas decreases. Answer: D Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
18) If producers have an expectation of higher future prices, the supply of the good that is currently available A) will be all that is produced. B) will increase. C) will decrease. D) will not change. Answer: C Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) Suppose that in October the price of a cup of cafe latte was $2.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 600 lattes were consumed. What might have caused this change? A) The price of tea (a substitute for cafe lattes) fell. B) The price of tea (a substitute for cafe lattes) rose. C) The price of coffee beans (an input of production of cafe lattes) rose. D) The price of coffee beans (an input of production of cafe lattes) fell. Answer: D Diff: 3 Topic: A Decrease in Supply Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) If the equilibrium price of a good increases and the equilibrium quantity of the good decreases, we can conclude that A) demand increased. B) demand decreased. C) supply increased. D) supply decreased. Answer: D Diff: 2 Topic: A Decrease in Supply Increases the Equilibrium Price Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
21) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. An increase in supply and an increase in quantity demanded are represented by a movement from A) point a to point b. B) point a to point c. C) point d to point b. D) point c to point d. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 22) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. A decrease in demand and a decrease in quantity supplied are represented by a movement from A) point c to point a. B) point a to point c. C) point b to point c. D) point d to point b. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
23) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. A decrease in supply and a decrease in quantity demanded are represented by a movement from A) point a to point d. B) point c to point d. C) point c to point a. D) point b to point c. Answer: B Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 24) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. An increase in demand and an increase in quantity supplied are represented by a movement from A) point b to point a. B) point c to point d. C) point d to point a. D) point b to point d. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 25) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. A decrease in supply and an increase in demand are represented by a movement from A) point d to point c. B) point c to point b. C) point b to point d. D) point c to point a. Answer: D Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
26) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. An increase in supply and a decrease in demand are represented by a movement from A) point d to point b. B) point d to point a. C) point a to point c. D) point b to point d. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 27) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. An increase in supply and an increase in demand are represented by a movement from A) point d to point b. B) point d to point a. C) point c to point a. D) point b to point c. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 28) Figure 4.5 illustrates a set of supply and demand curves for hamburgers. A decrease in supply and a decrease in demand are represented by a movement from A) point c to point a. B) point b to point d. C) point d to point a. D) point a to point b. Answer: B Diff: 3 Topic: Simultaneous Changes in Demand and Supply, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
29) Bananas and apples are substitutes. When the price of bananas falls, and a technological advance in apple production occurs at the same time A) the equilibrium price of apples rises and the equilibrium quantity of apples falls. B) the equilibrium price of apples rises and the equilibrium quantity of apples rises. C) the equilibrium price of apples rises and the equilibrium quantity of apples might rise or fall. D) the equilibrium price of apples falls and the equilibrium quantity of apples might rise or fall. Answer: D Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 30) Bananas and apples are substitutes. When the price of bananas rises, and a technological advance in apple production occurs at the same time A) the equilibrium price of apples rises and the equilibrium quantity of apples falls. B) the equilibrium price of apples rises and the equilibrium quantity of apples rises. C) the equilibrium price of apples rises and the equilibrium quantity of apples might rise or fall. D) the equilibrium quantity of apples rises and the equilibrium price of apples might rise or fall. Answer: D Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 31) If the demand for jelly decreases, and the price of grapes (used to make jelly) rises A) the equilibrium price of jelly rises and the equilibrium quantity of jelly might rise or fall. B) the equilibrium price of jelly falls and the equilibrium quantity of jelly might rise or fall. C) the equilibrium price of jelly might rise or fall, and the equilibrium quantity of jelly falls. D) the equilibrium price of jelly might rise or fall, and the equilibrium quantity of jelly rises. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
32) If the demand for jelly increases, and the price of grapes (used to make jelly) rises A) the equilibrium price of jelly rises and the equilibrium quantity of jelly might rise or fall. B) the equilibrium price of jelly falls and the equilibrium quantity of jelly might rise or fall. C) the equilibrium price of jelly falls and the equilibrium quantity of jelly rises. D) the equilibrium quantity of jelly falls and the equilibrium price of jelly might rise or fall. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 33) Suppose that a new advertising campaign extolling the virtues of apple juice is successful, and a major freeze destroys half of the country's apple crop. What happens to the price and quantity of apple juice? A) The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice falls. B) The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice rises. C) The equilibrium price of apple juice rises and the equilibrium quantity of apple juice might rise or fall. D) The equilibrium price of apple juice falls and the equilibrium quantity of apple juice might rise or fall. Answer: C Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 34) Suppose that a new study is released stating that consumption of orange juice (a substitute for apple juice) reduces the risk of cancer, and a major freeze destroys half of the country's apple crop. What happens to the price and quantity of apple juice? A) The price of apple juice might rise or fall and the quantity of apple juice falls. B) The price of apple juice might rise or fall and the quantity of apple juice rises. C) The price of apple juice falls and the quantity of apple juice falls. D) The quantity of apple juice might rise or fall, and the price of apple juice rises. Answer: A Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
Recall the Application about the harmattan and how it affects the price of cocoa to answer the following question(s). 35) According to this Application, the dry dust wind known as the harmattan has caused ________ of cocoa pods. A) a decrease in the supply B) an increase in the supply C) an increase in the demand D) a decrease in the demand Answer: A Diff: 1 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 36) According to this Application, the recent result of the harmattan was to ________ the equilibrium price and ________ the equilibrium quantity of cocoa. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 37) According to this Application, the longer than usual harmattan has impacted the supply curve for cocoa pods, shifting the supply curve to the ________ due to a(n) ________ in cocoa yields. A) right; increase B) right; decrease C) left; increase D) left; decrease Answer: D Diff: 2 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
38) This Application illustrates how a change in weather conditions can adversely impact the ________ by ________ the price of a good. A) demand; decreasing B) demand; increasing C) supply; decreasing D) supply; increasing Answer: D Diff: 2 Topic: Application 5, The Harmattan and the Price of Chocolate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 39) A change in the price of a product will change the supply of that product. Answer: FALSE Diff: 1 Topic: Change in Quantity Supplied versus Change in Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 40) A decrease in the cost of production will shift the supply curve down and to the right. Answer: TRUE Diff: 1 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 41) An increase in wages will shift the supply curve up and to the left. Answer: TRUE Diff: 1 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 42) If supply of a product increases and demand for the product decreases, equilibrium quantity will definitely change. Answer: FALSE Diff: 2 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive
markets
43) If supply of a product increases and demand for the product decreases, equilibrium price will definitely change. Answer: TRUE Diff: 2 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 44) Explain the difference between a change in quantity supplied and a change in supply. Answer: A change in quantity supplied of a product is caused by a change in the price of the product. It is represented by a movement along the product's supply curve. A change in supply of a product is caused by a change in a variable other than the price of the product. It is represented by a shift of the supply curve. Diff: 2 Topic: Change in Quantity Supplied versus Change in Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 45) Describe the changes in the variables that will cause supply for a product to increase, shifting the supply curve down and to the right. Answer: a decrease in wages of workers who produce the product; a decrease in the prices of materials or capital used to produce the product; advances in technology which is used in the production of the product; government subsidies applied to the production of the product; a decrease in the expected future price of the product; an increase in the number of producers of the product. Diff: 2 Topic: Increases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 46) Describe the changes in the variables that will cause supply for a product to decrease, shifting the supply curve up and to the left. Answer: an increase in wages of workers who produce the product; an increase in the prices of materials or capital used to produce the product; an increase in the per-unit tax on the product; an increase in the expected future price of the product; a decrease in the number of producers of the product. Diff: 2 Topic: Decreases in Supply Shift the Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
47) As a result of advances in technology, cellular telephones have become cheaper to produce. Illustrate the effect of this change on the market for cellular telephones. Answer:
As illustrated on the graph, the decreased cost of production leads to an increase in the supply of cellular telephones, with the result that the price of the product decreases and the quantity sold increases. Diff: 2 Topic: An Increase in Supply Decreases the Equilibrium Price, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 48) Using a graph, illustrate the effect that an increase in production costs will have on the equilibrium price and quantity of a good. Answer:
The graph shows a decrease in supply. The supply curve shifts to the left, causing equilibrium price to rise, and equilibrium quantity to fall. Diff: 2 Topic: A Decrease in Supply Increases the Equilibrium Price, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
49) Explain what would happen to the equilibrium price and quantity of oranges if the supply of oranges increased while the demand for oranges decreased. Answer: Equilibrium price would decrease. Equilibrium quantity would depend on which change was larger. If the supply increase was larger than the demand decrease, equilibrium quantity would increase. If the demand decrease was larger than the supply increase, equilibrium quantity would decrease. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 50) Explain what would happen to the equilibrium price and quantity of pineapples if the supply of pineapples decreased while the demand for pineapples increased. Answer: Equilibrium price would increase. Equilibrium quantity would depend on which change was larger. If the supply decrease was larger than the demand increase, equilibrium quantity would decrease. If the demand increase was larger than the supply decrease, equilibrium quantity would increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 51) Explain what would happen to the equilibrium price and quantity of iPhones if the supply of iPhones increased while the demand for iPhones also increased. Answer: Equilibrium quantity would increase. Equilibrium price would depend on which change was larger. If the supply increase was larger than the demand increase, equilibrium price would decrease. If the demand increase was larger than the supply increase, equilibrium price would increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 52) Explain what would happen to the equilibrium price and quantity of gasoline if the supply of gasoline decreased while the demand for gasoline also decreased. Answer: Equilibrium quantity would decrease. Equilibrium price would depend on which change was larger. If the supply decrease was larger than the demand decrease, equilibrium price would increase. If the demand decrease was larger than the supply decrease, equilibrium price would decrease. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking
Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 53) Explain what will happen to the equilibrium price and quantity of hybrid automobiles if there are technological advancements in the production of hybrid automobiles while at the same time consumer preference for hybrid automobiles increases. Answer: Technological advancements will cause supply to increase and increases in consumer preference will cause demand to increase. Equilibrium quantity will definitely increase. Equilibrium price will depend on whether the increase in supply or the increase in demand is larger. If the supply increase is larger than the demand increase, equilibrium price will decrease. If the demand increase is larger than the supply increase, equilibrium price will increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 54) Explain what will happen to the equilibrium price and quantity of satellite TV service if the wages of the workers who provide the satellite TV service increase while at the same time the price of cable television service (a substitute for satellite TV service) also increases. Answer: The wage increases will cause supply to decrease and increases in the price of cable television service will cause demand for satellite TV service to increase. Equilibrium price will definitely increase. Equilibrium quantity will depend on whether the decrease in supply or the increase in demand is larger. If the supply decrease is larger than the demand increase, equilibrium quantity will decrease. If the demand increase is larger than the supply decrease, equilibrium quantity will increase. Diff: 3 Topic: Simultaneous Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4.6 Predicting and Explaining Market Changes 1) When demand increases and the demand curve shifts to the right, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking
Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
2) When demand decreases and the demand curve shifts to the left, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 3) When supply increases and the supply curve shifts to the right, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: C Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 4) When supply decreases and the supply curve shifts to the left, equilibrium price ________ and equilibrium quantity ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
5) Suppose that the bakers of bread face an increase in the the price of flour (an input). In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to decrease; decrease C) demand for bread to decrease; increase D) demand for bread to increase; increase Answer: A Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 6) Suppose that the bakers of bread face an decrease in the the price of flour (an input). In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to increase; decrease C) demand for bread to decrease; increase D) demand for bread to increase; increase Answer: B Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 7) Suppose that the buyers of bread higher incomes and bread is a normal good. In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to increase; decrease C) demand for bread to decrease; increase D) demand for bread to increase; increase Answer: D Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
8) Suppose that the buyers of bread higher incomes and bread is an inferior good. In the market for bread, this will cause the ________ and the equilibrium price to ________. A) supply of bread to decrease; increase B) supply of bread to increase; decrease C) demand for bread to decrease; decrease D) demand for bread to increase; increase Answer: C Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 9) Suppose that only one curve shifts. If you observe that the equilibrium price increased while the equilibrium quantity decreased, then the market experienced a/an A) decrease in supply. B) increase in demand C) increase in supply. D) decrease in demand. Answer: A Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 10) Suppose that only one curve shifts. If you observe that the equilibrium price decreased while the equilibrium quantity increased, then the market experienced a/an A) decrease in supply. B) increase in demand C) increase in supply. D) decrease in demand. Answer: C Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
11) Suppose that only one curve shifts. If you observe that the equilibrium price and equilibrium quantity increased, then the market experienced a(n) A) decrease in supply. B) increase in demand C) increase in supply. D) decrease in demand. Answer: B Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 12) Suppose that only one curve shifts. If you observe that the equilibrium price and equilibrium quantity decreased, then the market experienced a(n) A) decrease in supply. B) increase in demand C) increase in supply. D) decrease in demand. Answer: D Diff: 2 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Recall the Application about the decrease in price of illegal drugs in the United States to answer the following question(s). 13) Recall the Application. The decrease in price of illegal drugs could be caused by either a(n) ________ in demand or a(n) ________ in supply of the drugs. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
14) Recall the Application. If the decrease in price of illegal drugs is primarily due to a change in demand, the equilibrium quantity of drugs A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: B Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 15) Recall the Application. If the decrease in price of illegal drugs is primarily due to a change in supply, the equilibrium quantity of drugs A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: A Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 16) Recall the Application. If the decrease in price of illegal drugs is due to equal changes in demand and supply, the equilibrium quantity of drugs A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: C Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
17) Recall the Application. If it is not known whether the decrease in price of illegal drugs is primarily due to a change in supply, a change in demand, or equal changes in both, the equilibrium quantity of drugs A) will increase. B) will decrease. C) will not change. D) may or may not change. Answer: D Diff: 2 Topic: Application 6, Why Lower Drug Prices? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 18) When demand changes and the demand curve shifts, equilibrium price and equilibrium quantity change in the same direction. Answer: TRUE Diff: 1 Topic: Predicting and Explaining Market Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 19) When supply increases and the supply curve shifts to the right, equilibrium price and equilibrium quantity will both increase. Answer: FALSE Diff: 1 Topic: Predicting and Explaining Market Changes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets 20) When the demand and the supply for bread increases simultaneously, will we able determine their effects on the equilibrium price? Answer: No. An increase in the demand creates an upward pressure on the equilibrium price. An increase in supply creates a downward pressure on the equilibrium price. The only way to determine the effect of the shift of both curves is to determine which shift, supply of demand, is larger. Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets
21) When the demand and the supply for bread increases simultaneously, will we able determine their effects on the equilibrium quantity? Answer: Yes An increase in the demand increases the equilibrium. An increase in supply also increases the equilibrium quantity. Together, both shifts in supply and demand will increase the equilibrium quantity. Diff: 3 Topic: Predicting and Explaining Market Changes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 5 Measuring a Nation's Production and Income 5.1 The Flip Sides of Macroeconomic Activity: Production and Income 1) Macroeconomics differs from microeconomics in that A) macroeconomics is the study of individual markets, while microeconomics deals with the nation's economy as a whole. B) microeconomics is the study of individual markets, while macroeconomics deals with the nation's economy as a whole. C) macroeconomics focuses principally on social and political issues, while microeconomics involves the study of a nation's monetary system. D) microeconomics focuses principally on social and political issues, while macroeconomics involves the study of a nation's monetary system. Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 2) Which of the following would be a macroeconomic question? A) How have the retirement benefits in the auto industry changed over time? B) How has inflation increased over time? C) How has the price of gold increased over time? D) How has the number of commercial airline flights decreased over time? Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 3) Which of the following is a macroeconomic statement? A) Motorcycle manufacturer productivity decreased by three percent in 2016. B) The price of cell phones decreased by 18 percent last year. C) Real domestic output of seafood increased 12 percent from 2015 to 2016.
D) The U.S. inflation rate was two percent in 2016. Answer: D Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns
4) Which of the following is NOT a macroeconomic statement? A) Aggregate worker productivity decreased by three percent in 2016. B) The price of cell phones decreased by 18 percent last year. C) Gross domestic product in Peru increased 4 percent from 2015 to 2016. D) The U.S. inflation rate was two percent in 2016. Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 5) Macroeconomics A) studies the behavior of individual consumers, firms and markets. B) studies the behavior of the economy as a whole. C) involves the interaction between different countries in specific markets. D) studies how computer automation has changed economics. Answer: B Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 6) Fluctuations in economic performance is one of the two basic issues of macroeconomics. The other is A) tracking unemployment. B) keeping interest rates in check. C) long-run economic growth. D) monitoring inflation rates. Answer: C Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns
7) What are the two critical measures of a nation's economic health? A) income and spending B) sales and taxes C) wages and raises D) production and income Answer: D Diff: 2 Topic: The "Flip" Sides of Macroeconomic Activity: Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 8) The circular flow is used to make the point that A) rising prices never occur during times of unemployment. B) unemployment only occurs during a recession. C) production generates income. D) households purchase factors of production from firms. Answer: C Diff: 1 Topic: The Circular Flow of Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 9) As depicted in the circular flow diagram, firms A) demand the goods and services that households supply in product markets. B) supply the goods and services that households demand in product markets. C) demand the resources that households supply in product markets. D) supply the resources that households demand in factor markets. Answer: B Diff: 1 Topic: The Circular Flow of Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
Recall the Application about using value added to measure the size of Walmart to answer the following question(s). 10) In listing both the amount and cost of Walmart's 2017 sales, this Application is addressing the economic concept of A) real versus nominal GDP. B) GDP as a measure of welfare. C) chain-weighted indexes. D) value added. Answer: D Diff: 1 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 11) According to this Application, why is the value of Walmart's 2017 sales NOT an accurate measurement of its actual sales impact on the U.S. economy? A) The sales figure did not account for chain-weighted inflation measurements. B) The sales figure includes the value of purchases from other firms. C) The sales figure did not take into account the recession of 2008. D) The sales figure was in nominal, not real dollars. Answer: B Diff: 2 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) According to this Application, by using a value-added approach to measure Walmart's sales in 2017 and its impact on the economy, we are A) using a chain-weighted index. B) avoiding double-counting. C) including GDP as a measure of welfare. D) excluding the net foreign sector. Answer: B Diff: 1 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
13) According to this Application, what was the approximate value of Walmart's value added in 2017? A) $120 billion B) $286 billion C) $361 billion D) $481 billion Answer: A Diff: 2 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 14) Macroeconomics is the study of individual economic markets. Answer: FALSE Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 15) The manner in which a nation's economy reacts when the measured factors are changed affects almost every individual. Answer: TRUE Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns 16) In the study of macroeconomics, production leads to income, and income leads to production in a continuing cycle. Answer: TRUE Diff: 1 Topic: The "Flip" Sides of Macroeconomic Activity: Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
Recall the Application about using value added to measure the size of Walmart to answer the following question(s). 17) When measuring the true contribution of Walmart to the U.S. economy, we must use the value of Walmart's total sales. Answer: FALSE Diff: 1 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 18) In the circular flow model, firms sell the services of factors of production to households. Answer: FALSE Diff: 1 Topic: The "Flip" Sides of Macroeconomic Activity: Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 19) If the prices of goods begin to rise rapidly, people may find it difficult to maintain their lifestyles. Explain why. Answer: The prices they pay for goods and services will increase and they will have to make sacrifices in other areas in order to maintain a lifestyle without going deeply into debt. Diff: 1 Topic: Measuring a Nation's Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 20) Explain the supply and demand of products, factors of production, the payments for the products and factors of production as described in the circular flow diagram. Answer: Households supply the factors of production demanded by firms through the factor market. Firms pay income to the households for these factors. Firms supply the goods and services demanded by households through the product market. Firms collect revenue from the households for the goods being purchased. Diff: 1 Topic: The Circular Flow of Production and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
Recall the Application about using value added to measure the size of Walmart to answer the following question(s). 21) Explain why we should use Walmart's value added, not its sales, when analyzing its impact on the U.S. economy? Answer: While Walmart's sales in 2017 was $481 billion, Walmart had to buy goods and services from many other companies. To get the true contribution of Walmart on the economy, we must subtract its cost of sales. By subtracting its cost of sales of $361 billion, Walmart's value added was approximately $120 billion. Diff: 2 Topic: Application 1, Using Value Added to Measure the True Size of Walmart Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 5.2 The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product 1) The value of all final goods and services produced during a given time period measures a nation's A) gross domestic product. B) net national product. C) consumer price index. D) net exports. Answer: A Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) If an economy produced 60 pounds of sushi at $12 per pound and 15 gallons of sake at $30 per gallon, the total value of these goods and services would be A) $450. B) $720. C) $1,170. D) $2,700. Answer: C Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
3) If an economy produced 220 pounds of jelly beans at $5 per pound and 90 pounds of gum drops at $2 per pound in 2016, its real gross domestic product (GDP) was A) 310 pounds of candy. B) $180. C) $1,100. D) $1,280. Answer: D Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 4) We measure gross domestic product by multiplying the quantities of goods by their prices because it allows us to A) express the values of products in a common unit of measurement. B) correct for inflation. C) directly compare the output of one economy to that of another. D) calculate the total number of units of goods produced in an economy. Answer: A Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) Gross domestic product calculations count only final goods and services because A) these are the only goods and services that are purchased in an economy. B) counting all goods and services would lead to double-counting of many activities. C) it is difficult to measure the prices of intermediate goods produced. D) one cannot calculate the quantities of intermediate goods produced. Answer: B Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
6) "Final goods and services" are those that are A) produced outside the United States. B) used in the production of other goods and services. C) double counted in the calculation of GDP. D) sold to ultimate or final purchasers. Answer: D Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 7) A rancher raises sheep. Once a year he shears them and sells the raw wool to a processor who cleans it and spins it into yarn. The yarn is then sold to a knitting mill, which produces and sells sweaters. In calculating GDP we would count A) the raw wool, the yarn and the sweaters. B) only the yarn and the sweaters. C) only the sweaters. D) only the raw wool and the yarn. Answer: C Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) How does real gross domestic product (GDP) differ from nominal GDP? A) Nominal GDP controls for price changes, while real GDP does not. B) Real GDP controls for price changes, while nominal GDP does not. C) Nominal GDP can be used to directly compare the amount of output produced from year to year, while real GDP cannot be used for such comparison. D) There is no difference between nominal GDP and real GDP. Answer: B Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
9) When there are sustained increases in real GDP over time, we say that the economy is undergoing A) economic stagnation. B) a recession. C) economic growth. D) massive changes in productive capacity. Answer: C Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 10) The data presented in the text shows that in the period from 1947-2013, real GDP in the United States has A) increased substantially. B) decreased in every year since 1947. C) decreased only in recent years. D) generally remained the same. Answer: A Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) Which prices are used to measure goods and services in calculating the nominal GDP? A) past years prices B) current prices C) average prices D) projected prices Answer: B Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
12) Which of the following is NOT a component of gross domestic product? A) net exports B) government purchases C) purchases by consumers of used goods D) purchases by consumers of finished goods Answer: C Diff: 1 Topic: The Components of GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) How many broad categories are used by economists to define the GDP? A) 3 B) 4 C) 6 D) 8 Answer: B Diff: 1 Topic: The Components of GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) The largest component of GDP is A) government spending. B) consumption expenditures. C) private investment expenditures. D) net exports. Answer: B Diff: 1 Topic: Consumption Expenditures Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) Which of the following is NOT an example of a consumption expenditure? A) a digital camera you purchase to take on vacation B) a new county jail C) a motorcycle you purchase to ride on the weekends D) a restaurant meal Answer: B Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 16) Which of the following is an example of a consumption expenditure?
A) the construction of a new public library B) the purchase of a ticket to a New Orleans Saints game C) the purchase of a new fire truck D) the salary paid to the mayor of Denver Answer: B Diff: 2 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 17) For the purpose of GDP accounting, consumption expenditures include A) only nondurable goods. B) only durable goods. C) both nondurable goods and services. D) durable goods, nondurable goods, and services. Answer: D Diff: 1 Topic: Consumption Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 18) What is the fastest-growing component of consumption in the United States? A) new home construction B) nondurable goods C) durable goods D) services Answer: D Diff: 1 Topic: Consumption Expenditures Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
19) Which of the following is the largest component of the GDP? A) consumption expenditures B) government purchases C) net exports D) investment Answer: A Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 20) Blu-ray disc players, iPhones, and hybrid cars are generally considered to be ________ goods. A) durable B) nondurable C) intermediate D) service Answer: A Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 21) Bananas, chocolate bars, chewing gum, orange juice and yogurt are considered to be ________ goods. A) durable B) nondurable C) essential D) service Answer: B Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
22) Going to the dentist would be counted in GDP as A) crowns and fillings. B) insurance utilization. C) a service. D) a measure of welfare. Answer: C Diff: 1 Topic: Consumption Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 23) Suppose that a sporting goods store had $800 of golf balls on its shelves at the beginning of 2016 and $1,300 at the end of 2016. The amount of inventory investment included in GDP would be A) $500. B) $800. C) $1,300. D) $2,100. Answer: A Diff: 1 Topic: Private Investment Expenditures Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 24) Which of the following is NOT a component of private investment, for purposes of GDP accounting? A) newly produced housing B) additions to firms' stock of inventories C) purchases by firms of used machinery D) newly built factories Answer: C Diff: 2 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
25) Gross investment is A) what is left over from total new private investment after depreciation. B) the total amount of private investment purchases, whether new or previously existing. C) the total amount of new private investment purchases. D) the wear and tear on private investment. Answer: C Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 26) Depreciation is A) what is left over from total new private investment after use for a year. B) the total amount of private investment purchases, whether new or previously existing. C) the total amount of new private investment purchases. D) the wear and tear on private investment. Answer: D Diff: 1 Topic: Private Investment Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 27) Net investment is A) what is left over from total new private investment after depreciation. B) the total amount of private investment purchases, whether new or previously existing. C) the total amount of new private investment purchases. D) gross investment plus depreciation. Answer: A Diff: 1 Topic: Private Investment Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
28) If in the third quarter of 2016 total investment spending was $4,768 billion and depreciation was $3,292 billion, then the amount counted in GDP, which is known as gross investment, would be A) $1,476 billion. B) $3,292 billion. C) $4,768 billion. D) $8,060 billion. Answer: C Diff: 2 Topic: Private Investment Expenditures Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 29) If in the third quarter of 2016 total investment spending was $4,768 billion and depreciation was $3,292 billion, then net investment was equal to A) $1,476 billion. B) $3,292 billion. C) $4,768 billion. D) $8,060 billion. Answer: A Diff: 1 Topic: Private Investment Expenditures Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 30) Which of the following is NOT an example of private investment expenditure? A) new plants and equipment added during the year B) new houses built during the year C) using credit cards to purchase durable and nondurable goods D) increases in inventories on goods produced during the year Answer: C Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
31) The majority of spending in the category of government purchases comes from A) the federal government. B) state and local governments. C) transfer payments. D) military spending. Answer: B Diff: 1 Topic: Government Purchases Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 32) For the purposes of GDP accounting, government purchases include A) the purchases of new military equipment. B) Social Security payments. C) direct transfer payments by the government to other individuals. D) welfare payments. Answer: A Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 33) For the purposes of GDP accounting, government purchases A) are considered part of investment. B) are considered part of consumption. C) include transfer payments. D) include wages and benefits paid to government workers. Answer: D Diff: 1 Topic: Government Purchases Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 34) Social Security payments are examples of A) nondurable goods. B) durable goods. C) services. D) transfer payments. Answer: D Diff: 1 Topic: Government Purchases Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 35) In GDP accounting, Social Security payments are
A) not counted as part of government purchases and GDP B) are counted in government purchases, but not counted in GDP. C) are not counted in government purchases, but counted in GDP. D) are counted both in government purchases and in the GDP. Answer: A Diff: 1 Topic: Government Purchases Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 36) Transfer payments are excluded from government purchases in GDP accounting because A) they are difficult to measure. B) they are a reward to individuals who have been productive their entire lives. C) they are already included as part of investment. D) nothing is being produced in return for the payment. Answer: D Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 37) A nation's net exports consist of A) its exports plus its imports. B) its exports minus its imports. C) its exports plus all other nation's imports. D) its imports plus all other nation's exports. Answer: B Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
38) Net exports include goods produced A) domestically that are sold domestically, less goods produced domestically that are sold abroad. B) domestically that are sold abroad, less goods produced domestically that are sold domestically. C) domestically that are sold abroad, less goods that are produced abroad that are sold domestically. D) abroad that are sold domestically, less goods that are produced domestically that are sold abroad. Answer: C Diff: 2 Topic: Net Exports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 39) Which of the following should be included in U.S. GDP? A) a 3D television manufactured in Thailand and sold in the United States B) a 3D television manufactured in Thailand by a U.S. firm and sold in the United States C) a 3D television manufactured in the United States and sold in Thailand D) a used 3D television manufactured in the United States and sold in Thailand Answer: C Diff: 1 Topic: Net Exports Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 40) A trade surplus occurs when A) a country purchases more from abroad than other countries purchase from it. B) a country sells more abroad than it purchases from abroad. C) a country's firms open more stores abroad than foreign firms open in the country. D) foreign firms open more stores in a country than the country opens in foreign countries. Answer: B Diff: 1 Topic: Net Exports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
41) Exports ________ GDP and imports ________ GDP. A) increase; decrease B) decrease; increase C) increase; increase D) decrease; decrease Answer: A Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 42) GDP is supposed to measure the goods ________ the United States. A) purchased in B) produced in C) imported to D) exported to Answer: B Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 43) When considering imports and exports, economists include the ________ as a component of the GDP. A) total imports B) total exports C) net exports D) gross exports Answer: C Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
44) A "trade deficit" occurs when A) we sell more to other countries than we buy from them. B) we buy more from other countries than we sell to them. C) we sell more to one country than another. D) we sell less to one country than another. Answer: B Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 45) The GDP equation is A) Y = C + I + G + NX. B) Y = C - I - G - NX. C) C + I = G + NX. D) C + I = Y + G + NX. Answer: A Diff: 1 Topic: Putting it all Together: The GDP Equation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Recall the Application about intellectual property in GDP accounts to answer the following question(s). 46) According to the Application, the government agency tasked with the production of the GDP and other national accounts is A) the Bureau of Economic Analysis B) the Central Intelligence Agency C) the Bureau of Labor Statistics D) the White House Answer: A Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
47) According to the Application, prior to 2013, which of the following was counted as intermediate inputs in our GDP accounts. A) research and development B) software development C) new artistic work D) all of the above are correct. Answer: D Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 48) According to the Application, prior to 2013, firm expenditures on research and development and new artistic work were treated as ________ in our GDP accounts. A) intermediate inputs B) investment C) net exports D) consumption Answer: A Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 49) According to the Application, after 2013, firm expenditures on research and development and new artistic work were treated as ________ in our GDP accounts. A) intermediate inputs B) investment C) net exports D) consumption Answer: B Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
50) According to the Application, what was the effect on GDP of counting research and development and new artistic work as investment instead of intermediate inputs starting 2013? A) It had no effect on GDP. B) It increased GDP. C) It may increase or decrease GDP. D) It decreased GDP. Answer: B Diff: 1 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 51) Intermediate goods are not counted as part of gross domestic product. Answer: TRUE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 52) The value of goods produced in a previous year but sold in the current year is added to the GDP for the current year. Answer: FALSE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 53) Nominal GDP is a measure of GDP that adjusts for price changes. Answer: FALSE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
54) Nominal GDP uses current year prices to measure GDP. Answer: TRUE Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 55) The four components of GDP are consumption expenditures, private investment expenditures, government purchases, and transfer payments. Answer: FALSE Diff: 1 Topic: The Components of GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 56) As a component of GDP, consumption expenditures refers to purchases by consumers of currently produced goods and services. Answer: TRUE Diff: 1 Topic: Consumption Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 57) In the GDP accounts, investment includes the purchase of newly issued shares of stock. Answer: FALSE Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 58) To an economist, "investment" in the GDP accounts means purchases of new final goods and services by firms. Answer: TRUE Diff: 1 Topic: Private Investment Expenditures Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
59) Depreciation is the term used when plants, equipment and housing deteriorate and wear out, thus losing their original values. Answer: TRUE Diff: 1 Topic: Private Investment Expenditures Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 60) The majority of spending in the government purchases category comes from the federal government. Answer: FALSE Diff: 1 Topic: Government Purchases Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 61) In the determination of production of goods or services with respect to GDP, transfer payments are included. Answer: FALSE Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 62) Wages paid to teachers, police personnel, and postal workers are not transfer payments because they are payments for services and not simply "transfers" of money. Answer: TRUE Diff: 1 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 63) A trade surplus occurs when a country's exports exceed that country's imports. Answer: TRUE Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
64) Net exports are total imports minus total exports. Answer: FALSE Diff: 1 Topic: Net Exports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 65) We ADD to the GDP when goods produced abroad are sold in the United States. Answer: FALSE Diff: 1 Topic: Net Exports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 66) Define GDP. Answer: The total market value of all final goods and services produced within an economy in a given year. Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 67) Explain why only final goods are included in GDP. Answer: Final goods are those that are sold to ultimate or final purchasers as opposed to intermediate goods, which are goods that are used in the production process. Suppose for example that a farmer grows potatoes and then sells them to a fast food chain that uses them to make fries, which are then sold to the public. If both the potatoes and the fries were counted then the same thing would be counted twice; in other words, the potatoes would be counted when they were potatoes and then again when they were in the form of the fries. In order to avoid this double counting only the final goods are included in GDP. Diff: 1 Topic: The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
68) List and describe the four components of GDP. Answer: Consumption expenditures are purchases by consumers of currently produced goods and services, either domestic or foreign. Private investment expenditures are purchases by firms. These include spending on new plants and equipment, newly produced housing and increases in inventory. Government purchases are purchases of newly produced goods and services by federal, state and local governments. They include any goods purchased and the wages and benefits of all government employees. Net exports are net purchases by the foreign sector, which is calculated as domestic exports minus domestic imports. Diff: 2 Topic: The Components of GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 69) Define transfer payments and explain why they are not included in the government purchases section of the GDP accounts. Answer: Transfer payments are funds paid to individuals that are not associated with the production of goods and services. They are not included in the government purchases section of the GDP accounts because nothing is being produced in return for the payment. However they do show up in the accounts indirectly when they are spent (and saved) by their recipients; thus they do appear in the consumption (and saving) section of the accounts. Diff: 2 Topic: Government Purchases Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Recall the Application about intellectual property in GDP accounts to answer the following question(s). 70) From what we learned in the Application, explain how changing the classification of research and development from intermediate inputs to investment will affect the size of the country's GDP. Answer: When research and development is classified as intermediate inputs, they are not included as part of GDP. Once we start counting research and development as part of investment, it is now counted as part of GDP. As a result, the country's GDP will increase after we made this change. Diff: 2 Topic: Application 2, Intellectual Property in GDP Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
5.3 The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income 1) Income that flows to the private sector for services and production is called A) net income. B) national income. C) deficit income. D) derived income. Answer: B Diff: 1 Topic: The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 2) When gross domestic product (GDP) is adjusted by adding any income earned abroad by U.S. firms or residents and by subtracting any income earned in the United States by non-U.S. corporations or foreign nationals, it is called A) depreciation. B) subsidized income. C) international GDP. D) gross national product (GNP). Answer: D Diff: 1 Topic: Measuring National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 3) Depreciation is subtracted from GNP to determine A) net income. B) net national product (NNP). C) net GDP. D) net imbalance on exports. Answer: B Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
4) Which of the following is a category of national income? A) net interest B) corporate profits C) rental income D) all of the above Answer: D Diff: 1 Topic: Measuring National Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) Which of the following is the largest component of national income? A) net interest B) corporate profits C) rental income D) compensation of employees by firms Answer: D Diff: 1 Topic: Measuring National Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 6) Which of the following is NOT a component of value added of a firm? A) expenditures on intermediate goods B) profits C) wages D) interest Answer: A Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 7) The amount of income that households keep after paying taxes is A) national income. B) personal income. C) personal disposable income. D) value added income. Answer: C Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) Personal income and personal disposable income refer to payments ultimately flowing
to A) firms. B) households. C) governments. D) foreigners. Answer: B Diff: 1 Topic: Measuring National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) A firm's value added can be measured as the value of its A) profits. B) purchases of inputs from other firms. C) total sales. D) total sales, less purchases from other firms. Answer: D Diff: 1 Topic: Measuring National Income through Value Added Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 10) If Cassie's Coffee House purchases 42 cents worth of ingredients and spends 28 cents on wages per cup of coffee to produce an 89 cent cup of coffee, then Cassie's Coffee House's value added per cup of coffee is A) 19 cents. B) 28 cents. C) 47 cents. D) 61 cents. Answer: C Diff: 2 Topic: Measuring National Income through Value Added Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
11) If Cassie's Coffee House purchases 33 cents worth of ingredients and spends 36 cents on wages per cup of coffee to produce an 89 cent cup of coffee, then Cassie's Coffee House's contribution to GDP is ________ per cup of coffee. A) 20 cents B) 33 cents C) 36 cents D) 56 cents Answer: D Diff: 2 Topic: Measuring National Income through Value Added Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) In the expanded circular flow diagram, the government supplies A) goods and services to the product market. B) factors of production to the factor market. C) goods and services to households. D) factors of production to firms. Answer: A Diff: 2 Topic: An Expanded Circular Flow Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) In the expanded circular flow diagram, the rest of the world interacts directly with A) households. B) firms. C) product markets. D) factor markets. Answer: C Diff: 2 Topic: An Expanded Circular Flow Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
Recall the Application about the link between happiness and GDP to answer the following question(s). Comparing changes in happiness to changes in per capita income over the last 30 years, economists at Dartmouth College and Warwick University have measured levels of happiness in the United States and United Kingdom based on income levels, ethnicity, age, and gender. 14) This Application addresses the economic concept of A) real versus nominal GDP. B) fluctuations in GDP. C) GDP as a measure of welfare. D) measuring a nation's national income. Answer: C Diff: 1 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) According to the Application A) reported levels of happiness in the United States have increased over the past 30 years. B) stable marriages account for no more happiness than marriages ending in divorce. C) retired people report higher levels of happiness than people below the age of 40. D) money does appear to buy happiness, ceteris paribus. Answer: D Diff: 1 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 16) According to the Application, large increases in per capita income in the United States over the past 30 years have A) had the greatest impact on retired people. B) not increased happiness levels. C) led to a higher divorce rate. D) lowered stress levels. Answer: B Diff: 1 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
17) National income is the income that individuals and firms earn from their production. Answer: TRUE Diff: 1 Topic: The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 18) Personal disposable income is pre-tax income that flows directly to households. Answer: FALSE Diff: 1 Topic: Measuring National Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 19) Compensation of employees is the largest component of national income. Answer: TRUE Diff: 1 Topic: Measuring National Income Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 20) Explain the difference between U.S. GDP and U.S. GNP. Answer: U.S. GDP is the total market value of all final goods and services produced within the United States within a given year. U.S. GNP is calculated by adding to U.S. GDP the net income earned by U.S. firms and residents abroad. Thus, U.S. GNP measures the total income earned by U.S. firms and residents worldwide. Diff: 2 Topic: Measuring National Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
Recall the Application about the link between happiness and GDP to answer the following question(s). Comparing changes in happiness to changes in per capita income over the last 30 years, economists at Dartmouth College and Warwick University have measured levels of happiness in the United States and United Kingdom based on income levels, ethnicity, age, and gender. 21) According to the article, how did the researchers conclude work may hinder happiness, even with higher income. Answer: In their study, Blanchflower and Oswald found that controlling for income, education, and other personal factors, happiness among men and women in the U.S. reaches a minimum at the ages of 49 and 45, respectively. Since these are also the years in which earnings are usually the highest, it does suggest that work takes its toll on happiness. Diff: 2 Topic: Application 3, The Links Between Self-Reported Happiness and GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5.4 A Closer Examination of Nominal and Real GDP 1) If real GDP was 100 in 2015 and 104.4 in 2016, the growth rate of real GDP between 2015 and 2016 was A) 2.2 percent. B) 4.4 percent. C) 100 percent. D) 102.2 percent. Answer: B Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) If the economy grew at 7 percent from 2015 to 2016 and real GDP was 400 in 2015, what was real GDP in 2016? A) 393 B) 400 C) 407 D) 428 Answer: D Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
3) Suppose that nominal GDP in year 1 is 200 and nominal GDP in year 2 is 242. Assume that inflation is ten percent per year. How fast did the economy grow between these two years? A) 10 percent B) 12 percent C) 21 percent D) 42 percent Answer: A Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Use the following information to answer the next several questions: Scenario 1: Imagine that an economy produces two goods, flashlights and fishing lures. In 2015, the economy produced 70 flashlights and 40 fishing lures, and the prices of flashlights and fishing lures were $5 and $12, respectively. In 2016, the economy produced 85 flashlights and 50 fishing lures, and the prices of flashlights and fishing lures were $7 and $15, respectively. 4) Based on the information in Scenario 1, nominal GDP in 2015 in this economy was A) $830. B) $1,025. C) $1,090. D) $1,345. Answer: A Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) Based on the information in Scenario 1, nominal GDP in 2016 in this economy was A) $830. B) $1,025. C) $1,090. D) $1,345. Answer: D Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
6) Based on the information in Scenario 1, real GDP in 2016 (in 2015 dollars) in this economy was A) $830. B) $1,025. C) $1,090. D) $1,345. Answer: B Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 7) Based on the information in Scenario 1, nominal GDP grew by about ________ percent from 2015 to 2016. A) 23 B) 31 C) 62 D) 162 Answer: C Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) Based on the information in Scenario 1, real GDP grew by about ________ percent from 2015 to 2016. A) 23 B) 31 C) 62 D) 162 Answer: A Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
9) When GDP is measured in "current prices" it is known as the A) real GDP. B) nominal GDP. C) real GNP. D) nominal GNP. Answer: B Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 10) When the GDP is measured using "adjustments for price changes" it is known as the A) real GDP. B) nominal GDP. C) real GNP. D) nominal GNP. Answer: A Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) A chain-weighted index A) is used to understate the rate of inflation. B) uses neighboring years' data to calculate changes in nominal GDP. C) calculates changes in prices by using an average of base years from neighboring years to obtain a more accurate measure of real GDP growth. D) is a useful tool for determining which fence to purchase. Answer: C Diff: 2 Topic: How to Use the GDP Deflator Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
12) What is the chain-weighted price index for GDP in the base year? A) 0 B) 1 C) 100 D) The answer depends on the price index for the current year. Answer: C Diff: 1 Topic: How to Use the GDP Deflator Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) When differences between nominal GDP and real GDP result due to price changes and nothing else is compared, an index is created called the A) inflation index. B) consumer price index. C) GDP deflator. D) index of leading indicators. Answer: C Diff: 1 Topic: How to Use the GDP Deflator Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) Nominal GDP measures the value of goods and services using current-year prices. Answer: TRUE Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) Nominal GDP is measured by calculating real GDP at constant prices. Answer: FALSE Diff: 1 Topic: Measuring Real versus Nominal GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
16) The GDP deflator measures how prices change over time. Answer: TRUE Diff: 1 Topic: How to Use the GDP Deflator Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 17) Imagine that an economy produces two goods, flashlights and fishing lures. In 2015, the economy produced 100 flashlights and 50 fishing lures, and the prices of flashlights and fishing lures were $5 and $11, respectively. In 2016, the economy produced 120 flashlights and 60 fishing lures, and the prices of flashlights and fishing lures were $7 and $14, respectively. respectively. What happened to nominal GDP from 2015 to 2016? What happened to real GDP? Answer: Nominal GDP in 2015 was (100 × 5) + (50 × 11) = $1,050. In 2016 nominal GDP was (120 × 7) + (60 × 14) = $1,680. For real GDP, we calculate GDP for 2016 in 2015 dollars. 2016 GDP in 2015 dollars would be (120 × 5) + (60 × 11) = $1,260. So while nominal GDP increased by 60 percent, real GDP only increased by 20 percent. Diff: 2 Topic: Measuring Real versus Nominal GDP Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 18) Prior to 1996 the government measured real GDP using 1987 prices. What would the rapid growth in computers and the fall in computer prices tend to do to the difference between true GDP growth and measured real GDP growth, relative to using a later year? Answer: Using 1987 prices would tend to overstate GDP growth relative to using prices from a later year. Computers were a burgeoning part of national product in the late 1980s and early 1990s, and the incremental contribution to GDP looks bigger when using a bigger price rather than a smaller price. Diff: 3 Topic: Measuring Real versus Nominal GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 19) Suppose someone told you that the chain-weighted price index for GDP in a country was 135. Why does this fact not convey much information to you? Answer: We do not have any price index information from any other years. So while we have a measure of "relative prices," we don't know what this measure is relative to. Diff: 2 Topic: How to Use the GDP Deflator Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
20) Between 2013 and 2016, a country's nominal GDP grew by 18 percent and its inflation rate (based on the chain-weighted price index for GDP) was 11 percent. How fast did real GDP grow over this period? Answer: The growth rate for real GDP would have been 1.18 / 1.11 = 1.06, so real GDP grew by 6 percent over the period. Diff: 3 Topic: How to Use the GDP Deflator Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5.5 Fluctuations in GDP 1) "Recession" refers to a period when real GDP in the economy A) declines for at least six months. B) suffers due to political instability. C) grows rapidly. D) experiences a rise in living standards. Answer: A Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) A period in which real GDP in the economy declines for at least six months is referred to as A) long term growth. B) a recession. C) a positive fluctuation. D) living standards. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
3) Business cycles are A) movements in stock prices. B) the transfer of executives between firms. C) used to describe fluctuations in GDP. D) a description of the time required to bring a new product to market. Answer: C Diff: 1 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 4) When real GDP falls for two consecutive quarters the economy is in a A) depression. B) recession. C) peak. D) trough. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) The date at which a recession starts is called the A) trough. B) peak. C) plateau. D) depression. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 6) The period of time in which the level of output moves from a trough to a peak is called a A) recovery or expansion. B) depression. C) contraction or recession. D) plateau. Answer: A Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
7) From World War II through 2017, the United States experienced ________ recessions. A) 2 B) 5 C) 11 D) 15 Answer: C Diff: 1 Topic: Fluctuations in GDP Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) A depression is A) a severe recession. B) a sustained economic upturn. C) another word for a bull market. D) the period of time following a peak in the business cycle. Answer: A Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) How many quarters (3-month periods) must the real GDP decline to have the economy considered to be in a recession? A) 1 B) 2 C) 3 D) 4 Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
10) The "expansion" of an economy occurs after A) firms produce more goods. B) people spend more money. C) a trough. D) an inflationary period. Answer: C Diff: 1 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) The common term for a severe recession is a A) downturn. B) depression. C) bottoming out. D) economic adjustment. Answer: B Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12) In a business cycle, the date at which a recession starts is called a trough. Answer: FALSE Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) In a business cycle, the period following a trough is called an expansion. Answer: TRUE Diff: 1 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) From 1948 to 2010, the United States has experienced only 4 recessions. Answer: FALSE Diff: 1 Topic: Fluctuations in GDP Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) Describe the recession phase of a business cycle, including when it begins and when
it ends. Answer: Business cycles describe time periods of economic fluctuations. A recession is a period when real GDP falls for six or more consecutive months. The date at which a recession starts is called a peak. The date at which a recession ends is called a trough. After a trough comes an expansion, or recovery, phase, eventually leading to a new peak, and a new cycle begins. Diff: 2 Topic: Fluctuations in GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 16) What are the four phases of the business cycle. Answer: The four phases of the business cycle are: expansion, peak, recession, trough. Diff: 2 Topic: Fluctuations in GDP Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5.6 GDP as a Measure of Welfare 1) What is the best measure of the value of output of an economy? A) GDP B) GNP C) NNP D) the GDP deflator Answer: A Diff: 1 Topic: GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) One of the shortcomings of GDP is that it A) includes only transactions that take place in formal businesses. B) ignores transactions that do not take place in organized markets. C) includes measures of the underground economy. D) includes measures of changes of quality of life associated with producing output. Answer: B Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
3) GDP understates the value of output produced by an economy because it A) includes transactions that do not take place in organized markets, such as homecooked meals. B) excludes value added from the underground economy, such as tips taken "under the table." C) includes environmental degradation caused by increased output production. D) excludes the value of the wages and benefits of government employees. Answer: B Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 4) Suppose that a tire factory produces $825,000 of output and causes $70,000 worth of pollution as a result of production. The tire factory's official contribution to GDP would be ________ and its overall contribution to society would be ________. A) $825,000; $895,000 B) $895,000; $825,000 C) $825,000; $755,000 D) $755,000; $825,000 Answer: C Diff: 2 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) GDP ignores all of the following EXCEPT A) household production. B) the value of leisure time. C) products produced in other countries that are sold in the United States. D) changes in the environment that occur in the production of output. Answer: C Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
6) Why is the value of leisure listed as a shortcoming in the measurement of GDP? A) When households take time off for leisure, the activity is not counted in GDP. However, taking time off for leisure makes households better off. B) Because GDP increases when households take more leisure. C) Because leisure increases happiness only when we take a vacation with it. D) Because households really want to work everyday, and leisure gets in the way of work. Answer: A Diff: 1 Topic: GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 7) GDP calculations tend to exclude all of the following EXCEPT A) illegal transactions. B) environmental quality. C) work that people do for themselves in their own homes. D) salaries paid to government employees. Answer: D Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) Not including transactions from the underground economy will tend to ________ GDP, and not including environmental changes caused by pollution will tend to ________ GDP. A) overvalue; undervalue B) undervalue; overvalue C) overvalue; overvalue D) undervalue; undervalue Answer: B Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) GDP ignores transactions that take place in the underground economy. Answer: TRUE Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
10) If GDP included the value of leisure time, the value of U.S. GDP would most likely increase. Answer: TRUE Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) GDP measures underestimate the value of output produced by an economy because they include services not transferred through markets. Answer: FALSE Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12) Why is GDP only an imperfect valid measure of the value of output produced by an economy? Answer: GDP will miss transactions that do not take place in organized markets, does not include leisure time, and ignores the underground economy. In addition, GDP does not value changes in the environment that arise through the production of output. Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 13) Give some examples of transactions in markets which are not regulated or controlled. Answer: services such as cleaning, cooking, free child care, and people who run businesses from their homes, yard sales, and flea markets Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) Why is the value of leisure listed as a shortcoming in the measurement of GDP? Answer: When households take time off for leisure, the activity is not counted in GDP. However, taking time off for leisure makes households better off. Diff: 1 Topic: GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
15) List four things considered to be shortcomings in the determination of GDP in relation to the use of GDP as a measure of welfare. Answer: Transactions in unorganized markets, leisure time, the underground economy, and changes in the environment. Diff: 1 Topic: Shortcomings of GDP as a Measure of Welfare Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 6 Unemployment and Inflation 6.1 Examining Unemployment 1) During periods of poor economic performance, real GDP A) declines and unemployment rises. B) declines and unemployment declines. C) declines but unemployment typically does not change. D) is unchanged but unemployment rises sharply. Answer: A Diff: 1 Topic: Examining Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 2) An economic ________ refers to either an upturn or a downturn in the economy. A) stagnation B) model C) fluctuation D) chain index Answer: C Diff: 1 Topic: Examining Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 3) Economists define the unemployed as individuals who are A) not currently working. B) not currently working but are actively looking for work. C) working but looking for a different job. D) working less than their desired amount of time. Answer: B Diff: 1 Topic: How is Unemployment Defined and Measured?
Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
4) Economists define the labor force to include A) only people who are working full time. B) people who are working. C) people who are not working but are actively looking for a job, and people who are working. D) all individuals of working age, regardless of whether they are working or looking for a job. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 5) The unemployment rate is the number of unemployed people A) divided by the number of people who are working. B) divided by the total working-age population. C) divided by the sum of the number of people who are working and the number of people who are looking for work. D) and the number of people working fewer than their desired number of hours, divided by the number of people who are working or looking for work. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6) If Sam does not have a job and is NOT looking for work, he is considered A) unemployed and in the labor force. B) unemployed and not in the labor force. C) not in the labor force. D) unemployed. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
7) If Sam does not have a job and is NOT currently looking for work but has looked in the past, he is considered A) unemployed and in the labor force. B) unemployed and not in the labor force. C) not in the labor force. D) unemployed. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 8) People who are currently not working but are actively looking for work are officially classified as A) unemployed and in the labor force. B) unemployed and out of the labor force. C) employed and in the labor force. D) employed and out of the labor force. Answer: A Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 9) People who are only working part-time, but want to be working full-time, are classified officially as A) unemployed and in the labor force. B) unemployed and out of the labor force. C) employed and in the labor force. D) employed and out of the labor force. Answer: C Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
10) The fraction of the working-age population that is in the labor force is called the A) employment rate. B) unemployment rate. C) labor force participation rate. D) nonresponse rate. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 11) What is the threshold age for individuals to be considered as being in the "labor force" for statistical purposes? A) 16 B) 18 C) 21 D) Over 21 Answer: A Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 12) Suppose an economy consists of 500,000 individuals 16 years and older, 260,000 are employed, and 21,000 are unemployed but actively seeking work. In this example the labor force is A) 239,000. B) 260,000. C) 281,000. D) 500,000. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
13) Suppose an economy consists of 500,000 individuals 16 years and older, 260,000 are employed, and 21,000 are unemployed but actively seeking work. In this example the labor force participation rate is approximately A) 4 percent. B) 48 percent. C) 52 percent. D) 56 percent. Answer: D Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 14) Suppose an economy consists of 500,000 individuals 16 years and older, 260,000 are employed, and 21,000 are unemployed but actively seeking work. In this example the unemployment rate is approximately A) 4.2 percent. B) 6.1 percent. C) 7.5 percent. D) 8.0 percent. Answer: C Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 15) In June 2012, the U.S. labor force consisted of 142,415,000 employed and 12,749,000 unemployed. The U.S. unemployment rate for June 2012 was about A) 7.4 percent. B) 8.2 percent. C) 9.0 percent. D) 11.2 percent. Answer: B Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
Employment status of the working age population of Metropolis is approximately: Employed full-time: 4,200 Employed part-time: 700 Not employed and looking for work: 300 Not employed and not looking for work: 200 Table 6.1 16) Given the data in Table 6.1, the labor force participation rate of Metropolis is approximately A) 96 percent. B) 91 percent. C) 83 percent. D) 78 percent. Answer: A Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 17) Given the data in Table 6.1, the unemployment rate of Metropolis is approximately A) 6 percent. B) 9 percent. C) 12 percent. D) 22 percent. Answer: A Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
18) Suppose that 50 percent of the part-time workers of Metropolis are looking for fulltime jobs. Given the data in Table 6.1, if these workers were counted as not employed and looking for work, the unemployment rate of Metropolis would be approximately A) 6 percent. B) 13 percent. C) 16 percent. D) 21 percent. Answer: B Diff: 2 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 19) Given the data in Table 6.1, if the workers who are "not employed and not looking for work" were counted as not employed and in the labor force, the unemployment rate of Metropolis would be approximately A) 4 percent. B) 7 percent. C) 9 percent. D) 10 percent. Answer: C Diff: 3 Topic: How is Unemployment Defined and Measured? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes Recall the Application about declining U.S. labor force participation rate since 1999 to answer the following question(s). 20) According to this Application, one explanation for the decline in the U.S. labor force participation rate since 1999 is A) the decline in the overall population. B) the increasing number of retiring baby boomers. C) the increase in immigration to the United States. D) the increase in outsourcing by U.S. companies. Answer: B Diff: 1 Topic: Application 1, Declining Labor Force Participation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 21) According to this Application, one explanation for the decline in the U.S. labor force participation rate since 1999 is
A) higher college enrollment. B) the increase in foreign ownership of U.S.-based companies. C) sluggish economic growth that resulted in more discouraged workers. D) the growing number of workers who have postponed retirement. Answer: C Diff: 1 Topic: Application 1, Declining Labor Force Participation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 22) Since 1997, the labor force participation rate for women in the United States has A) remained virtually constant. B) increased more than 10 percent. C) decreased more than 20 percent. D) equaled the participation rate for men. Answer: A Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 23) People who want to work but have stopped looking for work because they could not find jobs after actively searching are called A) employed. B) unemployed. C) discouraged workers. D) empowered. Answer: C Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
24) The existence of discouraged workers will lead to an official unemployment rate that is A) overstated. B) understated. C) either overstated or understated. D) unbiased. Answer: B Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 25) If a large number of workers are classified as being out of the labor force when they are really looking for work, this will lead to an official unemployment rate that is A) overstated. B) understated. C) neither overstated or understated. D) unbiased. Answer: B Diff: 2 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 26) Which specific government agency monitors unemployment? A) Commerce Department B) Bureau of Labor Statistics C) Executive Branch D) State Department Answer: B Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
27) For the purpose of statistically reporting the unemployment rate, "discouraged workers" are A) counted. B) not counted. C) offered other jobs. D) trained to do different work. Answer: B Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 28) Individuals who have stopped looking for work after an active search because of the lack of transportation, lack of affordable child care, etc. are classified as ________ workers. A) non-contributing B) nonfunctional C) marginally attached D) very lazy Answer: C Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 29) The unemployment rate A) rises during booms and falls during recessions. B) rises during recessions and falls during booms. C) rises during times of rapid economic growth and falls during times of slow economic growth. D) tends to remain the same in booms and recessions. Answer: B Diff: 1 Topic: Who are the Unemployed? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
30) Seasonally adjusted unemployment rates A) adjust for the predictable summer increase in the unemployment rate for teenagers. B) adjust for the predictable summer decrease in the unemployment rate for teenagers. C) are the same as the unadjusted rates in periods of bad weather. D) are not calculated for the U.S. economy. Answer: A Diff: 1 Topic: Who are the Unemployed? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 31) The unemployment rate is calculated by dividing the number of unemployed and looking for work by the sum of the number employed and the number unemployed and looking for work. Answer: TRUE Diff: 1 Topic: Examining Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 32) Individuals who are not working and are not actively looking for work are counted as unemployed if they have looked for work in the past. Answer: FALSE Diff: 1 Topic: Examining Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 33) The labor force participation rate is the fraction of the population over 16 years of age that is looking for work. Answer: FALSE Diff: 1 Topic: Examining Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
34) A person who is not working and who has looked for work in the past, but is not looking for work now is not considered "unemployed." Answer: TRUE Diff: 1 Topic: How is Unemployment Defined and Measured? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 35) If a person without a job is not actively looking for work, that person is classified as not being in the labor force. Answer: TRUE Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 36) If a large number of people are classified as being out of the labor force when they are really looking for work, this will lead to an official unemployment rate that is lower than the true unemployment rate. Answer: TRUE Diff: 2 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 37) People who stopped looking for work because they could not find jobs are called discouraged workers. Answer: TRUE Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
38) Marginally attached workers are discouraged workers who have stopped their job search for reasons other than the lack of jobs. Answer: TRUE Diff: 1 Topic: Alternative Measures of Unemployment and Why They Are Important Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 39) Explain what is meant by the terms "labor force," "unemployment rate," and "labor force participation rate." Answer: The labor force comprises all workers who are currently employed and unemployed workers who are actively looking for work. The unemployment rate is the percentage of the labor force which is unemployed. The labor force participation rate is the percentage of the population over 16 years of age that is in the labor force. Diff: 1 Topic: Examining Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 40) Name two types of jobs most likely affected by "seasonal unemployment." Answer: Farming, construction work Diff: 1 Topic: Who are the Unemployed? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 41) What is seasonal unemployment? Give an example of unemployment that recur during certain times on the calendar. year Answer: Seasonal unemployment is unemployment that recur due to calendar effects. For example, farmers usually harvest their crops in September and October, as they require more help in farming, the unemployment rate usually drops. However, the unemployment rate usually increases in November once the harvest is done. Diff: 1 Topic: Who are the Unemployed? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
42) How does the BLS "seasonally adjust" the unemployment rate? Answer: The BLS uses statistical procedures to remove these seasonal factors, so that users of the data can more accurately interpret underlying trends in the economy. For example, they control for the predictable increase in the unemployment rate after agricultural harvests in the fall. Diff: 1 Topic: Who are the Unemployed? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6.2 Categories of Unemployment 1) Unemployment that naturally occurs during the normal workings of an economy as people change jobs and move across the country is called A) natural unemployment. B) frictional unemployment. C) structural unemployment. D) cyclical unemployment. Answer: B Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 2) Hector voluntarily left his job to search for a job in accounting, the field in which he has his bachelor's degree. Hector is considered A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) not to be unemployed. Answer: C Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
3) Juanita quit her job to move to Santa Fe to be closer to her family. She is actively looking for a new job in Santa Fe. Juanita is considered A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) not to be unemployed. Answer: C Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 4) Auto workers laid off from Hot-Rod Autoworks as the result of a recession are considered A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) seasonally unemployed. Answer: B Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 5) Steel workers laid off from their jobs as the result of a recession are considered A) structurally unemployed. B) cyclically unemployed. C) frictionally unemployed. D) seasonally unemployed. Answer: B Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
6) Customer service representatives who have lost their jobs as a result of call centers being outsourced to India are an example of A) structural unemployment. B) cyclical unemployment. C) frictional unemployment. D) voluntary unemployment. Answer: A Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 7) ________ unemployment is most closely associated with periods of falling GDP. A) Structural B) Cyclical C) Frictional D) Voluntary Answer: B Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 8) ________ unemployment is NOT associated with economic fluctuations. A) Structural B) Cyclical C) Frictional D) both A and C Answer: D Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
9) Cyclical unemployment occurs A) because the government labels some people who aren't really in the labor force as unemployed. B) with economic fluctuations; it increases during bad times and decreases during good times. C) naturally during the normal workings of an economy, as people change jobs, move across the country, etc. D) because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs. Answer: B Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 10) ________ unemployment occurs due to a mismatch between the jobs that are available and the skills of workers seeking jobs. A) Structural B) Cyclical C) Frictional D) Voluntary Answer: A Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 11) When the "real" GDP falls, the rate of unemployment generally A) increases. B) decreases. C) stays constant. D) equals the natural rate. Answer: A Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
12) When displaced workers require retraining before entering the labor force again, it is the result of ________ unemployment. A) cyclical B) frictional C) structural D) seasonal Answer: C Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 13) At full employment the unemployment rate equals the A) cyclical unemployment rate. B) structural unemployment rate. C) structural unemployment rate plus the cyclical unemployment rate. D) structural unemployment rate plus the frictional unemployment rate. Answer: D Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 14) Economists say that the economy is at "full employment" when the A) structural unemployment rate is zero. B) total unemployment rate is zero. C) frictional unemployment rate is zero. D) cyclical unemployment rate is zero. Answer: D Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
15) At full employment there is no A) structural unemployment. B) cyclical unemployment. C) frictional unemployment. D) all of the above Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 16) The economy needs some unemployment to operate efficiently, because without it A) firms will find it difficult to recruit workers, leading to increased wages and prices. B) firms will find it difficult to recruit workers, leading to reduced wages and prices. C) workers will find it difficult to find a job, leading to increased wages and prices. D) workers will find it difficult to find a job, leading to reduced wages and prices. Answer: A Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 17) In the United States today, economists estimate that the natural rate of unemployment is between ________ and ________ percent. A) 3; 5.5 B) 3; 4 C) 5; 6.5 D) 6.5; 7.5 Answer: C Diff: 1 Topic: The Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
18) The natural rate of unemployment A) can vary over time and will differ across countries. B) can vary over time but tends to be the same across countries. C) tends to remain constant over time but at different levels for different countries. D) tends to remain constant over time and is the same across countries. Answer: A Diff: 1 Topic: The Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 19) As compared to the estimates of the natural rate of unemployment for the United States, those for Europe are A) the same. B) higher. C) lower. D) higher and more variable. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 20) Compared to the natural rate of unemployment, the actual unemployment rate is A) always higher. B) always lower. C) always the same. D) higher in periods when GDP fails to grow at its normal rate. Answer: D Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
21) In periods when GDP fails to grow at its normal rate, the actual unemployment rate will be ________ than the natural rate of unemployment. A) lower B) higher C) the same D) falling faster Answer: B Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 22) Actual unemployment can exceed the natural rate of unemployment due to A) structural unemployment. B) cyclical unemployment. C) frictional unemployment. D) all of the above. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 23) In periods when GDP grows very rapidly for a long period, the actual unemployment rate will be ________ than the natural rate of unemployment. A) lower B) higher C) the same D) more variable Answer: A Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
24) Actual unemployment can fall below the natural rate of unemployment due to A) structural unemployment. B) negative cyclical unemployment. C) frictional unemployment. D) all of the above. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 25) The typical relationship between inflation and unemployment is A) as unemployment falls, inflation falls. B) as unemployment falls, inflation increases. C) as unemployment falls, nothing happens to inflation. D) unemployment changes do not directly lead to changes in inflation, but inflation changes may cause changes in unemployment. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 26) Economic expansions might lead to inflation because an expansion leads to A) a decrease in the unemployment rate, which increases wages. B) an increase in the unemployment rate, which increases wages. C) a decrease in the unemployment rate, which decreases wages. D) an increase in the unemployment rate, which decreases wages. Answer: A Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
27) Which one of the following statements is NOT correct? A) The natural rate of unemployment is estimated to be between 5 percent and 6.5 percent in the U.S. B) The term "full employment" means that 100 percent of the labor force is employed. C) The line between frictional and structural unemployment is sometimes hard to draw. D) Unemployment can occur even when an economy is growing. Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 28) Economists consider an economy to be at "full employment" when A) the unemployment rate equals the natural rate of unemployment. B) there is only a small amount of cyclical unemployment. C) there is no frictional unemployment. D) there is no structural unemployment. Answer: A Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 29) To operate efficiently, an economy generally "needs" ________ unemployment. A) cyclical B) frictional C) structural D) seasonal Answer: B Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
Recall the Application about the impact of disability insurance benefits on the labor force participation rate to answer the following question(s). 30) From the Application, which of the following federal programs provide income protection to individuals with disabilities? A) Social Security Disability Insurance (SSDI) B) Supplemental Security Income (SSI) C) Medicare D) A and B Answer: D Diff: 1 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 31) According to the results of the study featured in the Application, Veterans of the Vietnam War, in relation to other veterans, were more likely to enroll in disability programs if they had ________. A) a heart attack B) PTSD (Post Traumatic Stress Disorder) C) cancer D) Type 2 diabetes. Answer: D Diff: 1 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 32) According to the results of the study featured in the Application, an increase in the disability benefits received by veterans resulted in A) no change in the labor force participation rate for those qualified to receive the benefits. B) a lower labor force participation rate for those not qualified to receive the benefits. C) a higher labor force participation rate for those qualified to receive the benefits. D) a lower labor force participation rate for those qualified to receive the benefits. Answer: D Diff: 1 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
33) Unemployment occurs even during periods when the economy is growing. Answer: TRUE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 34) Cyclical unemployment increases during recessions. Answer: TRUE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 35) Frictional unemployment is unemployment reflecting a mismatch of skills and jobs. Answer: FALSE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 36) Structural unemployment exists because workers and employers try to find the right employment matches. Answer: FALSE Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 37) Economists consider the economy to be at "full employment" when there is no cyclical unemployment. Answer: TRUE Diff: 1 Topic: The Natural Rate of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 38) The actual unemployment rate can be greater than or less than the natural rate of unemployment.
Answer: TRUE Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 39) Name the three types of unemployment. Answer: cyclical, frictional and structural Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 40) What is cyclical unemployment? Answer: Cyclical unemployment is the unemployment that accompanies fluctuations in real GDP. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 41) What is frictional unemployment? Answer: Frictional unemployment is unemployment that occurs naturally during the normal workings of the economy, such as workers taking time to to search for suitable jobs and companies taking time to search for qualified employees. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
42) What is structural unemployment? Answer: Structural unemployment is unemployment that occurs as the economy evolves, and reflects a mismatch of skills and jobs. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 43) Could the advent of the internet completely eliminate frictional unemployment? Answer: While the internet can improve the exchange of information, that is not enough to reduce frictional unemployment to zero. Some workers, for example, would prefer to continue searching for jobs in their own area rather than moving across the country to seek another job. In fact, improving information flows could even have a negative effect of informing workers of other opportunities in the economy and thereby leading to more of them quitting their current jobs to seek other employment! Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 44) Why is the line between frictional and structural unemployment sometimes hard to draw? Answer: Suppose a highly skilled steel worker is laid off because his company shuts down its plant in his area and moves to a new location overseas. The worker would like to find a comparable job, but only low-wage, unskilled work is available in his town. Jobs are available, but not his kind of job; and the steel company will not come back. There is really no correct answer as to whether this is frictional or structural unemployment. Diff: 2 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 45) In what sense is frictional unemployment "good" for the economy? Answer: Since frictional unemployment is the unemployment that exists so that workers and firms find the right matches, the economy needs some frictional unemployment to operate efficiently. Diff: 1 Topic: Types of Unemployment: Cyclical, Frictional, and Structural Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
46) What is meant by the term "the natural rate of unemployment"? Answer: The natural rate of unemployment is the level of unemployment at which there is no cyclical unemployment. It consists only of frictional and structural unemployment. Diff: 1 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 47) Why does unemployment not go to zero during booms? Answer: While unemployment has a cyclical component—that is, it naturally goes up during recessions as people are laid off and down during booms as people are hired— there are other components of unemployment that do not vary over the business cycle. For instance, some people are going to be transitioning between jobs at all times of the business cycle (this is frictional unemployment). Frictional and structural unemployment rates are nonzero, so "full employment" actually means that some people are unemployed all the time. Diff: 2 Topic: The Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes Recall the Application about the impact of disability insurance benefits on the labor force participation rate to answer the following question(s). 48) According to the article, why were Vietnam War veterans (compared with other veterans) with Type 2 diabetes more likely to enroll in disability programs? Answer: A change i in the benefits paid to veterans in 2001 allowed veterans of the Vietnam War to claim disability benefits if they suffered from Type 2 diabetes. Other veterans who had Type 2 diabetes were not able to receive benefits. Diff: 2 Topic: Application 2, Disability Insurance and Labor Force Participation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
6.3 The Costs of Unemployment 1) ________ is/are the payments that people may receive when they lose their job. A) Unemployment insurance B) Food stamps C) Social security D) Salaries Answer: A Diff: 1 Topic: The Costs of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 2) The table that summarizes the percent of the unemployed who have been unemployed for different lengths of time is called A) the duration of unemployment. B) the labor force participation rate. C) structural unemployment D) natural rate of unemployment. Answer: A Diff: 1 Topic: The Costs of Unemployment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 3) When the economy experiences sustained economic expansion, the percent of the population who are unemployed 27 weeks of longer A) decreases. B) increases. C) may increase or decrease. D) does not change. Answer: A Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
4) When the economy experiences a prolonged recession, the percent of the population who are unemployed 27 weeks of longer A) decreases. B) increases. C) may increase or decrease. D) does not change. Answer: B Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes Recall the Application about the study done about the perceptions and behavior of the unemployed in Great Britain to answer the following question(s). 5) According to this Application, becoming unemployed caused ________ in perceived well-being for men if those in their peer group were also unemployed. A) a larger decrease B) a smaller decrease C) no change D) an large increase Answer: B Diff: 1 Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6) According to this Application, the more unhappy the unemployed individuals were about their situations, A) the more likely they were to remain unemployed. B) the more aggressive they would be to try to find a job. C) the more they congregated around others who were unemployed. D) the longer they collected unemployment benefits. Answer: B Diff: 1 Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
7) According to this Application, if you are unemployed and if your peer group were also unemployed A) you have a better chance of finding employment. B) you may not be as aggressive in searching for work. C) you will want to find a job quickly to encourage your peer group about employment prospects. D) you have little chance of finding a job. Answer: B Diff: 1 Topic: Application 3, Social Norms, Unemployment, and Perceived Happiness Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 8) Unemployment insurance typically replaces a worker's full earnings. Answer: FALSE Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 9) Unemployment insurance tends to lead to the unemployed worker spending less time unemployed. Answer: FALSE Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 10) The effects of long term unemployment are purely financial. Answer: FALSE Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
11) How does prolonged unemployment harm workers when they are applying for a job? Answer: Workers who suffer long-term unemployment may lose job related skills and work habits, and may be less desirable candidates for jobs that the apply for in the future. Diff: 1 Topic: The Costs of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6.4 The Consumer Price Index and the Cost of Living 1) The value of a dollar A) is its purchasing power. B) remains constant over time. C) is its face value. D) is set by the government. Answer: A Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 2) The real-nominal principle can be stated as A) production generates income. B) only final goods and services should be counted in GDP. C) what matters to people is the purchasing power of money or income. D) only the manufacture of real goods is production. Answer: C Diff: 1 Topic: The CPI and the Cost of Living Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
3) The index most widely used by the government and the private sector to measure changes in the cost of living is the A) Producer Price Index. B) Consumer Price Index. C) the GDP deflator. D) the chain-weighted price index. Answer: B Diff: 1 Topic: The CPI and the Cost of Living Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) The Consumer Price Index (CPI) relies on the calculation of A) prices of a fixed basket of goods that does not change often. B) prices of a variable basket of goods that changes frequently. C) the components of GDP that change annually. D) the components of GDP that do not change frequently. Answer: A Diff: 1 Topic: The CPI and the Cost of Living Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 5) Which one of the following statements is TRUE of the Consumer Price Index (CPI)? A) It does not take account of the price of imported goods and services. B) It measures changes in prices of a fixed basket of goods. C) It does not take into account the price of used goods. D) It understates the true rate of inflation. Answer: B Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
The following table lists the basket of goods in the Consumer Price Index for the nation of Astro (assume 2014 is the base year). 2014 2014 2015 2015 2016 2016 Quantity Price Quantity Price Quantity Price Sunglasses 8 $9.00 10 $11.00 7 $10.00 Toothpaste 15 3.00 18 4.00 15 4.00 Ferrets 6 12.00 4 15.00 9 18.00 Table 6.2 6) Using the information in Table 6.2, the Astro Consumer Price Index for 2014 is A) 24. B) 100. C) 124. D) 189. Answer: B Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) Using the information in Table 6.2, the Astro Consumer Price Index for 2015 is A) 87. B) 99. C) 126. D) 238. Answer: C Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
8) Using the information in Table 6.2, the Astro Consumer Price Index for 2016 is A) 87. B) 104. C) 131. D) 298. Answer: C Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) Using the information in Table 6.2, the inflation rate from 2014 to 2015 is about A) 26 percent. B) 38 percent. C) 42 percent. D) 49 percent. Answer: A Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) Using the information in Table 6.2, the inflation rate from 2015 to 2016 is about A) 4 percent. B) 5 percent. C) 17 percent. D) 31 percent. Answer: A Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
11) Using the information in Table 6.2, the percent increase in prices over the two year period from 2014 to 2016 is approximately A) 26 percent. B) 31 percent. C) 38 percent. D) 98 percent. Answer: B Diff: 2 Topic: The CPI and the Cost of Living Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) What does the Consumer Price Index (CPI) measure? A) prices of durable goods B) prices of non durable goods C) the cost of living over time D) the cost of replacing lost items Answer: C Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 13) The Consumer Price Index (CPI) differs from a chain-weighted price index in that the CPI A) requires calculation of GDP, while the chain-weighted index does not. B) measures the costs of a typical fixed basket of goods over time, while the chainweighted index does not. C) allows for the goods consumed in an economy to change over time, while the chainweighted index does not. D) compares the prices of all goods in one year to the prices of all goods in other years. Answer: B Diff: 2 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
14) The chain-weighted index for GDP and the CPI differ in that the CPI A) excludes price changes from used and imported goods while the chain-weighted index includes these price changes. B) asks how much a fixed basket of goods costs in the current year as compared to the cost of those same goods in a base year while the chain-weighted index takes an average of price changes using base years from neighboring years. C) is calculated by the Commerce Department while the chain-weighted index is calculated by local newspapers. D) is calculated in nominal terms and the chain-weighted index is calculated in real terms. Answer: B Diff: 3 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 15) Chain-weighted price indices are constructed such that A) prices in different economies can be directly compared with one another. B) prices in different years can be directly compared with one another. C) all years' levels of GDP are directly related to a base year level of GDP. D) prices of one good can be directly compared with prices of other goods. Answer: B Diff: 2 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 16) Most economists believe that price indices A) overstate inflation and understate growth in nominal GDP. B) overstate inflation and understate growth in real GDP. C) understate inflation and understate growth in nominal GDP. D) understate inflation and understate growth in real GDP. Answer: B Diff: 2 Topic: Problems in Measuring Changes in Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
17) The principal reason why the chain-weighted index for GDP and the CPI both overstate actual changes in prices is that A) it is hard to measure quality changes. B) the basket of goods purchased by consumers never changes. C) price data is often inaccurate. D) all of the above Answer: A Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 18) Economists believe that the CPI overstates actual price changes by as much as ________ to ________ percent each year. A) 1; 2 B) 2; 3 C) 0.5; 1 D) 0.5; 1.5 Answer: D Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 19) Cost-of-living adjustments are A) automatic wage changes based on the CPI which are included in some union contracts. B) changes in the basket of goods used in calculating the CPI. C) averages of neighboring years' base prices used in constructing the CPI. D) quality measurements included in the calculation of the CPI. Answer: A Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
20) When wages or benefits are automatically increased based on the reported inflation rate, it is called the ________ adjustment. A) natural flow of money B) cost-of-living C) change in exports D) change in imports Answer: B Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) Social Security payments automatically increase when the Consumer Price Index (CPI) goes up because of the A) age of the recipient. B) years receiving social security. C) cost-of-living adjustments. D) individual being married or unmarried. Answer: C Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Recall the Application about the time involved in including cell phones in the calculation of the Consumer Price Index (CPI) to answer the following question(s). 22) According to this Application, cell phones were introduced to the public in 1983, but it took the Bureau of Labor Statistics ________ to include them in calculating the Consumer Price Index (CPI). A) 3 years B) 7 years C) 15 years D) 24 years Answer: C Diff: 1 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
23) According to this Application, the failure of including cell phones in a timely manner when calculating the Consumer Price Index (CPI) caused the telecommunications component of the price index A) to be biased downward. B) to be biased upward. C) to actually register no perceptible bias. D) to become negative. Answer: B Diff: 1 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 24) According to this Application, the bias in the Consumer Price Index (CPI) would be ________ if new goods are ________ incorporated in CPI calculations. A) smaller; quickly B) greater; immediately C) smaller; slowly D) negligible; slowly Answer: A Diff: 1 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 25) According to the Application, as new products are constantly invented and introduced on the market, A) the bias in the CPI can be large. B) the bias in the CPI tends to become smaller. C) the bias in the CPI will eventually disappear. D) the bias in the CPI will remain virtually unchanged. Answer: A Diff: 2 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
26) According to the Application, the telecommunications component of the Consumer Price Index (CPI) was biased A) upward by 0.8 to 1.9 percent B) upward by 1.8 to 2.9 percent C) downward by 0.8 to 1.9 percent D) downward by 1.8 to 2.9 percent Answer: A Diff: 2 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 27) According to the Application, if the telecommunications component of the Consumer Price Index (CPI) was biased upward by 1.9 percent, then if increase in telecommunications prices were measured at 1.1 percent, then in reality, telecommunication prices A) decreased by 0.8 percent. B) increased by 3 percent. C) increased by 0.8 percent. D) decreased by 3 percent. Answer: A Diff: 2 Topic: Application 4, The Introduction of Cell Phones and the Bias in the CPI Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 28) The basket of goods measured in computing the Consumer Price Index (CPI) includes goods produced in prior years and imported goods. Answer: TRUE Diff: 1 Topic: The CPI versus the Chain Index for GDP Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
29) Most economists believe that the Consumer Price Index (CPI) overstates the actual changes in prices while the chain index for GDP understates them. Answer: FALSE Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 30) What is the Consumer Price Index (CPI)? Answer: The Consumer Price Index is a measure which tracks the cost of living over time. The CPI measures the cost of a fixed basket of goods chosen to represent the consumption pattern of a typical consumer. Diff: 1 Topic: The CPI and the Cost of Living Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 31) What is a "cost-of-living" adjustment? Answer: Increases in nominal wages or benefits to keep purchasing power constant. Diff: 1 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 32) Why do both the chain-weighted index for GDP and the CPI overstate actual price increases? Answer: Both price indices overstate the actual price inflation experienced by economic agents because quality improvements are difficult to measure. For example, the price of computers may stay the same but one can get more computing power for one's money; thus while the price has remained constant, in some sense it has really fallen, but this is difficult to measure. Diff: 2 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
33) How costly are biases in the Consumer Price Index (CPI)? Answer: Each year the federal government increases Social Security payments to the elderly by the rate of increase of prices as measured by the CPI. Economists believe that the CPI overstates actual price increases by between 0.5% and 1.5% a year. If we assume that the figure is 1%, and use the estimates provided by the Congressional Budget Office, reducing Social Security payments by 1% would save 42 billion dollars over a five-year period! Diff: 2 Topic: Problems in Measuring Changes in Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6.5 Inflation 1) The percentage rate of change in the price level is called the A) chain-weighted price index. B) Consumer Price Index. C) rate of inflation. D) rate of absorption. Answer: C Diff: 1 Topic: Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 2) Suppose that a price index in Paraguay was 131 in 2015 and 152 in 2016. The inflation rate between those two years was approximately A) 10.5 percent. B) 11.6 percent. C) 16 percent. D) 21 percent. Answer: C Diff: 1 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
3) Suppose that the CPI in Thailand was 345 in 2015 and 388 in 2016. The inflation rate between those two years was approximately A) 11.2 percent. B) 14.3 percent. C) 12.5 percent. D) 43 percent. Answer: C Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) Suppose that the chain-weighted index for GDP in Panama was 180 in 2015 and 188 in 2016. The inflation rate between those two years was approximately A) 1.1 percent. B) 4.4 percent. C) 8 percent. D) 10.4 percent. Answer: B Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 5) Suppose that a price index in Latvia was 120 in 2015 and 150 in 2016. The inflation rate between those two years was approximately A) 8 percent. B) 12.5 percent. C) 25 percent. D) 30 percent. Answer: C Diff: 1 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
6) Suppose that the chain-weighted index for GDP in Gambia was 275 in 2015 and 350 in 2016. The inflation rate between those two years was approximately A) 20.2 percent. B) 27.3 percent. C) 37.5 percent. D) 75 percent. Answer: B Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) Suppose that the CPI in Egypt was 111 in 2015 and 122 in 2016. The inflation rate between those two years was approximately A) 4.8 percent. B) 5.5 percent. C) 9.9 percent. D) 11 percent. Answer: C Diff: 2 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 8) Suppose that in 2015 the chain-weighted price index for GDP in Estonia is 220 and the chain-weighted price index in Lithuania is 160. In 2016 the price index in Estonia is 242 and the price index in Lithuania is 180. You could conclude that A) Estonia is a more expensive place to live than Lithuania. B) Lithuania is a more expensive place to live than Estonia. C) Estonia's rate of inflation is higher than Lithuania's. D) Lithuania's rate of inflation is higher than Estonia's. Answer: D Diff: 3 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
9) In the United States during the 1950s and 1960s A) the inflation rate was frequently less than 2 percent a year. B) prices fell. C) prices rose sharply. D) there was zero inflation. Answer: A Diff: 1 Topic: Historical U.S. Inflation Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) The biggest problem caused by a deflation is that A) prices fall. B) wages fall. C) people cannot repay their debts. D) interest rates rise. Answer: C Diff: 1 Topic: The Perils of Deflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 11) Inflation must be high in Moscow because it is very expensive to live there. Answer: FALSE Diff: 1 Topic: Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) Since the 1930s the United States has experienced continuous deflation. Answer: FALSE Diff: 1 Topic: Historical U.S. Inflation Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
13) Critically evaluate the statement "Honolulu is an expensive place to live. Therefore the inflation rate must be high in Honolulu." Answer: The statement confuses the price level with the inflation rate. Inflation is a flow variable—it measures changes in prices from year to year, while the price level is a stock variable. The statement observes the price level, not the inflation rate. Diff: 2 Topic: Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 14) Explain why deflation could prevent people from being able to repay their debts. Answer: When an economy experiences deflation, or falling price levels, wages can actually decline. If someone has an outstanding loan that needs to be paid off, a decrease in wages will make it harder to pay the loan, since outstanding loan amounts will not decrease with deflation and the decrease in wages. Diff: 2 Topic: The Perils of Deflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6.6 The Costs of Inflation 1) Economists call the physical cost of changing prices A) the cost of doing business. B) menu costs. C) inflationary suffrage. D) increasing profits. Answer: B Diff: 1 Topic: Anticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
2) On what kind of income is our tax system based? A) real B) nominal C) adjusted D) inflationary Answer: B Diff: 1 Topic: Anticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 3) The costs associated with recalculating prices and printing new price lists when there is inflation are known as A) shoe leather costs. B) menu costs. C) chain-index costs. D) diminishing costs. Answer: B Diff: 1 Topic: Anticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) The costs of inflation that arise from trying to reduce cash holdings are known as A) shoe leather costs. B) menu costs. C) chain-index costs. D) diminishing costs. Answer: A Diff: 1 Topic: Anticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
5) What happens to your purchasing power if inflation is less than you anticipated? A) It decreases. B) It increases. C) It devalues your net worth. D) It won't change much. Answer: B Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6) If you negotiated a salary based on an anticipated inflation rate of 4 percent, and the actual inflation rate turned out to be 6 percent A) the purchasing power of your real wages would be more than you anticipated. B) your employer would have gained at your expense. C) your real wage will increase, but your nominal wage will decrease. D) the purchasing power of your wages will not change, since purchasing power is based on your nominal wage. Answer: B Diff: 2 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) If you take out a bank loan prior to unanticipated inflation A) it will be harder for you to repay the loan because of the inflated dollar. B) you will gain at the expense of your bank. C) your bank will gain at your expense. D) neither you nor your bank will be affected, because the loan was made prior to the inflation. Answer: B Diff: 2 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
8) One cost of unanticipated inflation is A) both lenders and borrowers lose. B) arbitrary redistributions of income. C) nominal income falls below real income. D) people cannot repay their debts. Answer: B Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) When inflation increases by more than what people expect, A) lenders lose while debtors gain. B) both lenders and debtors lose. C) debtors lose and lenders gain. D) both lenders and debtors gain. Answer: A Diff: 2 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) In September 2008, the MONTHLY rate of inflation in Zimbabwe approached 489 BILLION percent. An inflation rate such as this would A) seriously disrupt normal commerce. B) decrease the natural rate of unemployment. C) be too high to calculate using the CPI. D) all of the above. Answer: A Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
11) An inflation rate that exceeds 50 percent per month is referred to as A) anticipated inflation. B) destructive deflation. C) hyperinflation. D) superflation. Answer: C Diff: 1 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) Hyperinflation is defined as an inflation rate A) that doubles each year. B) that exceeds 50 percent per month. C) that increases rapidly in one year and decreases rapidly the next year. D) that is moderately high but anticipated. Answer: B Diff: 2 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 13) If a can of soda costs $1.00 today, how much would it cost next month if the prices go up by 50 percent in one month? A) $1.50 B) $0.50 C) $150.00 D) $2.50 Answer: A Diff: 2 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
14) If a can of soda costs $1.00 today, how much would it cost in two months if the prices go up by 50 percent per month? A) $2.25 B) $1.50 C) $2.00 D) $2.50 Answer: A Diff: 2 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 15) If a can of soda costs $1.00 today, how much would it cost in 12 months (1 year) if the prices go up by 50 percent per month? A) about $130.00 B) about $7.00 C) about $6.00 D) about $24.00 Answer: A Diff: 3 Topic: Unanticipated Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 16) Anticipated inflation is associated with cost increases which are fully expected. Answer: TRUE Diff: 1 Topic: The Costs of Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 17) Unanticipated inflation is associated with cost increases which are not expected. Answer: TRUE Diff: 1 Topic: The Costs of Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
18) Inflation distorts the operation of our tax and financial system. Answer: TRUE Diff: 1 Topic: Anticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 19) Hyperinflation refers to an inflation rate which exceeds 5 percent per month. Answer: FALSE Diff: 1 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 20) Unemployment and recessions are sometimes necessary to curb high inflation. Answer: TRUE Diff: 1 Topic: Unanticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) Explain menu costs and shoe leather costs as they relate to inflation. Answer: When there is inflation, menu costs refer to the actual physical costs of changing prices, as would be necessary for printed material such as catalogs, price tags and restaurant menus. Shoe leather costs refer to the costs involved with holding less cash. When there is inflation, people will tend to want to hold less cash, since the value of cash being held will decrease. If less cash is held, more frequent trips to banks or ATMs will be necessary when people need cash. Diff: 2 Topic: Anticipated Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
22) What is hyperinflation? Answer: Hyperinflation refers to an inflation rate which exceeds 50 percent per month. Diff: 1 Topic: Unanticipated Inflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 7 The Economy at Full Employment 7.1 Wage and Price Flexibility and Full Employment 1) The economic model of the economy at full employment that assumes fully adjustable wages and prices is called the A) classical model B) the Keynesian model. C) the neoclassical model D) the Law of Supply and Demand. Answer: A Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 2) The school of thought that believes that wages and prices adjust quickly to bring the economy back to full employment is called the A) classical school B) the Keynesian school C) the neoclassical school D) the Post-Keynesian school. Answer: A Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 3) The classical school of thought dominated economics until A) the mid 1930s. B) the mid 1970s. C) the mid 1950s. D) the mid 1990s. Answer: A Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Fact
AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
4) One of the necessary conditions for the classical model to be TRUE is that A) wages and prices are fully flexible. B) wages and prices are partly flexible. C) wages and prices will not change. D) wages were flexible and prices are fixed. Answer: A Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 5) ________ unemployment occurs naturally in the labor market as workers search for jobs. A) Cyclical B) Frictional C) Structural D) Inflationary Answer: B Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6) ________ unemployment arises from a mismatch of skills and jobs. A) Cyclical B) Frictional C) Structural D) Inflationary Answer: C Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
7) ________ unemployment rises and falls with economic fluctuations. A) Cyclical B) Frictional C) Structural D) Inflationary Answer: A Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 8) The economy is at full employment when it has A) no cyclical unemployment. B) no structural unemployment. C) no frictional unemployment. D) no seasonal unemployment. Answer: A Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 9) When the economy is at full employment, A) it has no cyclical unemployment. B) the unemployment rate is above zero. C) it is neither in a recession of boom. D) all of the above are correct. Answer: D Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
10) When developing classical models, there is an assumption that wages and prices will remain fixed relative to changes in supply and demand. Answer: FALSE Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 11) The term "classical" refers to an economic theory which states that over a relatively short period of time, wages and prices will adjust quickly to bring the economy back to full employment. Answer: TRUE Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 12) When an economy is at full employment, the unemployment rate is zero percent. Answer: FALSE Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 13) What assumptions are made concerning wages and prices in a classical economic model? Answer: Wages and prices adjust freely to changes in supply and demand. Diff: 1 Topic: Wage and Price Flexibility and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
7.2 The Production Function 1) Consider a two-input production function Y = F(K,L), where Y is the level of GDP, K is the stock of capital and L is the stock of labor. GDP will increase when A) K increases and L is constant. B) both K and L increases. C) L increases and K is constant. D) All of the above will result in an increase in GDP. Answer: D Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 2) Consider a production function Y = F(K,L), where Y is the level of GDP, K is the stock of capital and L is the stock of labor. If the production function was drawn with labor on the x-axis and GDP on the y-axis, then an increase in labor will be illustrated as A) a movement in the production function upward along the line. B) a movement in the production function downward along the line. C) a downward shift in the production function. D) an upward shift in the production function. Answer: A Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 3) Consider a production function Y = F(K,L), where Y is the level of GDP, K is the stock of capital and L is the stock of labor. If the production function was drawn with labor on the x-axis and GDP on the y-axis, then a decrease in labor will be illustrated as A) a movement in the production function upward along the line. B) a movement in the production function downward along the line. C) a downward shift in the production function. D) an upward shift in the production function. Answer: B Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
4) Consider a production function Y = F(K,L), where Y is the level of GDP, K is the stock of capital and L is the stock of labor. If the production function was drawn with labor on the x-axis and GDP on the y-axis, then a decrease in capital will be illustrated as A) a movement in the production function upward along the line. B) a movement in the production function downward along the line. C) a downward shift in the production function. D) an upward shift in the production function. Answer: C Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 5) Consider a production function Y = F(K,L), where Y is the level of GDP, K is the stock of capital and L is the stock of labor. If the production function was drawn with labor on the x-axis and GDP on the y-axis, then n increase in capital will be illustrated as A) a movement in the production function upward along the line. B) a movement in the production function downward along the line. C) a downward shift in the production function. D) an upward shift in the production function. Answer: D Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 6) Consider a two-input production function, one of which is increasing while the other is fixed. At the point of diminishing returns, output will A) increase at an increasing rate. B) increase at a decreasing rate. C) decrease at an increasing rate. D) decrease at a decreasing rate. Answer: B Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
7) Purchasing additional equipment for more people to use or share in a production environment usually results in a A) more expensive level of output. B) higher level of output. C) backlog of production. D) worker sharing his or her load. Answer: B Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories Output Labor Input 50 3 70 4 86 5 98 6 108 7 116 8 Assume the stock of capital is held constant. Table 7.1 8) Refer to Table 7.1. Output is increasing at A) an increasing rate. B) a constant rate. C) a diminishing rate. D) a negative rate. Answer: C Diff: 2 Topic: The Production Function Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 9) Table 7.1 exemplifies the principle of A) real vs. nominal costs. B) marginal costs. C) diminishing returns. D) full employment equilibrium. Answer: C Diff: 1 Topic: The Production Function Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 10) Refer to Table 7.1. As labor inputs increase from 5 to 6, output
A) increases by 16 units. B) increases by 98 units. C) increases at a negative rate. D) increases by 12 units. Answer: D Diff: 1 Topic: The Production Function Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 11) Investments made "today" in machines, equipment and buildings do not have an immediate effect on total capital stock. Answer: TRUE Diff: 1 Topic: The Production Function Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 12) When considering a two-input production function, one of which is increasing while the other is fixed, at some point called the point of diminishing returns, output will increase at a decreasing rate. Answer: TRUE Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 13) By providing workers with more machines, equipment and buildings to use in the production of goods, production would decrease. Answer: FALSE Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
14) Describe the relationship demonstrated by a production function. Answer: The production function shows the relationship between the level of output of a good and the factors of production that are inputs to production. Diff: 1 Topic: The Production Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 7.3 Wages and the Demand and Supply for Labor 1) The downward sloping labor demand curve demonstrates that as the ________ increases the ________ decreases. A) real wage; amount of labor supplied B) real wage; amount of labor hired C) nominal wage; amount of labor supplied D) nominal wage; amount of labor hired Answer: B Diff: 2 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 2) The ________ curve shows a(n) ________ relationship between the real wage and the number of workers who are willing to work. A) labor demand; positive B) labor demand; direct C) labor supply; positive D) labor supply; inverse Answer: C Diff: 2 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
3) If the real wage rises A) the marginal cost of labor falls. B) firms will hire additional labor. C) the marginal benefit of the worker increases. D) firms will hire less labor. Answer: D Diff: 2 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 4) The labor demand curve is downward sloping because as the real wage ________ the amount of labor hired ________. A) rises; increases B) falls; increases C) falls; decreases D) rises; remains constant Answer: B Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 5) Suppose the stock of capital remains constant. By adding more labor, perhaps a second work shift, output A) decreases. B) increases. C) remains the same. D) becomes more costly. Answer: B Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
6) The labor supply and demand most directly affect the level of ________ in an economy. A) people attending colleges B) people requiring retraining C) employment D) welfare benefits Answer: C Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 7) Firms consider the ________ wage when considering whether to hire additional units of labor. A) nominal B) real C) minimum D) normal Answer: B Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 8) A wage rate that is adjusted for changes in the price level is known as the A) real wage. B) nominal wage. C) minimum wage. D) functional wage. Answer: A Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 9) In equilibrium, the quantity of labor demanded is ________ the quantity of labor supplied. A) greater than B) less than C) equal to D) the primary determinant of Answer: C Diff: 1 Topic: Labor Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking
Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 10) The marginal principle states that one should A) increase the level of an activity if the marginal benefit exceeds its marginal cost. B) decrease the level of an activity if the marginal cost exceeds the marginal benefit. C) if possible, pick the level at which the marginal benefit equals the marginal cost. D) all of the above Answer: D Diff: 1 Topic: Changes in Demand and Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 11) The marginal benefit of a worker to a firm is the value of the extra output that results when A) some workers are laid off and the remaining workers become more productive. B) an additional worker is hired. C) workers get paid for working overtime. D) work is outsourced to a foreign country. Answer: B Diff: 1 Topic: Changes in Demand and Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 12) If the demand for labor ________, real wages rise and the amount of labor employed ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Diff: 1 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
13) If the demand for labor ________, real wages fall and the amount of labor employed ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 14) If the supply of labor ________, real wages fall and the amount of labor employed ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 15) If the supply of labor ________, real wages rise and the amount of labor employed ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
16) An increase in the demand for labor means that A) the demand for labor increases as a result of an increase in the real wage rate. B) the demand for labor increases as a result of a decrease in the real wage rate. C) the demand for labor increases at any real wage rate. D) the supply of labor must also be increasing. Answer: C Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 17) An increase in a firm's capital stock ________ in the marginal benefit of hiring labor. A) will cause an increase B) will cause a decrease C) will cause no change D) may cause an increase, a decrease, or no change Answer: A Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 18) If a firm increases its capital stock, real wages will likely ________ and the equilibrium quantity of labor will likely ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
19) If a firm decreases its capital stock, real wages will likely ________ and the equilibrium quantity of labor will likely ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 20) As firms reduce their stock of capital, labor demand ________ and labor supply ________. A) increases; increases B) decreases; decreases C) increases; stays the same D) decreases; stays the same Answer: D Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 21) As the result of a decrease in capital, the demand for labor would ________, the supply of labor would ________, and the real wage would ________. A) decrease; decrease; decrease B) decrease; remain the same; decrease C) decrease; remain the same; increase D) decrease; increase; remain the same Answer: B Diff: 3 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
22) As the result of an increase in the price of capital, the demand for labor would ________, the supply of labor would ________, and the quantity of labor hired would ________. A) decrease; decrease; decrease B) decrease; remain the same; decrease C) increase; remain the same; decrease D) decrease; increase; remain the same Answer: B Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 23) As more efficient capital equipment becomes available, the demand for labor will ________, the real wage will ________, and the quantity of labor hired will ________. A) increase; increase; increase B) increase; remain the same; increase C) increase; remain the same; decrease D) increase; decrease; remain the same Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 24) As a result of an increase in the enforcement of illegal immigration laws, the demand for labor will ________, the supply of labor will ________, and the real wage will ________. A) remain the same; decrease; increase B) increase; decrease; remain the same C) remain the same; increase; decrease D) decrease; increase; remain the same Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
25) If the government stops granting temporary work permits to foreign nationals, the demand for labor will ________, the supply of labor will ________, and the quantity of labor hired will ________. A) remain the same; increase; decrease B) increase; decrease; remain the same C) increase; decrease; decrease D) remain the same; decrease; decrease Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 26) If the government liberalizes immigration policies, the demand for labor will ________, the real wage will ________, and the quantity of labor hired will ________. A) remain the same; decrease; decrease B) increase; decrease; remain the same C) remain the same; increase; decrease D) remain the same; decrease; increase Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 27) Suppose that workers develop a greater taste for leisure, and thus require more time away from work. What is likely to happen to wages and the quantity of labor hired? A) Wages increase, quantity of labor hired increases B) Wages increase, quantity of labor hired decreases C) Wages decrease, quantity of labor hired increases D) Wages decrease, quantity of labor hired decreases Answer: B Diff: 3 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
28) Suppose that workers decrease their taste for leisure, and thus require less time away from work. What is likely to happen to wages and the quantity of labor hired? A) Wages increase, quantity of labor hired increases B) Wages increase, quantity of labor hired decreases C) Wages decrease, quantity of labor hired increases D) Wages decrease, quantity of labor hired decreases Answer: C Diff: 3 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 29) An increase in the demand for labor will ________ real wages and ________ employment. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 30) A decrease in the demand for labor will ________ real wages and ________ employment. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
31) An increase in the supply of labor will ________ real wages and ________ employment. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 32) A decrease in the supply of labor will ________ real wages and ________ employment. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 33) Which of the following would result in a higher real wage rate and a greater level of employment in the United States? A) an increase in the U.S. population B) more liberal U.S. immigration policies C) an increase in the supply of capital in the United States D) all of the above Answer: C Diff: 2 Topic: Changes in Demand and Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
34) What is the fundamental principle that economists use when evaluating the costs and benefits of production? A) supply and demand principle B) marginal principle C) cost of goods principle D) production principle Answer: B Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 35) If firms have more capital, it is ________ for workers. A) harmful B) beneficial C) ineffective D) unimportant Answer: B Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 36) When there is a decrease in labor supply, real wages are likely to A) remain the same. B) increase. C) decrease. D) allow less leisure time. Answer: B Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
37) Which of the following factors is likely to increase the amount of available labor and decrease the real wages of workers? A) consumers demanding more goods B) a large number of factory closings C) a high influx of immigration D) in increase in the supply of capital stock Answer: C Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 38) Suppose the equilibrium quantity of labor hired decreases and the equilibrium real wage rate increases. All else constant, this situation will also result in A) higher output prices. B) lower output prices. C) fewer benefits for those still unemployed. D) more government outlay for the unemployed. Answer: A Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 39) The main effect of a decrease in labor demand that arises from a decrease in capital stock is A) shifts in unemployment. B) a need for fewer immigrant workers. C) lower real wages. D) companies make fewer profits. Answer: C Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
Figure 7.1 40) Refer to Figure 7.1. In equilibrium, the real wage is ________ and the amount of labor employed is ________. A) Z; C B) Y; C C) X; C D) Y; B Answer: D Diff: 1 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 41) Refer to Figure 7.1. Start from initial equilibrium. If the economy experiences increased immigration, the new real wage could be ________ and the new amount of labor employed could be ________. A) Z; C B) Y; A C) X; C D) Z; A Answer: C Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
42) Refer to Figure 7.1. Start from initial equilibrium. If firms reduce their capital stock, the new real wage could be ________ and the new amount of labor employed could be ________. A) Z; C B) Y; C C) X; C D) X; A Answer: D Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 43) Refer to Figure 7.1. Start from initial equilibrium. If firms increase their capital stock, the new real wage could be ________ and the new amount of labor employed could be ________. A) Z; A B) Z; C C) X; A D) X; C Answer: B Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories Recall the Application about the level of real wages for laborers in England from 1350 to 1550 to answer the following question(s). In 1348, the bubonic plague, also known as the Black Death, arrived in England from Asia and caused a long decline in total population through the 1450s. 44) According to this Application, the decline in population caused by the Black Death resulted in ________ real wages and ________ total output. A) higher; less B) higher; more C) lower; less D) lower; more Answer: A Diff: 2 Topic: Application 1, The Black Death and Living Standards in Old England Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
45) According to this Application, the decline in population resulting from the Black Death caused the ________ curve for labor to shift to the ________. A) demand; right B) demand; left C) supply; right D) supply; left Answer: D Diff: 1 Topic: Application 1, The Black Death and Living Standards in Old England Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 46) According to this Application, economist Thomas Malthus observed that social maladies such as the Black Death would temporarily ________ living standards until ________ living standards led to increased population growth. A) raise; lower B) raise; higher C) lower; lower D) lower; higher Answer: B Diff: 2 Topic: Application 1, The Black Death and Living Standards in Old England Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 47) Suppose bad weather in Florida unexpectedly results in a much smaller citrus crop than had been projected. This would cause the ________ labor to pick citrus fruit in Florida to ________. A) demand for; increase B) demand for; decrease C) supply of; increase D) supply of; decrease Answer: B Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
48) Suppose bad weather in Florida unexpectedly results in a much smaller citrus crop than had been projected. This would tend to cause the labor demand curve for citrus pickers to shift to the A) right, increasing wages. B) right, decreasing wages. C) left, increasing wages. D) left, decreasing wages. Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 49) Suppose bad weather in Florida unexpectedly results in a much smaller citrus crop than had been projected. The reduction in the supply of Florida citrus fruit would tend to A) increase the supply of California citrus fruit. B) decrease the price of California citrus fruit. C) increase the price of Florida citrus fruit. D) shift the supply curve for Florida citrus fruit down and to the right. Answer: C Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 50) Suppose bad weather in Florida unexpectedly results in a much smaller citrus crop than had been projected. This would tend to cause the labor supply curve for citrus pickers to A) shift to the right, causing the labor demand curve to shift to the right. B) shift to the left, causing the labor demand curve to shift to the left. C) remain unchanged, and the wage rate would tend to increase. D) remain unchanged, and the wage rate would tend to decrease. Answer: D Diff: 2 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 51) The nominal wage is the wage rate adjusted for changes in the price level. Answer: FALSE Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
52) When firms increase capital stock, the productivity of their workers increases. Answer: TRUE Diff: 1 Topic: Labor Market Equilibrium Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 53) Labor market equilibrium occurs at a real wage where the demand for labor exceeds the supply of labor. Answer: FALSE Diff: 1 Topic: Labor Market Equilibrium Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 54) An increase in the amount of capital in the economy will shift the demand curve for labor to the left. Answer: FALSE Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 55) Increased immigration is likely to lead to the labor demand curve shifting to the right. Answer: FALSE Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 56) The marginal principle dictates that marginal cost should equal marginal benefit. Answer: TRUE Diff: 1 Topic: Changes in Demand and Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
57) Increases in the real wage will lead workers to supply more hours of labor. Answer: TRUE Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 58) There is an inverse relationship between the amount of labor supplied and real wages. Answer: FALSE Diff: 1 Topic: Changes in Demand and Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 59) Explain the difference between nominal wages and real wages. Answer: Nominal wages are the actual wages earned by employees. Real wages are the wages paid to employees after being adjusted for changes in the price level. Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 60) Suppose the government raises the minimum wage in the economy. All else constant, how will this affect the quantity of labor demanded and the quantity of labor supplied? Answer: The increase in the real wage will increase the marginal cost of labor and firms will therefore hire fewer workers (a decrease in the quantity of workers demanded). Since more people would be willing to work at a higher real wage, the quantity of labor supplied should increase. Diff: 1 Topic: Wages and the Demand and Supply for Labor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
61) Suppose the government cracks down on illegal immigration. How will this affect the demand and supply of labor. Answer: The reduction in immigration causes a decrease in the supply of labor (the curve shifts to the left). This results in a new equilibrium at a higher real wage and a lower level of employment. The quantity of labor demanded will also decrease, but the labor demand curve remains the same because none of the determinants of labor demand have changed. Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 62) Suppose that we observe that wages are falling while output is increasing. Holding the demand for output constant, what might cause this to happen? Answer: Something must have shifted the labor supply curve to the right. This could have been due to any number of things. One possibility could be an increase in the population, and hence, in the potential labor force. Diff: 1 Topic: Changes in Demand and Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 63) Draw a graph illustrating a labor market in equilibrium. Illustrate and explain the effect of an increase in the capital stock. Answer:
As shown in the graph, the increase in the capital stock results in an increased demand for labor. This, in turn, results in a higher real wage (from E to E') and an increase in the quantity of labor hired. Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
64) Draw a graph illustrating a labor market in equilibrium. Illustrate and explain the effect of an increase in immigration. Answer:
As shown in the graph, the increase in immigration results in an increased supply of labor. This, in turn, results in a lower real wage (from E to E') and an increase in the quantity of labor hired. Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 65) Draw a graph illustrating a labor market in equilibrium. Illustrate and explain the effect of an increase in the preference for leisure by workers. Answer:
As shown in the graph, the change in workers' preference for leisure results in a decreased supply of labor. This, in turn, results in a higher real wage (from E to E') and a decrease in the quantity of labor hired. Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
66) Draw a graph illustrating a labor market in equilibrium. Illustrate and explain the effect of a decrease in the preference for leisure by workers. Answer:
As shown in the graph, the change in workers' preference for leisure results in an increased supply of labor. This, in turn, results in a lower real wage (from E to E') and an increase in the quantity of labor hired. Diff: 2 Topic: Changes in Demand and Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 7.4 Labor Market Equilibrium and Full Employment 1) Full-employment output is also called A) natural output. B) national output. C) potential output. D) target output. Answer: C Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
2) The level of output produced when the labor market is in equilibrium is called A) natural output. B) product market equilibrium output. C) potential output. D) global production output. Answer: C Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 3) The level of output produced when the labor market is in equilibrium is called A) natural output. B) target output. C) product market equilibrium output. D) full-employment output. Answer: D Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 4) The natural rate of unemployment is the estimated rate of unemployment that would prevail when ________ unemployment is zero. A) frictional B) cyclical C) structural D) seasonal Answer: B Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes
5) In the United States, estimates of the natural rate of unemployment in recent years have varied between A) 0 percent and 4 percent. B) 0 percent and 2 percent. C) 2 percent and 4 percent. D) 4 percent and 6 percent. Answer: D Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes 6) The level of potential output in the United States increases as the A) supply of labor increases. B) stock of capital decreases. C) demand for labor decreases. D) supply of labor decreases. Answer: A Diff: 2 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 7) If current unemployment is close to the natural rate of unemployment, the level of the ________ GDP is likely to be close to the level of potential output. A) nominal B) structural C) real D) estimated Answer: C Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
8) Increased labor demand will result in A) lower wages. B) no change in wages. C) higher wages. D) more employment benefits. Answer: C Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 9) When the quantity of labor supplied is equal to the quantity of labor demanded at the equilibrium wage rate A) there is a lack of unemployment. B) the economy operates at full-employment output. C) frictional unemployment is zero. D) the economy is at a peak point during an inflationary period. Answer: B Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 10) A decrease in the population of an economy is likely to lead to lower wages and a lower quantity of labor used. Answer: FALSE Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 11) Full-employment output is the level of output that is produced when the labor market is in equilibrium. Answer: TRUE Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
12) If current unemployment is close to the natural rate of unemployment, the level of real GDP is likely to be close to the level of potential output. Answer: TRUE Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 13) Potential output in an economy decreases as the supply of labor decreases or the capital stock increases. Answer: FALSE Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 14) What two factors need to increase in order to increase potential output in an economy? Answer: Supply of labor, stock of capital Diff: 1 Topic: Labor Market Equilibrium and Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 7.5 Using the Full-Employment Model 1) Suppose that a new tax on hiring labor is imposed. The demand for labor will ________, and as a result real wages will ________ and employment will ________. A) increase; increase; decrease B) decrease; decrease; decrease C) increase; decrease; increase D) increase; increase; increase Answer: B Diff: 2 Topic: Taxes and Potential Output Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
2) Imposing an employment tax leads to A) more employment. B) decreased potential output in the economy. C) greater demand for labor. D) a decreased supply of labor. Answer: B Diff: 1 Topic: Taxes and Potential Output Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 3) The extent of the decline in output associated with the imposition of an employment tax depends on the A) slope of the labor demand curve. B) slope of the labor supply curve. C) tax rate. D) wage rate. Answer: B Diff: 1 Topic: Taxes and Potential Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 4) The argument that raising the employment tax leads to more employment is most likely to hold if the A) labor demand curve is vertical. B) labor supply curve has a steep slope. C) labor supply curve has a relatively flat slope. D) labor supply curve has the same slope as labor demand. Answer: C Diff: 1 Topic: Taxes and Potential Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
5) An increase in the employment tax should have a relatively small effect on output if the labor supply curve A) is relatively steep. B) is relatively flat. C) is perfectly horizontal. D) has a positive slope. Answer: A Diff: 1 Topic: Taxes and Potential Output Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 6) An increase in the employment tax will have no effect on output if the labor supply curve A) has a negative slope. B) is perfectly vertical. C) is perfectly horizontal. D) has a positive slope. Answer: B Diff: 1 Topic: Taxes and Potential Output Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 7) If the cost of hiring workers increases but the marginal benefit remains unchanged, employers are likely to respond by hiring ________ at any given wage. A) more workers B) fewer workers C) immigrant workers D) teenaged workers Answer: B Diff: 1 Topic: Taxes and Potential Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
Recall the Application about European soccer stars choosing to play for clubs in countries with lower tax rates to reduce their taxes to answer the following question(s). A study conducted by economists Henrik Jacobsen Kleven, Camille Landais,and Emmanuel Saez found that top tax rates and tax breaks do matter when soccer stars choose where to locate. 8) Recall the Application. If country A has a lower overall income tax rate than country B, and labor can freely and easily move between the two countries, ________ in country A will tend to ________. A) labor supply; increase B) labor supply; decrease C) labor demand; increase D) labor demand; decrease Answer: A Diff: 2 Topic: Application 2, Do European Soccer Stars Change Clubs to Reduce Their Taxes? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 9) Recall the Application. If country A has a lower overall income tax rate than country B, and labor can freely and easily move between the two countries, ________ in country B will tend to ________. A) labor supply; increase B) labor supply; decrease C) labor demand; increase D) labor demand; decrease Answer: B Diff: 2 Topic: Application 2, Do European Soccer Stars Change Clubs to Reduce Their Taxes? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 10) Recall the Application. If country A has a lower overall income tax rate than country B, and labor can freely and easily move between the two countries, real wages in country A will tend to ________ and employment in country A will tend to ________. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: B Diff: 2 Topic: Application 2, Do European Soccer Stars Change Clubs to Reduce Their Taxes? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 11) Recall the Application. If country A has a lower overall income tax rate than country
B, and labor can freely and easily move between the two countries, real wages in country B will tend to ________ and employment in country B will tend to ________. A) increase; increase B) decrease; increase C) increase; decrease D) decrease; decrease Answer: C Diff: 2 Topic: Application 2, Do European Soccer Stars Change Clubs to Reduce Their Taxes? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 12) According to this Application, many economists believe that the increase in "globalization" in the last 30 years has ________ the ability of countries to levy taxes at rates that differ substantially from other countries. A) limited B) slightly increased C) eliminated D) greatly increased Answer: A Diff: 1 Topic: Application 2, Do European Soccer Stars Change Clubs to Reduce Their Taxes? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 13) Fluctuations in economic activity can result from A) the loss of crops due to drought or insects. B) increases in the price of oil. C) wars. D) all of the above. Answer: D Diff: 1 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
14) Real business cycle theory emphasizes the role of ________ in causing economic fluctuations. A) agriculture B) wars C) natural disasters D) technological change Answer: D Diff: 1 Topic: Real Business Cycle Theory Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 15) Suppose that technological advancement makes labor more productive. What is likely to happen to wages and to potential output? A) Wages increase and potential output increases. B) Wages increase and potential output decreases. C) Wages decrease and potential output increases. D) Wages decrease and potential output decreases. Answer: A Diff: 2 Topic: Real Business Cycle Theory Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 16) Suppose that a technological decline makes labor less productive. What is likely to happen to wages and to potential output? A) Wages increase and potential output increases. B) Wages increase and potential output decreases. C) Wages decrease and potential output increases. D) Wages decrease and potential output decreases. Answer: D Diff: 2 Topic: Real Business Cycle Theory Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
17) The real business cycle school of thought is generally viewed as controversial because A) it contradicts classical economic thought. B) critics find it difficult to understand how many of the post-World War II recessions could be explained by adverse changes in technology. C) it blames unemployment on immigration. D) all of the above. Answer: B Diff: 1 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 18) According to real business cycle theorists, in modern times, economic fluctuations can largely be attributed to A) immigration policies that increased the supply of labor. B) advancements in technology. C) the entry of more college graduates in the labor market. D) large scale unemployment. Answer: B Diff: 1 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 19) The real business cycle theory emphasizes that in today's modern age, ________ technology plays a significant role in causing economic fluctuations. A) shocks to B) advances in C) obsolete ideas in D) duplications in Answer: A Diff: 1 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
20) If there was an adverse technological shock which decreased the demand for labor, then A) GDP would increase. B) GDP would decrease. C) imports would increase. D) imports would decrease. Answer: B Diff: 1 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 21) If there was a positive technological shock which increased the demand for labor, then A) GDP would increase. B) GDP would decrease. C) imports would increase. D) imports would decrease. Answer: A Diff: 1 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories Recall the Application about China's high savings rate to answer the following question(s). 22) According to the Application, China's gross savings rate is about ________ percent, which is one of the ________ in the world. A) 27; lowest B) 48; lowest C) 47; highest D) 84; highest Answer: C Diff: 1 Topic: Application 3, Government Policies and Savings Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
23) According to the Application, which of the following is one of the explanations for China's high savings rate? A) Housing is expensive and mortgages are not common. B) The government is forcing a high savings rate. C) Incomes have been declining. D) Healthcare costs are rising, so the Chinese are saving more to prepare for future expenditures. Answer: A Diff: 1 Topic: Application 3, Government Policies and Savings Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 24) According to the Application, which of the following is one of the explanations for China's high savings rate? A) Households with male sons needed to save more to make their sons more attractive. B) The government has introduced better government pension systems. C) The government has been increasing taxes on consumption goods. D) Education costs are rising, so the Chinese are saving more to prepare for future expenditures. Answer: A Diff: 1 Topic: Application 3, Government Policies and Savings Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 25) According to the Application, how will China's one-child policy affect savings rate in the long run? A) It will lower the savings rate as there will be more old people than young and the old saves less than the young. B) It will lower the savings rate as there will be less old people than young and the old saves more than the young. C) It will raise the savings rate as there will be more old people than young and the old saves less than the young. D) It will raise the savings rate as there will be less old people than young and the old saves more than the young. Answer: A Diff: 1 Topic: Application 3, Government Policies and Savings Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
26) Higher employment taxes lead to lower levels of employment. Answer: TRUE Diff: 1 Topic: Taxes and Potential Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 27) Real business cycle theory emphasizes that shocks to technology can play a big part in causing economic fluctuations. Answer: TRUE Diff: 1 Topic: Real Business Cycle Theory Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 28) The key idea of the real business theory is that potential output itself will remain stable over time. Answer: FALSE Diff: 1 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 29) Suppose that the government increases a tax paid by employers for hiring workers (for example, Social Security). What are the likely effects on real wages, output and employment? What are the likely magnitudes of these effects? Answer: The tax increases will shift labor demand to the left, so real wages and employment will each go down. As employment goes down, so will output. The likely magnitudes of these effects is less clear. If labor supply is near vertical, the effects on wages will be large, but the effects on employment and output will be small. If labor supply is near horizontal, the effects on wages will be small, but the effects on employment and output will be large. Diff: 2 Topic: Taxes and Potential Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories
30) Using the real business cycle theory, explain the effects of an adverse technological shock on the labor market and on the output market. Illustrate graphically how the adverse technology shock affects labor demand and supply. Why is this theory controversial? Answer: The real business cycle theory emphasizes that changes in technology will usually change the level of full employment and output. An adverse technological shock would cause output and potential output to fall and would cause a decrease in the demand for labor. Critics of the theory find it difficult to explain how many of the post-World War II recessions can be explained by adverse technological shocks. Critics also point to the fact that the theory does not provide an explanation for unemployment, because in the real business cycle model, the labor market is in equilibrium: the quantity of labor demanded equals the quantity of labor supplied, and everyone who seeks employment finds employment.
Diff: 3 Topic: Real Business Cycle Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-17: Discuss the fundamentals of key macroeconomic theories 7.6 Dividing Output Among Competing Demands for GDP at Full Employment 1) In 2016, which of the following countries had the highest share of consumption spending in GDP? A) China B) the United States C) Germany D) France Answer: B Diff: 1 Topic: International Comparisons Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
2) In 2016, which of the following countries had the highest share of investment spending in GDP? A) China B) the United States C) Germany D) France Answer: A Diff: 1 Topic: International Comparisons Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 3) In 2016, which of the following countries had negative net export spending in GDP? A) China B) the United States C) Hong Kong D) Germany Answer: B Diff: 1 Topic: International Comparisons Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 4) In 2016, China's share of investment spending as a percentage of GDP was ________ Germany's share. A) less than half of B) slightly less than C) more than twice as much as D) roughly equal to Answer: C Diff: 1 Topic: International Comparisons Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
5) Crowding out refers to A) increases in consumption, investment, or net exports caused by an increase in government purchases. B) decreases in consumption, investment, or net exports caused by an increase in government purchases. C) reductions in tax revenues associated with increases in tax rates. D) increases in tax revenues associated with increases in tax rates. Answer: B Diff: 1 Topic: Crowding Out in a Closed Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 6) Decreases in consumption, investment, or net exports caused by an increase in government purchases are known as A) diminishing returns. B) demand-side effects. C) crowding out. D) strategic substitution. Answer: C Diff: 1 Topic: Crowding Out in a Closed Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 7) A closed economy refers to an economy with A) no immigration. B) no international trade. C) tariffs and import quotas. D) government control of all factors of production. Answer: B Diff: 1 Topic: Crowding Out in a Closed Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
8) When the share of government spending in GDP increased in the United States during World War II A) consumption's share of GDP increased. B) investment's share of GDP fell. C) government spending was crowded out. D) investment's share of GDP increased. Answer: B Diff: 1 Topic: Crowding Out in a Closed Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 9) When the share of government spending in GDP increased in the United States during World War II A) consumption's share of GDP fell. B) consumption's share of GDP increased. C) government spending was crowded out. D) investment's share of GDP increased. Answer: A Diff: 1 Topic: Crowding Out in a Closed Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 10) An open economy refers to an economy with A) unrestricted immigration. B) international trade. C) no trade barriers. D) no government intervention. Answer: B Diff: 1 Topic: Crowding Out in a Closed Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
11) In practice, increases in government spending in an open economy can crowd out A) consumption. B) investment. C) net exports. D) all of the above Answer: D Diff: 1 Topic: Crowding Out in an Open Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) Compared to a closed economy, an open economy has ________ included in the GDP. A) unemployment B) net exports C) salary increases D) taxation factors Answer: B Diff: 1 Topic: Crowding Out in an Open Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 13) The difference between exports and imports in GDP is called A) net imports. B) net exports. C) import tariffs. D) gross imports. Answer: B Diff: 1 Topic: Crowding Out in an Open Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
14) An increase in consumption, investment, or net exports caused by a decrease in government purchases is known as A) a closed economy. B) demand-side effects. C) crowding in. D) crowding out. Answer: C Diff: 1 Topic: Crowding In Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 15) If a change in government spending causes "crowding in" in an open economy, which of the following might increase in addition to consumption and investment? A) unemployment B) net exports C) stock of capital D) supply and demand Answer: B Diff: 1 Topic: Crowding In Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 16) Compared to other countries, the United States has a relatively low share of consumption spending in GDP. Answer: FALSE Diff: 2 Topic: International Comparisons Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 17) When the economy operates below full employment, an increase in government spending must crowd out another component of GDP. Answer: FALSE Diff: 1 Topic: Crowding Out in a Closed Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
18) In an open economy, increases in government spending can crowd out consumption, investment, or net exports. Answer: TRUE Diff: 1 Topic: Crowding Out in an Open Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 19) In an open economy with strong international trade, increases in government spending are likely to crowd out consumption, investment and net exports. Answer: TRUE Diff: 1 Topic: Crowding Out in an Open Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 20) Explain the concept of "crowding out" in a closed economy. Answer: In a closed economy, GDP consists of consumer spending, investment spending and government purchases. If we consider the economy to be at full employment, then GDP is considered fixed. If government spending increases, other components of the fixed GDP must decrease. In this sense, increased government spending reduces, or "crowds out" other components of GDP—investment spending and/or consumer spending. Diff: 2 Topic: Crowding Out in a Closed Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 21) Explain the difference between an open economy and a closed economy. Answer: An open economy is an economy with international trade. In an open economy, full employment output is divided among four uses: consumption, investment, government purchases, and net exports. A closed economy is an economy without international trade. In a closed economy, full employment output is divided among just three different uses: consumption, investment, and government purchases. Diff: 2 Topic: Crowding In Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
22) Explain the concept of "crowding in." Answer: "Crowding in" occurs when a government decreases spending. If the level of output is fixed, when the government reduces spending, other spending components of GDP will increase. In a closed economy, consumption and investment could increase. In an open economy, consumption, investment and net exports could all increase. Diff: 2 Topic: Crowding In Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 8 Why Do Economies Grow? 8.1 Economic Growth Rates 1) According to the text, ________ is perhaps the most critical aspect of a country's economic performance. A) growth in GDP B) the inflation rate C) the unemployment rate D) the living standard Answer: A Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 2) An increase in a country's capital stock relative to its work force is known as A) capital deepening. B) capital growth. C) capital improvement. D) capital augmentation. Answer: A Diff: 1 Topic: Why Do Economies Grow? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 3) Technological progress occurs when the economy gets more output A) without any more capital or labor. B) by using more capital per worker. C) by using more capital but not more workers. D) by using more labor but not more capital. Answer: A Diff: 1 Topic: Why Do Economies Grow?
Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
4) GDP per capita means GDP A) in real terms. B) adjusted for inflation. C) per person. D) divided by the capital stock. Answer: C Diff: 1 Topic: Measuring Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 5) Suppose real GDP was 120 in year 1 and 156 in year 2. The growth rate of real GDP is A) 5.6 percent. B) 18 percent. C) 30 percent. D) 36 percent. Answer: C Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 6) Suppose real GDP was 100 in year 1 and 105 in year 2. The growth rate of real GDP is A) 0.5 percent. B) 1.5 percent. C) 2.5 percent. D) 5 percent. Answer: D Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
7) If the growth rate for GDP was 9 percent and GDP in year 1 was 100, then GDP in year 2 would be A) 90. B) 109. C) 190. D) 199. Answer: B Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8) If the growth rate for GDP was 5 percent and GDP in year 1 was 140, then GDP in year 2 would be A) 133.3. B) 135. C) 145. D) 147. Answer: D Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 9) Suppose that real GDP starts at 100 and grows at a rate of 10 percent per year for two years. In the third year real GDP would be A) 110. B) 110.1. C) 120. D) 121. Answer: D Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
10) Suppose that real GDP starts at 200 and grows at a rate of 9 percent per year for two years. In the third year real GDP would be A) 183.49. B) 236. C) 237.62. D) 239.24. Answer: C Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 11) Using the rule of 70, if the GDP per capita growth rate in the United States is 3.5 percent, real GDP per capita doubles every A) 20 years. B) 24.5 years. C) 35 years. D) 70 years. Answer: A Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 12) Using the rule of 70, if the GDP per capita growth rate in the United States is 4.4 percent, real GDP per capita doubles every A) 6.72 years. B) 15.91 years. C) 44 years. D) 65.6 years. Answer: B Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
13) Suppose the annual growth rate of GDP in Nepal is 5 percent. In 35 years, GDP in Nepal will double A) 1.75 times. B) 2.5 times. C) 7 times. D) 24.5 times. Answer: B Diff: 3 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 14) Suppose the annual growth rate of GDP in Belize is 3.5 percent. In 20 years, GDP in Belize will double A) 1 time. B) 1.5 times. C) 3.5 times. D) 7 times. Answer: A Diff: 3 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 15) When comparing the measure of goods and services of one country to that of another, economists generally compare A) the real GDP. B) the real GDP per capita. C) the real GDP and net exports. D) the real GDP and the labor force. Answer: B Diff: 1 Topic: Measuring Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
16) Over time, a country's real GDP per capita typically A) shrinks B) grows. C) remains stable. D) increases and decreases randomly. Answer: B Diff: 1 Topic: Measuring Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures Recall the Application about the effect of global warming on economic growth to answer the following question(s). 17) According to this Application, the economic effects of increases in temperature seem to A) be confined to poorer countries. B) be confined to richer countries. C) be equal across all countries. D) be nonexistent in most countries. Answer: A Diff: 2 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 18) According to this Application, a study of municipalities in Latin and South America found that a one degree Celsius rise in temperature was associated with A) no measurable change in per capita income. B) a small decline in real income and a small increase in per capita real income. C) a slight increase in municipal per capita income. D) a decline in municipal per capita income. Answer: D Diff: 1 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
19) According to this Application, over time, as economies adapt to higher temperatures A) approximately half the decline in per capita income disappears. B) approximately half the increase in per capita income disappears. C) per capita income does not seem to change. D) real income begins to increase and per capita income begins to decrease. Answer: A Diff: 1 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) According to this Application, a one degree Celsius rise in temperature A) increases poor countries' exports. B) decreases poor countries' exports. C) increases rich countries' exports. D) decreases all countries' exports. Answer: B Diff: 1 Topic: Application 1, Global Warming, Rich Countries, and Poor Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 21) Which of the following creates difficulties in making comparisons of real GDP across nations? A) Each nation has a different population. B) Nations produce different goods and services. C) Relative prices differ sharply across countries. D) Nations often have different languages. Answer: C Diff: 1 Topic: Comparing the Growth Rates of Various Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
22) In making accurate comparisons of GDP across countries, it is important to take differences in ________ into account. A) population size B) the average age of the population C) family size D) all of the above Answer: A Diff: 1 Topic: Comparing the Growth Rates of Various Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 23) Convergence refers to closing the gap in ________ between poorer countries and richer countries. A) real GDP B) real GDP per capita C) the growth rate in real GDP D) the growth rate in real GDP per capita Answer: B Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 24) A comparison of the average growth rates across time for developed nations indicates that A) nations with lower levels of income grow more slowly than those with higher levels of income. B) nations with lower levels of income will never be as rich as nations with high levels of income. C) nations with high levels of income experience a continuously increasing growth rate. D) nations with lower levels of income grow more quickly than those with higher levels of income. Answer: D Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
25) Nations with low levels of GDP per capita may converge to richer nations if A) nations with high levels of income experience a continuously increasing growth rate. B) nations with lower levels of income grow more quickly than those with higher levels of income. C) nations with lower levels of income spend less on investment. D) nations with lower levels of income grow more slowly than those with higher levels of income. Answer: B Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 26) If a nation with a low level of GDP per capita converges to a richer nation, the poor nation A) experiences low growth rates. B) enters into a free trade agreement with the richer nation. C) experiences a rate of high growth such that its GDP per capita increases to that of the richer nation. D) experiences a rate of low growth such that its GDP per capita increases to that of the richer nation. Answer: C Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 27) Most economists believe that convergence of GDP per capita ________ between developed nations and ________ between developing and developed nations. A) has occurred; has occurred B) has not occurred; has occurred C) has occurred; has not occurred D) has not occurred; has not occurred Answer: C Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
28) Technological progress is one of the mechanisms by which economies can grow. Answer: TRUE Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 29) Capital deepening is the only mechanism by which economies can grow. Answer: FALSE Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 30) The real GDP per capita allows economic comparison between countries. Answer: TRUE Diff: 1 Topic: Measuring Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 31) At a 3.5 percent annual growth rate it would take 20 years for GDP per capita to double. Answer: TRUE Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 32) Economists who have studied economic growth find strong evidence of convergence. Answer: FALSE Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
33) Explain the two basic mechanisms that increase GDP per capita over the long term. Answer: The two basic mechanisms are capital deepening, meaning increases in an economy's stock of capital relative to its work force, and technological progress, which results in an economy operating more efficiently. Diff: 1 Topic: Why Do Economies Grow? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 34) Suppose that one country has a GDP that is ten percent of its richer neighbor, but the poorer country is growing at a rate of eight percent per year while the richer country is growing at a rate of two percent per year. Which country will be richer in 60 years? Answer: Using the rule of 70, it can be shown that the poor country will be richer in 60 years. The poor country's GDP will have doubled more than six times over this period, while the rich country's GDP will not have even doubled twice. So while the poor country might have started slowly, it is much richer than the rich country by 60 years later! Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 35) If real GDP is 100 in year 1, and grows at a rate of 3 percent per year for 9 years, what will real GDP be in 9 years? Answer: GDP [9 years later] = (1 + .03)9(100) = 130.48 Diff: 2 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 36) If an economy grows at 6 percent per year, how many years would it take for real GDP to double? Answer: Using the rule of 70, it would take 70/6 = 11.67 years for real GDP to double. Diff: 1 Topic: Measuring Economic Growth Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures
37) Why is it difficult to make accurate and valid comparisons of real GDP or GNP for different countries, and how do the World Bank and the IMF deal with these difficulties? Answer: Difficulties arise for several reasons. Countries have their own currencies, patterns of consumption and prices differ between countries. In some countries, consumption patterns vary based on the availability of certain goods and services. For example, in nations where land is scarce, housing prices can be higher than in nations where land is abundant. Developing nations can have much different price structures on non-traded goods than developed nations have. Services like housekeeping or yard maintenance are usually much less expensive in developing nations than in developed nations. The World Bank and the IMF make adjustments for consumption patterns and relative prices when they gather price data for comparable goods to use in measuring real GDP across nations. Diff: 2 Topic: Comparing the Growth Rates of Various Countries Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 38) Explain the economic concept of convergence. Answer: Convergence is the process by which poorer countries close the gap between their level of GDP per capita and the GDP per capita of richer countries. To converge, poorer countries must grow at a faster rate than richer countries. Diff: 1 Topic: Are Poor Countries Catching Up? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures 8.2 Capital Deepening 1) If a firm increases its capital stock per person while holding constant the number of workers employed, the firm is said to experience A) capital augmentation. B) investment deepening. C) labor intensity. D) capital deepening. Answer: D Diff: 1 Topic: Capital Deepening Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
2) Decreases in the stock of capital will lead to A) increases in wages and total GDP. B) decreases in wages and increases in GDP. C) increases in wages and decreases in GDP. D) decreases in wages and GDP. Answer: D Diff: 1 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) An increase in the capital stock will A) shift the production function downward. B) shift the production function upward. C) flatten the production function. D) steepen the production function. Answer: B Diff: 1 Topic: Capital Deepening Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) Capital deepening causes ________ in the demand for labor. A) an increase B) a decrease C) no change D) either an increase or decrease Answer: A Diff: 1 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
Recall the Application about incentives to immunize children in developing countries to answer the following question(s). 5) This Application emphasizes the importance of A) wealth distribution. B) economic incentives. C) literacy rates. D) none of the above. Answer: B Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) According to this Application, the incentives described were ________ because they ________ the rate of immunizations. A) effective; increased B) effective; decreased C) not effective; increased D) not effective; decreased Answer: A Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 7) According to this Application, why did parents not complete the sequence of vaccines for their children? A) because the costs of completing vaccine sequences were high in the short run. B) because the costs of completing vaccine sequences were high in the long run. C) because the benefits of completing vaccine sequences were low in the long run. D) because the pain to the children of completing vaccine sequences were high. Answer: A Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
8) According to this Application, which of the following were given to parents who immunized their children? A) dal (a common Indian food) B) a set of cooking pans C) rupees D) both A and B Answer: D Diff: 1 Topic: Application 2, Behavioral Incentives in Development Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) In a simple economy without government or foreign trade, any income not consumed is called A) investment. B) net investment. C) saving. D) depreciation. Answer: C Diff: 1 Topic: Saving and Investment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 10) In a simple economy without government or foreign trade,and output can be purchased only by consumers or by firms, saving must equal A) investment. B) depreciation. C) consumption. D) income. Answer: A Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
11) Increases in the stock of capital are the result of decreases in A) gross investment. B) depreciation. C) net investment. D) all of the above. Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 12) Gross investment minus depreciation is equal to A) gross domestic product. B) net investment. C) personal investment. D) nominal investment. Answer: B Diff: 1 Topic: Saving and Investment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13) Gross investment minus net investment is equal to A) depreciation. B) nominal investment. C) real investment. D) consumption. Answer: A Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 14) Net investment plus depreciation is equal to A) gross depreciation. B) gross domestic product. C) gross exports. D) gross investment. Answer: D Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 15) The stock of capital ________ with any gross investment and ________ with any
depreciation. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 16) To determine the change in the capital stock, the level of new investment must be adjusted for depreciation because some new investment A) is not used immediately. B) merely replaces existing, but worn out, capital. C) replaces existing workers. D) is more efficient than existing capital. Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) As the stock of capital grows, there will typically be ________ depreciation. A) less B) more C) the same amount of D) no Answer: B Diff: 2 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
18) Increases in net investment generally result in A) lower levels of capital stock and lower levels of depreciation. B) lower levels of capital stock and higher levels of depreciation. C) higher levels of capital stock and higher levels of depreciation. D) higher levels of capital stock and lower levels of depreciation. Answer: C Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 19) In the short run, if the stock of capital ________ there will be more depreciation. A) grows B) declines C) remains stable D) grows, declines, or remains stable Answer: A Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) The factor that ultimately determines the change in the stock of capital, the level of real wages, and the output of an economy is A) the labor force. B) net investment. C) the unemployment level. D) GDP. Answer: B Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
21) Suppose that for a given firm, the increase in output resulting from the last worker hired is less than the increase in output of the previous worker hired. This is an example of A) diminishing returns. B) constant returns. C) increasing return. D) capital deepening. Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 22) If the stock of capital of a nation is ________ while the population ________, the nation can produce more output, but output per worker falls. A) fixed; decreases B) declining; decreases C) fixed; increases D) fixed; remains stable Answer: C Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) Which of the following uses of tax revenues collected by the government leads to increased capital deepening? A) building roads B) increased foreign aid C) Medicare payments D) Social Security payments Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
24) Which of the following uses of tax revenues collected by the government leads to increased capital deepening in the United States? A) providing food to a nation suffering from a famine B) foreign aid given to Mexico to build new schools C) higher salaries for members of Congress D) subsidizing airport construction in Seattle Answer: D Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 25) If the government ________ taxes to pay for spending on infrastructure, the result will most likely be a(n) ________ in capital deepening. A) increases; increase B) decreases; increase C) increases; decrease D) eliminates; elimination Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 26) Suppose consumers save 3 percent of their incomes. If the government collects 1 dollar in taxes from each taxpayer, private saving will ________ per taxpayer. A) decrease by 3 cents B) decrease by 97 cents C) increase by $1 D) increase by 97 cents Answer: A Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
27) Suppose consumers save 5 percent of their incomes. If the government collects 100 dollars in taxes from each taxpayer, private saving will ________ per taxpayer. A) increase by $105 B) decrease by $95 C) decrease by $5 D) decrease by 95 cents Answer: C Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 28) Suppose consumers save 17 percent of their incomes. If the government collects 10 dollar in taxes from each taxpayer and invested it in infrastructure, total social investment will ________ per taxpayer. A) increase by $10.17 B) increase by $8.30 C) decrease by $1.70 D) decrease by $8.30 Answer: B Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 29) Suppose consumers save 8 percent of their incomes. If the government collects 4 dollar in taxes from each taxpayer and invested it in infrastructure, total social investment will ________ per taxpayer. A) increase by $ 4.32 B) increase by $3.68 C) increase by 32 cents D) decrease by 64 cents Answer: B Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
30) Nations that borrow from abroad to support current investment will A) always be better off in the future. B) always sacrifice future consumption. C) be better off in the future if the investments are profitable. D) sacrifice future consumption only if the investments are profitable. Answer: C Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 31) Nations that borrow from abroad to support current consumption A) will always be better off in the future. B) will always sacrifice future consumption. C) may sacrifice future consumption. D) will always sacrifice current consumption. Answer: B Diff: 2 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 32) Trade deficits always lead to future decreases in consumption if the trade deficits A) support current investment. B) support current consumption. C) support either current investment or current consumption. D) require borrowing from abroad. Answer: B Diff: 3 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 33) An economy is better off with an increase in the stock of capital. Answer: TRUE Diff: 1 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
34) In a simple economy without government or the foreign sector, saving must equal investment because output is divided into consumption and investment, and income is either consumed or saved. Answer: TRUE Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 35) Assuming full employment, if the private sector saves 8 percent of its income and the government raises taxes by $500 to finance public investments, total investment will increase by $460. Answer: TRUE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 36) If a country runs a trade deficit to finance increased current consumption, it will have to increase consumption in the future to pay back its borrowings. Answer: FALSE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 37) A larger labor force will allow the economy to produce more total output. Answer: FALSE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 38) The point of diminishing returns means that output will decrease at an increasing rate. Answer: FALSE Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
39) Explain the impact of capital deepening on workers. Answer: Capital deepening is an increase in the amount of capital per worker. In a fullemployment economy under the assumption that the supply of labor is fixed, an increase in capital shifts the production function upwards because more output can be produced with the same amount of labor. Firms will therefore increase their demand for labor because the marginal benefit from hiring labor will increase. The real wage also rises. Thus workers will enjoy higher wages, and total GDP in the economy will increase. Diff: 2 Topic: Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 40) Draw a graph showing the effect of an increase in the saving rate on the production function.
Answer: An increase in the saving rate causes the production function to shift upwards. Diff: 1 Topic: Capital Deepening, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 41) Why does depreciation decrease the stock of capital? Answer: As capital stock items such as buildings and machinery become older, they wear out and become less productive. New investment is needed to replace these buildings and machinery that have depreciated or become obsolete. Diff: 1 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 42) Will increased imports of supercomputers for industry promote economic growth?
Answer: Yes—doing so will lead to an increase in the economy's stock of capital. Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 43) Explain the effect of trade deficits on economic growth. Answer: The foreign sector can affect capital deepening. An economy can run a trade deficit and import investment goods to aid capital deepening. Even though it borrows from abroad, the resulting increase in GDP and wealth will enable it to repay those borrowings. However, an economy can also run a trade deficit because it wants to buy more consumer goods. In this case the economy is borrowing from abroad but there would be no capital deepening, just additional consumer spending. As a result there would be no increase in GDP and when it comes time to repay the borrowing, society will be poorer. Diff: 1 Topic: How Do Population Growth, Government, and Trade Affect Capital Deepening? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8.3 The Key Role of Technological Progress 1) An event that allows the economy to operate more efficiently by producing more outputs without using any more inputs is referred to as A) absolute progress. B) efficiency progress. C) capital investment. D) technological progress. Answer: D Diff: 1 Topic: The Key Role of Technological Progress Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
2) Which of the following is NOT an example of technological progress? A) an increase in the labor supply as the result of population growth B) the development of laser eye surgery C) the invention of the microwave oven D) the development of smart phones Answer: A Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) Which of the following is NOT an example of technological progress? A) builders constructing a new office building that uses less energy B) an increase in Florida's orange crop resulting from a mild winter C) the invention of wireless internet access D) the development of Bluetooth headsets Answer: B Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) Which of the following is an example of technological progress? A) an increase in corn output resulting from genetic engineering B) the invention of the air conditioner C) the invention of LCD televisions D) all of the above Answer: D Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 5) According to Robert Solow, the production function should be written as A) Y = F(K, L). B) Y = F(K, L, A). C) Y = F(K, A). D) Y = F(A, L). Answer: B Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) Growth accounting refers to the method used to
A) identify the contribution of economic growth from increased capital, labor, and technological progress. B) identify the costs of promises made by the government today but paid for by future generations. C) measure the growth in the labor force. D) measure growth in the capital stock. Answer: A Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 7) According to the method of growth accounting, which of the following contribute to economic growth? A) capital growth B) labor growth C) technological progress D) all of the above Answer: D Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8) Suppose the growth rate of GDP in the United States is 4.2 percent. If 2.9 percent and 1.3 percent of GDP growth are due, respectively, to capital and labor growth, the amount resulting from technological progress is A) 0 percent. B) 1.3 percent. C) 2.9 percent. D) 4.2 percent. Answer: A Diff: 2 Topic: How Do We Measure Technological Progress? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
9) Suppose the growth rate of GDP in the United States is 4.2 percent. If 1.1 percent and 1.4 percent of GDP growth are due, respectively, to capital and labor growth, the amount resulting from technological progress is A) 0.3 percent. B) 1.1 percent. C) 1.4 percent. D) 1.7 percent. Answer: D Diff: 2 Topic: How Do We Measure Technological Progress? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about growth in China and India to answer the following question(s). From 1978 to 2004, China grew at a rate of 9.3 percent per year and India grew at a rate of 5.4 percent per year. 10) According to this Application, based on the analysis of the sources of growth in China and India, and assuming that nothing changes, it can be concluded that A) India's long-term growth prospects are not as strong those for China. B) the growth rate in China should significantly slow down in the near future, but the growth rate in India will continue to rapidly increase in the near and distant future. C) there is convergence between the nations in Asia. D) China's reliance on technology for economic growth makes it less likely to keep pace with the growth rate in India. Answer: A Diff: 2 Topic: Application 3, Sources of Growth in China and India Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 11) According to this Application, China's growth rate was faster than India's during this 26 year period because A) China received more contributions from human capital than India received. B) China invested more in physical capital than India invested. C) China's growth was based more on human capital and India's growth was based more on physical capital. D) China's growth was based more on human capital and India's growth was based more on technological progress. Answer: B Diff: 1 Topic: Application 3, Sources of Growth in China and India Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 12) According to this Application, China's GNP per capita and India's GDP per capita are
________ U.S. GNP per capita. A) now greater than B) still significantly less than C) now equal to D) within 5 percentage points of Answer: B Diff: 2 Topic: Application 3, Sources of Growth in China and India Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about the productivity of large infrastructure investments to answer the following question(s). 13) According to the Application, which of the following techniques do economists use to measure the productive effects of investments? A) growth accounting B) opportunity costs. C) supply and demand analysis D) production possibility curves Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 14) According to the Application, what is the massive investment project did China recently embark on? A) bullet trains B) irrigation C) stem cell research D) reforestation Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
15) According to the Application, which infrastructure investment in the U.S. contributed to the increased the productivity of agricultural lands between 1870-1890? A) railroads B) the internet C) the highway systems. D) dams. Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 16) According to the Application, Donaldson and Hornbeck's (2010) study estimated that without railroads, agricultural productivity would have been ________ less. A) 60 percent B) 100 percent C) 30 percent D) 37.8 percent Answer: A Diff: 1 Topic: Application 4, How Important is Infrastructure? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) Labor productivity is defined as A) total output per worker. B) output per hour of work. C) output divided by the average hourly wage. D) price of output divided by cost of output. Answer: B Diff: 1 Topic: Using Growth Accounting Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 18) Technological progress means that we produce more output with the same amount of inputs. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
19) Technological innovations are not necessarily major scientific breakthroughs. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) Technological progress can be another mechanism which affects economic growth. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 21) In terms of technological progress, economists interpret this as meaning an economy operates more efficiently by producing more output without using any more inputs. Answer: TRUE Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 22) The contribution to output growth of technological progress is estimated by how much of the output growth can be explained by the growth in inputs. Answer: FALSE Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) Do inventions have to be major technological breakthroughs to affect the efficiency of producing goods? Explain. Answer: No. Small changes in methodology can increase productivity or improvement to an existing machine can make it more productive. Diff: 1 Topic: The Key Role of Technological Progress Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
24) Growth accounting is a method which measures the contributions to economic growth from what three factors? Answer: Increased capital; labor; technological progress Diff: 1 Topic: How Do We Measure Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8.4 What Causes Technological Progress? 1) All of the following can cause technological progress EXCEPT A) research and development. B) education. C) free trade. D) population decreases. Answer: D Diff: 1 Topic: What Causes Technological Progress? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 2) It is possible for an economy to become more productive and per-capita output to increase if A) new ideas are generated. B) inventions are developed. C) technology is improved. D) all of the above. Answer: D Diff: 1 Topic: What Causes Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) The process by which monopoly profits lead to technological progress in known as A) imperfect competition. B) destructive creation. C) creative destruction. D) economies of scale. Answer: C Diff: 1 Topic: Monopolies That Spur Innovation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) Monopoly profits lead to technological process by
A) carefully investing deadweight loss. B) encouraging the development of innovations by firms attempting to break a monopoly. C) firms lobbying Congress for protection of their monopolies. D) increasing the amount of human capital in the economy. Answer: B Diff: 1 Topic: Monopolies That Spur Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 5) When one company is the sole seller of certain products in a market, it is called a A) government exclusive. B) monopoly. C) manipulation of the market. D) conglomerate. Answer: B Diff: 1 Topic: Monopolies That Spur Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) All of the following encourage increases in technological progress EXCEPT A) larger markets through free trade. B) the possibility of monopoly profits. C) the ability to patent a new invention. D) closed economies. Answer: D Diff: 1 Topic: The Scale of the Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
7) To reduce labor costs, companies often invent machines and methods to produce products and reduce the amount of labor required. This is called A) downsizing. B) induced innovation. C) failed labor utilization. D) anti-union. Answer: B Diff: 1 Topic: Induced Innovations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8) The returns to education are A) lowest in developing nations. B) highest in developed nations. C) highest in developing nations. D) never reflected in the wages of workers. Answer: C Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) According to human capital theory, all of the following help make workers more productive EXCEPT A) education. B) health and fitness. C) skills. D) increased unemployment benefits. Answer: D Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
10) In developing countries, the highest returns are from investing in A) transportation systems. B) sanitation systems. C) education. D) defense. Answer: C Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 11) Developing countries send their best students to get an education in developed countries to help develop A) more education people. B) a channel of communications. C) a skilled work force. D) better political skills. Answer: C Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 12) Knowledge and skills are part of ________ in an economy. A) educational functions B) human capital C) market growth D) innovation Answer: B Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
13) In developing countries, economists have found ________ correlation between a person's height and the wages he can earn in the farming sector. A) a weak B) a strong C) an inverse D) no Answer: B Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about the role of megacities in economic growth to answer the following question(s). 14) According to the Application, what is the term economists use to refer to the extra productivity that occur in larger cities? A) agglomeration economies B) aggregation economies C) economies of scale D) comparative advantage Answer: A Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 15) According to the Application, who recognized that specialization of labor can generate higher productivity? A) Adam Smith B) Karl Marx C) David Ricardo D) John Maynard Keynes Answer: A Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
16) According to the Application, why would more face-to-face interactions in densely populated cities lead to more economic growth? A) More face-to-face interactions can lead to less need for social media. B) More face-to-face interactions can raise the cost of sharing of new ideas. C) More face-to-face interactions can lead to the production and sharing of new ideas. D) More face-to-face interactions can lead to more social unrest. Answer: C Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) According to the Application, which country has more cities with a population greater than 5 million? A) South Korea B) The United States C) China D) Japan Answer: C Diff: 1 Topic: Application 5, The Role of Megacities in Economic Growth Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about cultural factors in England and their relevance to the Industrial Revolution to answer the following question(s). 18) According to the Application, the cultural habits of the rich filtered down through English society. These habits included all of the following virtues EXCEPT A) thrift. B) prudence. C) hard work. D) impulsive behavior. Answer: D Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
19) According to the Application, the cultural changes in England allowed individuals to take advantage of A) new developments in science and technology. B) the increase in agrarian lifestyles. C) the decrease in population caused by the number of citizens who were leaving for the New World. D) the elimination of trade barriers resulting from the formation of the European Union. Answer: A Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) According to the Application, the differential survival of the wealthy created an environment A) which allowed for economic growth. B) which caused increased class warfare. C) where lower-class people could no longer afford to live in the country. D) that directly led to the demise of the British monarchy. Answer: A Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 21) The Application cites a study by Galor and Moav (2002) that found that families with fewer children gained a comparative advantage in the evolutionary cycle because A) they invested more human capital on their offspring than the families with more children. B) having more children lead to more chaos. C) having more children meant more workers in the farms. D) they lived in cities while families with more children lived in the countryside. Answer: A Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
22) A example of a topic studied in the field of new growth is how incentives for ________ interact with the accumulation of physical capital. A) research and development B) new product development C) international trade D) all of the above Answer: D Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) The idea that investment in comprehensive education in developing countries leads to permanent increases in the rate of technological progress is an example of A) increasing economic inequality. B) capital deepening. C) new growth theory. D) a trade-off between human capital and technology. Answer: C Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 24) A defining feature of new growth theory is that it involves economic models of growth which account for A) population increases. B) technological progress. C) political changes. D) capital flight. Answer: B Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
25) Models of growth that account for technological progress are part of A) creative destruction theory. B) new growth theory. C) growth accounting. D) all of the above. Answer: B Diff: 1 Topic: New Growth Theory Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 26) Innovation and incentives to come up with new products and production methods are stifled in larger markets. Answer: FALSE Diff: 1 Topic: The Scale of the Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 27) In larger markets, the quest for profit by firms motivates them to be innovative and produce new and more appealing products. Answer: TRUE Diff: 1 Topic: The Scale of the Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 28) Human capital includes investments in education and skills. Answer: TRUE Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 29) Education is an integral part of economic growth. Answer: TRUE Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
30) Human capital is equally, if not more, important than physical capital. Answer: TRUE Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 31) All growth theory today is "new growth theory" because it considers a broad framework that includes technological progress. Answer: TRUE Diff: 1 Topic: New Growth Theory Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 32) Suppose you were interested in increasing technological progress in your country. Suggest some ways to do it. Answer: The text offers a number of possibilities. Increasing research and development in fundamental science, allowing a limited number of monopolies that spur innovation, investing in education and the accumulation of knowledge are all policy prescriptions that may be expected to increase technological progress. Diff: 1 Topic: What Causes Technological Progress? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 33) What are the trade-offs involved in shortening the length of a patent for pharmaceuticals? Answer: On the one hand, shortening the length of a patent will lead to reduced profits by drug companies and increased competition, meaning lower prices for consumers. On the other hand, reducing this legal monopoly period will reduce the incentive to invest in research and development, and fewer pharmaceuticals may be invented. Diff: 1 Topic: Monopolies That Spur Innovation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
34) In what two ways can education contribute to economic growth? Answer: Increased knowledge and skills of people complement current investments in physical capital. Education enables a workforce to use its skills to develop new ideas or copy ideas or import them from other nations. Diff: 1 Topic: Education, Human Capital, and the Accumulation of Knowledge Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about cultural factors in England and their relevance to the Industrial Revolution to answer the following question(s). 35) In the Application, what was Galor and Moav's (2002) explanation for why families with fewer children gain a comparative advantage in the evolutionary cycle? Answer: They argue that at some point during the human evolutionary process, families that had fewer children but invested more in them gained a competitive advantage in the evolutionary cycle. The offspring of these families had more human capital and more easily adapted to technological progress and the other changes that were taking place in societies. Diff: 1 Topic: Application 6, Culture, Evolution, and Economic Growth Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8.5 A Key Governmental Role: Providing the Correct Incentives and Property Rights 1) Economic growth is severely impeded in economies A) with a lack of clear property rights. B) with a strong market system. C) with high rates of convergence. D) which encourage induced innovation. Answer: A Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
2) The absence of clear property rights A) is caused by capital deepening. B) is common in many developing nations. C) encourages creative destruction. D) all of the above. Answer: B Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) According to economists, the lack of clear property rights will A) remove the proper incentives to invest in the future. B) encourage more incentives to invest in the future. C) lower the costs of investing in the future. D) all of the above are correct. Answer: A Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) Which of the following is the best example of a person NOT having clear property rights? A) a city parks worker who inherits his uncle's town house B) a dairy farmer who pays off the mortgage on his farm C) a medical student who lives on campus for his first year of studies D) a retired college professor who builds a bungalow on her oceanfront property Answer: C Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
5) According to William Easterly, a former World Bank Economist, the World Bank's role in development is to A) increase the cost of education in a country. B) hold governments responsible for creating the proper economic environment. C) help governments increase inflation rates in a country. D) allow countries to tax their exports. Answer: B Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) Which of the following government actions can hinder the economic development of a country? A) It inhibits the growth of the financial and banking sector B) It implements policies that increase inflation rates in a country. C) It adopts policies that effectively tax exports. D) All of the above are correct. Answer: D Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Recall the Application about the lack of property rights in Peru, and why clear property rights are important for economic growth in developing countries, to answer the following question(s). 7) According to this Application, clear property rights A) are important for economic growth in developed nations, but not in developing nations. B) hinder economic growth in developing nations. C) have no impact on the economic growth of developed nations. D) are important for economic growth in developing and developed nations. Answer: D Diff: 1 Topic: Application 7, Lack of Property Rights Hinders Growth in Peru Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
8) According to this Application, clear property rights are important for economic growth, because without a clear title to property A) the property cannot be used as collateral for loans. B) people will not reside on the property. C) no utilities will be available for the property. D) the property has no value. Answer: A Diff: 1 Topic: Application 7, Lack of Property Rights Hinders Growth in Peru Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) According to this Application, in Peru, producing palm oil is very profitable but is a time consuming process. Producing coca paste, an ingredient in cocaine, is not as costly or as time consuming as the production of palm oil. To switch Peruvian farmers from producing an ingredient used for cocaine to producing the profitable and safe palm oil would require A) informal ownership of property. B) cocaine being declared illegal in Peru. C) improvements in finance and the ability to borrow funds. D) governmental approval. Answer: C Diff: 1 Topic: Application 7, Lack of Property Rights Hinders Growth in Peru Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 10) The absence of clear property rights inhibits investment and economic growth. Answer: TRUE Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 11) The substantial increase in clear property rights has severely impeded growth in many developing countries. Answer: FALSE Diff: 1 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
12) Explain the connection between property rights and economic growth. Answer: Clear property rights provide property owners the incentives to invest in the future. With clear property rights, the property owner can reap the economic benefits from investing in the property. Without clear property rights, someone else could enjoy the benefits from this investment, and this possibility could significantly decrease the incentive to invest. Diff: 2 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13) What is former World Bank economist William Easterly's explanation for why developing countries fail to grow even with the aid of international agencies like the World Bank? Answer: According to Easterly, governments in developing countries have failed to provide the proper economic environment that would motivate individuals and firms to take actions that promote economic development. The World Bank and other international agencies should not try to find a magic bullet for development, but should instead hold governments responsible for creating the proper economic environment. Diff: 2 Topic: A Key Governmental Role: Providing the Correct Incentives and Property Rights Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8.6 Appendix: A Model of Capital Deepening 1) Increasing the stock of capital while holding the labor force constant will ________ output at a(n) ________ rate. A) increase; increasing B) increase; decreasing C) decrease; increasing D) decrease; decreasing Answer: B Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
2) Capital stock will increase as long as A) capital deepening decreases. B) depreciation exceeds real GDP. C) gross investment exceeds depreciation. D) net investment equals zero. Answer: C Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 3) In the Solow model, if total saving exceeds depreciation A) capital deepening stops. B) gross investment is negative. C) real wages decrease. D) capital stock increases. Answer: D Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 4) As capital deepening occurs, there will be A) economic growth and decreases in depreciation. B) increased real wages and economic growth. C) decreased real wages and decreases in saving. D) decreases in depreciation and decreases in saving. Answer: B Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
5) Refer to Figure 8A.1. When the economy reaches K, total saving is represented by point ________ and depreciation is represented by point ________. A) e; Y B) e; e C) Y; e D) Y; Y Answer: B Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 6) Refer to Figure 8A.1. The stock of capital no longer increases once the economy reaches point A) a. B) b. C) c. D) e. Answer: D Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
7) Refer to Figure 8A.1. Suppose that the economy starts with a capital stock of K0. Then total saving is given by point ________ and depreciation by point ________. A) a; b B) b; a C) c; d D) d; c Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 8) Refer to Figure 8A.1. Moving from K0 to K1 A) economic growth stops. B) saving becomes negative. C) capital stock continues to increase. D) depreciation starts to decline. Answer: C Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 9) Refer to Figure 8A.1. When the economy reaches K A) depreciation equals saving. B) depreciation is zero. C) capital stock increases. D) economic growth through capital deepening continues to increase. Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
10) Refer to Figure 8A.1. Capital deepening occurs as long as A) total saving exceeds depreciation. B) depreciation exceeds total saving. C) total saving and depreciation are equal. D) the level of Y is increasing. Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
11) Refer to Figure 8A.2. Compared to curve s1Y, curve s2Y represents A) a decrease in capital deepening. B) a higher saving rate. C) a decrease in depreciation. D) a decrease in original capital stock. Answer: B Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
12) Refer to Figure 8A.2. If the economy were saving at the rate s1 A) saving would equal depreciation at e1. B) capital stock would increase until the economy reached K2. C) the economy would grow until it reached e2. D) all of the above. Answer: A Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 13) Refer to Figure 8A.2. If the economy were originally saving at the rate s1 but changed to the rate s2 A) depreciation will not catch up to total saving. B) capital deepening will continue past K2. C) saving exceeds depreciation at K1. D) the economy stops growing at e1. Answer: C Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 14) Refer to Figure 8A.2. An increase in the saving rate is represented by A) shifting from s2Y to dK. B) shifting from s1Y to s2Y. C) a movement from K1 to e1. D) a movement from e2 to e1. Answer: B Diff: 2 Topic: A Model of Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 15) Capital deepening will occur as long as total saving is greater than depreciation. Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 16) Eventually the process of capital deepening comes to a halt as depreciation catches up with total saving.
Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 17) A higher saving rate will promote capital deepening. Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 18) Technological progress directly raises output, but also slows capital deepening. Answer: FALSE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 19) As capital deepening occurs, there will be increased real wages and economic growth. Answer: TRUE Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 20) The capital deepening model developed by Robert Solow shows the links among which three items? Answer: saving, depreciation, capital deepening Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
21) In to the Solow model, what is capital deepening? How can a country achieve capital deepening? Answer: Capital deepening occurs when the amount of capital per worker increases. A country can do this by increasing its saving and investment in capital. Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 22) According to the Solow model, technological progress will cause output to increase for two reasons. What are these two reasons? Answer: The increased efficiency which comes with technological progress will directly raise per capita output and technological progress leads to additional capital deepening. Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth 23) According to the Solow model, can a country have capital deepening without any limit? Answer: No. Capital deepening will halt when depreciation catches up with total saving. Diff: 1 Topic: A Model of Capital Deepening Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth
24) Draw a graph showing the Solow model. Illustrate and explain the point at which capital deepening ceases. Answer:
Capital deepening occurs as long as total saving exceeds depreciation. This occurs as long as the saving function sy is above the depreciation line dK in the graph. At the point where the two cross, shown as the capital level k*, capital deepening will cease. Diff: 2 Topic: Capital Deepening, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-4: Explain the sources of productivity growth Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 9 Aggregate Demand and Aggregate Supply 9.1 Sticky Prices and Their Macroeconomic Consequences 1) Recessions occur because of A) real adverse shocks to the economy. B) shocks to technology. C) difficulties in coordinating economic affairs. D) all of the above. Answer: D Diff: 2 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 2) Real business cycle theory emphasizes the role of A) demand shocks as a cause of economic fluctuations. B) technology shocks as a cause of economic fluctuations. C) shocks to the money supply as a cause of economic fluctuations. D) government spending as a cause of economic fluctuations. Answer: B Diff: 1 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual
AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 3) The economic theory that emphasizes the role of difficulties in coordinating economic affairs as a cause of economic fluctuations is known as A) Keynesian economics. B) investment cycle theory. C) real business cycle theory. D) technology shock theory. Answer: A Diff: 1 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
4) The mechanism that normally coordinates what goes on in an economy is the A) government. B) price system. C) stock market. D) Federal Reserve. Answer: B Diff: 1 Topic: Sticky Prices and Their Macroeconomic Consequences Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 5) In modern economies A) all prices are very flexible. B) some prices are very flexible while others are not. C) no prices are very flexible. D) prices become less flexible as they increase. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 6) Which of the following is a problem with the price system that can lead to a breakdown in the coordination of economic activity? A) The price system works silently in the background. B) Prices can be slow to adjust. C) Prices may be flexible. D) all of the above Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
7) Which of the following is a problem with the price system that can lead to fluctuations in output? A) The price system works silently in the background. B) Prices can be slow to adjust. C) Prices may be flexible. D) all of the above Answer: B Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 8) Prices that adjust nearly on a daily basis are A) custom prices. B) auction prices. C) sticky prices. D) heavy prices. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 9) Prices that adjust slowly are A) custom prices. B) auction prices. C) flexible prices. D) heavy prices. Answer: A Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
10) Prices for fresh fruit, vegetables and other food products are examples of A) custom prices. B) auction prices. C) sticky prices. D) temporary prices. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 11) Prices for industrial commodities such as steel rods or machine tools are A) heavy prices. B) sticky prices. C) auction prices. D) custom prices. Answer: D Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 12) Because wages of sports stars can change frequently, their wages are considered A) auction prices. B) custom prices. C) sticky prices D) irrational prices Answer: A Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 13) Because laundromat prices can change infrequently, the prices are considered A) auction prices. B) custom prices. C) flexible prices D) irrational prices Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 14) If prices are sticky
A) economic activity will be coordinated efficiently. B) economic activity will not be coordinated efficiently. C) prices will quickly adjust to changes in demand. D) quantity supplied will always equal quantity demand. Answer: B Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 15) Workers often have ________ contracts and so their wages are ________. A) long-term; flexible B) long-term; sticky C) short-term; sticky D) short-term; flexible Answer: B Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 16) Stickiness of wages A) is unrelated to stickiness of prices. B) lessens the stickiness of prices. C) reinforces stickiness of prices. D) may or may not reinforce stickiness of prices. Answer: C Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
17) The economy's ability to coordinate economic activity is hindered by A) sticky wages causing sticky prices. B) auction prices. C) workers whose wages change quickly. D) all of the above. Answer: A Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 18) Workers whose wages tend to adjust slowly include all of the following EXCEPT A) union workers. B) unskilled, low wage workers. C) those with long-term contracts. D) movie stars, professional athletes, and rock stars. Answer: D Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 19) Which of the following types of workers might have wages that change quickly? A) unskilled, low-wage workers B) union workers C) employees of state and local governments D) movie stars and rock stars Answer: D Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 20) In which market would the price be least likely to be "sticky"? A) refrigerators B) steel rods C) fresh fruit D) trucks Answer: C Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 21) Suppose the demand for hot dogs decreases. In the short run, firms that produce hot
dogs will experience a fall in prices, which will induce them to A) increase production and increase the number of workers. B) decrease production and increase the number of workers. C) decrease production and reduce the number of workers. D) increase production and reduce the number of workers. Answer: C Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 22) Suppose the demand for hamburgers increases. In the short run, firms that produce hamburgers will experience a rise in prices, which will induce them to A) decrease production and decrease the number of workers. B) increase production and increase the number of workers. C) decrease production and increase the number of workers. D) increase production and decrease the number of workers. Answer: B Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 23) Suppose consumer tastes and preferences shift from pizza to tacos. In the short run, these changing tastes will result in pizza restaurants ________ pizza prices and taco restaurants ________ taco prices. A) increasing; decreasing B) decreasing; increasing C) decreasing; decreasing D) increasing; increasing Answer: B Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
24) Suppose consumer tastes and preferences shift from tacos to pizzas. In the short run, these changing tastes will result in pizza restaurants ________ pizza prices and taco restaurants ________ taco prices. A) increasing; decreasing B) decreasing; increasing C) decreasing; decreasing D) increasing; increasing Answer: A Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 25) The short run in macroeconomics is the period in which A) prices change significantly. B) no contracts or agreements exist to fix prices. C) demand determines output. D) the demand curve is vertical. Answer: C Diff: 1 Topic: How Demand Determines Output in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model Recall the Application about the behavior of prices in retail catalogs to answer the following question(s). 26) This Application examines the concept of A) the wealth effect. B) sticky prices. C) consumer spending habits. D) stagflation. Answer: B Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
27) In the Application, findings by Anil Kasyap showed that even though the catalogs listed in the Application were reissued every six months, the prices which were tracked in these retail catalogs A) were typically fixed for a year or more. B) changed every month. C) tended to fall during periods of high inflation. D) were not listed due to low rates of inflation. Answer: A Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 28) In the Application, Anil Kasyap found that in periods of high inflation A) prices tended to change more frequently. B) prices tended to change less frequently. C) prices do not change at all. D) prices change equally as often as during periods of low inflation. Answer: A Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 29) According to this Application, the prices which were tracked in the retail catalogs exemplified the macroeconomic concept of the short run, a period of time in which A) price changes are significant because the aggregate supply curve is vertical. B) prices never change because the aggregate demand curve is vertical. C) prices change frequently because of changes in aggregate supply. D) prices don't change very much, implying that the aggregate supply curve is relatively flat. Answer: D Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
30) In the Application, Mark Bils and Peter Klenow's findings were A) different from Anil Kashyap's findings. They found prices changing more frequently. B) different from Anil Kashyap's findings. They found prices changing less frequently. C) similar to Anil Kashyap's findings. They found prices changing very frequently. D) similar to Anil Kashyap's findings. They found prices changing very infrequently. Answer: A Diff: 1 Topic: Application 1, Measuring Price Stickiness in Consumer Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 31) The price system always works instantaneously. Answer: FALSE Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 32) Prices of industrial products and wages tend to be the most "flexible." Answer: FALSE Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 33) For most firms, the biggest cost of doing business is wages. Answer: TRUE Diff: 1 Topic: Flexible and Sticky Prices Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 34) The price system works in an economy on a day-to-day basis to match the desires of consumers with the output from producers. Answer: TRUE Diff: 1 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
35) Changes in demand will often be met with changes in output rather than changes in prices because of formal and informal contracts. Answer: TRUE Diff: 1 Topic: How Demand Determines Output in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 36) What are some reasons why coordination of economic affairs through the price system may not work perfectly? Answer: There are a number of correct answers here, but three principal reasons are that there may be too few prices (that is, more markets than prices), prices may not contain sufficient information, and prices may be "sticky." Diff: 2 Topic: Flexible and Sticky Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 37) What are the two types of prices in an economy? Answer: auction, custom Diff: 1 Topic: Flexible and Sticky Prices Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 38) Suppose that demand for a product falls, but prices are sticky. What is likely to happen to prices and output in that market, in the short run? Answer: If prices are not flexible, they may not immediately adjust downward in response to the decrease in demand. So in the short run, prices may stay constant, and output might fall by more than would have happened if prices were flexible. Diff: 2 Topic: How Demand Determines Output in the Short Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
9.2 Understanding Aggregate Demand 1) The relationship between the level of prices and the total demand for all goods and services is known as A) aggregate supply. B) market supply. C) aggregate demand. D) market demand. Answer: C Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 2) Aggregate demand refers to the relationship between A) prices and the quantity of a good supplied. B) the price level and the quantity of real GDP supplied. C) prices and the quantity of a good demanded. D) the price level and the quantity of real GDP demanded. Answer: D Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 3) What is the total demand for goods and services in an entire economy called? A) supply and demand B) aggregate demand C) consumer demand D) GDP demand Answer: B Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
4) The aggregate demand curve is A) downward sloping. B) upward sloping. C) a vertical line at potential output. D) a horizontal line at the current price level. Answer: A Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 5) As the price level ________, the purchasing power of money ________. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; stays the same Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 6) The increase in spending that occurs because the real value of money increases when the price level falls is known as the A) interest rate effect. B) international trade effect. C) price effect. D) wealth effect. Answer: D Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
7) One reason the aggregate demand curve is downward sloping is because of the A) interest rate effect. B) welfare effect. C) price effect. D) tariff effect. Answer: A Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 8) The increase in spending that occurs because the demand for investment goods increases when the price level falls is known as the A) interest rate effect. B) international trade effect. C) price effect. D) wealth effect. Answer: A Diff: 2 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 9) The increase in spending that occurs because domestic goods become cheaper relative to foreign goods when the price level falls is known as the A) interest rate effect. B) international trade effect. C) price effect. D) wealth effect. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
10) The purchasing power of money increases as the A) demand increases. B) unemployment decreases. C) price level falls. D) production increases. Answer: C Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 11) The purchasing power of money decreases as the A) production decreases. B) price level increases. C) employment increases. D) demand increases. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 12) The real value of money ________ as the price level falls. A) remains the same B) decreases C) increases D) none of the above Answer: C Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
13) When interest rates are lower, consumers and companies are able to borrow money more cheaply in order to make major purchases. As a result, the demand for goods in an economy will generally A) decrease. B) increase. C) remain the same. D) be minimally affected. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 14) When the price level is low, resulting in domestic goods being cheaper than imported foreign goods A) consumers hold more money. B) consumers spend less money. C) the demand for domestic goods will increase. D) there will be a reduction in import tariffs. Answer: C Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 15) When the price level is low and the demand for domestic goods increases, how does it affect international trade? A) Net exports will decrease. B) Net exports will increase. C) Prices of all international goods will decrease. D) Prices of all international goods will increase. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
16) If home prices are falling, consumers purchasing a home will find their purchasing power of money has increased. This benefit to consumers is called the A) inflation effect. B) wealth effect. C) home equity effect. D) multiplier effect. Answer: B Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 17) Which of the following does NOT shift the U.S. aggregate demand curve? A) an increase in the supply of money B) an increase in GDP in Japan C) a decrease in taxes D) a decrease in the price level Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 18) Which of the following does NOT decrease aggregate demand in the United States? A) a decrease in the price of oil B) a decrease in GDP in Germany C) a decrease in government spending D) a decrease in the supply of money Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
19) Which of the following would cause an increase in aggregate demand in the short run? A) an increase in the supply of money B) a decrease in the price level C) an increase in taxes D) a crop failure Answer: A Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 20) Which of the following would cause a decrease in aggregate demand? A) a rise in wages B) an increase in the price level C) an increase in the money supply D) a fall in investor confidence Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 21) Which of the following causes a movement upward along the aggregate demand curve? A) a fall in wages B) an increase in the price level C) an increase in government spending D) an increase in the money supply Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 22) Which of the following causes a movement downward along the aggregate demand curve? A) a decrease in the price level B) an increase in the price level C) an increase in the money supply D) a decrease in government spending Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking
Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 23) Which one of the following would shift the aggregate demand curve to the left? A) an increase in the money supply B) an increase in government spending C) an increase in exports D) an increase in taxes Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
24) Figure 9.1 shows three aggregate demand curves. A shift from curve AD1 to curve AD0 could be caused by a(n) A) increase in the money supply. B) decrease in taxes. C) increase in the price level. D) decrease in government spending. Answer: D Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 25) Figure 9.1 shows three aggregate demand curves. A shift from curve AD1 to curve
AD2 could be caused by a(n) A) decrease in the money supply. B) increase in taxes. C) decrease in the price level. D) increase in government spending. Answer: D Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 26) Figure 9.1 shows three aggregate demand curves. A shift from curve AD1 to curve AD2 could be caused by a(n) A) increase in the money supply. B) increase in taxes. C) increase in the price level. D) decrease in government spending. Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 27) Figure 9.1 shows three aggregate demand curves. A shift from curve AD1 to curve AD0 could be caused by a(n) A) decrease in the money supply. B) decrease in taxes. C) increase in the price level. D) increase in government spending. Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
28) Figure 9.1 shows three aggregate demand curves. A shift rom curve AD0 to curve AD1 could be caused by a(n) A) decrease in the money supply. B) decrease in taxes. C) decrease in the price level. D) decrease in government spending. Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 29) Figure 9.1 shows three aggregate demand curves. A shift from curve AD2 to curve AD1 could be caused by a(n) A) increase in the money supply. B) increase in taxes. C) increase in the price level. D) increase in government spending. Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 30) Figure 9.1 shows three aggregate demand curves. A movement from point b to point a could be caused by a(n) A) decrease in the money supply. B) increase in taxes. C) increase in the price level. D) increase in government spending. Answer: C Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
31) Figure 9.1 shows three aggregate demand curves. A movement from point b to point c could be caused by a(n) A) increase in the money supply. B) decrease in taxes. C) decrease in the price level. D) decrease in government spending. Answer: C Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 32) Suppose that we are currently at pt. b in Figure 9.1. An increase in government spending will result in a A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point b to point c. Answer: A Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 33) Suppose that we are currently at pt. c in Figure 9.1. An increase in income taxes will result in a A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point a to point c. Answer: B Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
34) Suppose that we are currently at pt. B in Figure 9.1. An increase in the price level will result in a A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point b to point c. Answer: C Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 35) Suppose that we are currently at pt. b in Figure 9.1. A decrease in the price level will result in a A) shift in the AD curve from AD1 to AD2. B) shift in the AD curve from AD1 to AD0. C) movement from point b to point a. D) movement from point a to point b. Answer: D Diff: 2 Topic: Shifts in the Aggregate Demand Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 36) Assuming the price level has not changed, how would an increase in the aggregate demand affect real GDP? A) It decreases. B) It increases. C) It only changes with changes in imports. D) It only changes with changes in exports. Answer: B Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
37) A decrease in spending on new homes will, other things being equal A) increase aggregate demand. B) decrease aggregate demand. C) increase aggregate supply. D) decrease aggregate supply. Answer: B Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 38) Any change in spending from ________ will also change aggregate demand. A) households B) firms C) the foreign sector D) all of the above Answer: D Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 39) The relationship between consumer spending and income is known as the A) rate of income. B) consumption function. C) inflation rate. D) rate of individual wealth. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 40) When consumers spend and buy things regardless of their level of income, this is known as A) bad financial management. B) living the good life. C) autonomous consumption spending. D) using credit to its maximum. Answer: C Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
41) When consumers realize additional income in a household and spend the additional money, the portion of the additional income that is spent is measured by the A) credit increase theory. B) marginal propensity to consume. C) aggregate demand factor. D) measure of individual wealth. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 42) The multiplier represents the ratio of the total shift in aggregate demand to the A) total shift in short-run aggregate supply. B) initial shift in short-run aggregate supply. C) initial shift in aggregate demand. D) total shift in long-run aggregate supply. Answer: C Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 43) The marginal propensity to save (MPS) is the A) amount of saving that is later consumed. B) fraction of additional income that is saved. C) part of consumption spending that does not depend on income. D) total amount of income that is saved. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
44) If the government increases its purchases of goods and services by $3,000 and the MPC is 0.8, GDP and income will eventually increase by A) $2,400. B) $6,000. C) $15,000. D) $24,000. Answer: C Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 45) If the government decreases its purchases of goods and services by $12,000 and the MPS is 0.5, GDP and income will eventually decrease by A) $2,400. B) $6,000. C) $24,000. D) $60,000. Answer: C Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 46) If the government increased its purchases of goods and services by $12,000, and this resulted in an eventual increase in GDP and income of $60,000, the MPS would be equal to A) 0.2. B) 0.4. C) 0.8. D) 2. Answer: A Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
47) If the government decreased its purchases of goods and services by $4,000, and this resulted in an eventual decrease in GDP and income of $10,000, the MPC would be equal to A) 2.5. B) 1.5. C) 0.6. D) 0.4. Answer: C Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 48) If the MPC = 0.9, the multiplier would be A) 0.1. B) 2. C) 9. D) 10. Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 49) If the MPS = 0.1, the multiplier would be A) 10. B) 1. C) 9. D) 0.9. Answer: A Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
50) If the MPS = 0.1, the MPC would be A) 10. B) 1. C) 9. D) 0.9. Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 51) If the multiplier is 10, then the MPS is _______while the MPC would be ________. A) 1, 9 B) 0.9, 0.1 C) 9, 10 D) 0.1, 0.9 Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 52) If the MPS = 0.2, the multiplier would be A) 0.5. B) 1. C) 2. D) 5. Answer: D Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 53) If the multiplier = 2.5, the MPC would be A) 0.25. B) 0.4. C) 0.6. D) 0.75. Answer: C Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 54) If the multiplier = 2.5, the MPS would be
A) 0.25. B) 0.4. C) 0.6. D) 0.75. Answer: B Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 55) Aggregate demand is the total demand for intermediate goods and services in an entire economy. Answer: FALSE Diff: 1 Topic: What is the Aggregate Demand Curve? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 56) Higher prices lead to higher levels of real wealth. Answer: FALSE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 57) Aggregate demand will be affected by the purchasing power of money. Answer: TRUE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 58) The purchasing power of money decreases as the price level increases. Answer: TRUE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
59) When considering the aggregate demand curve, the wealth effect, interest rate effect and international trade effect reinforce each other. Answer: TRUE Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 60) Decreases in taxes shift the aggregate demand curve to the right. Answer: TRUE Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 61) An increase in the money supply will increase aggregate demand. Answer: TRUE Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 62) An increase in government spending will shift the aggregate demand curve to the left. Answer: FALSE Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 63) The ratio of the total shift in aggregate demand to the initial shift in aggregate demand is known as the multiplier. Answer: TRUE Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
64) The relationship between the level of income and investment spending is known as the consumption function. Answer: FALSE Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 65) What are the four components of aggregate demand? Answer: consumption spending, investment spending, government purchases, net exports Diff: 1 Topic: The Components of Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 66) What three effects can alter the aggregate demand curve? Answer: wealth effect, interest rate effect, international trade effect Diff: 1 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 67) Explain how the wealth effect can affect aggregate demand. Answer: As price levels change, the purchasing power of money changes. If price levels decrease, people holding money find they are better off, and will spend more on additional goods and services. The increase in consumer spending increases aggregate demand. If price levels decrease, people's wealth is reduced and the total demand for goods and services decreases. Diff: 2 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 68) Explain how the interest rate effect can increase aggregate demand. Answer: In an economy with a fixed supply of money, price level changes lead to interest rate changes. If price levels drop, interest rates fall. When interest rates fall, both consumers and businesses will find it cheaper to borrow money to make purchases. The increases in consumer and business spending increase aggregate demand. Diff: 2 Topic: Why the Aggregate Demand Curve Slopes Downward Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
69) Identify three key factors that can cause a shift in the aggregate demand curve. Answer: the supply of money, changes in taxes, changes in government spending Diff: 1 Topic: Shifts in the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 70) Define the "consumption function." Answer: The consumption function represents the relationship between consumer spending and income. Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 71) Define "autonomous consumption spending." Answer: Autonomous spending is consumer spending that does not depend on the level of income. Diff: 1 Topic: How the Multiplier Makes the Shift Bigger Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 72) Define the marginal propensity to consume (MPC) and the marginal propensity to save (MPS), and explain why MPC + MPS always equals 1. Answer: MPC is the fraction of additional income that is spent. MPS is the fraction of additional income that is saved. The MPC + MPS must equal 1 because additional income is either spent or saved, so the two fractions must add up to 1. Diff: 2 Topic: How the Multiplier Makes the Shift Bigger Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
9.3 Understanding Aggregate Supply 1) The relationship between the level of prices and the quantity of real GDP supplied is known as A) aggregate supply. B) market supply. C) aggregate demand. D) market demand. Answer: A Diff: 1 Topic: Understanding Aggregate Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 2) The relationship between the level of prices and total quantity of goods and services producers are willing to supply is represented by the A) aggregate demand curve. B) aggregate supply curve. C) sticky price curve. D) GDP multiplier. Answer: B Diff: 1 Topic: Understanding Aggregate Supply Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 3) To determine the equilibrium price level and equilibrium level of real GDP, the aggregate demand and aggregate supply must A) be considered separately. B) intersect. C) be disregarded. D) be considered as a multiplier. Answer: B Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
4) The long-run aggregate supply curve is A) downward sloping. B) upward sloping. C) a vertical line at potential output. D) a horizontal line at the current price level. Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 5) Assuming a long-run aggregate supply curve, an increase in the money supply results in ________ in output and ________ in price level. A) a decrease; a decrease B) an increase; no change C) a decrease; no change D) no change; an increase Answer: D Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 6) Assuming a long-run aggregate supply curve, a decrease in government spending results in ________ in output and ________ in price level. A) no change; an increase B) no change; a decrease C) a decrease; a decrease D) an increase; no change Answer: B Diff: 2 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
7) Assuming a long-run aggregate supply curve, a decrease in taxes results in ________ in output and ________ in price level. A) a decrease; a decrease B) no change; an increase C) no change; a decrease D) an increase; no change Answer: B Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 8) Assuming a long-run aggregate supply curve, a decrease in consumer confidence results in ________ in output and ________ in price level. A) a decrease; no change B) no change; a decrease C) a decrease; a decrease D) an increase; no change Answer: B Diff: 3 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 9) Which of the following curves reflects the idea that in the long run, output is determined only by the factors of production and given technology? A) the aggregate demand curve B) the market supply curve C) the long-run aggregate supply curve D) the Keynesian aggregate supply curve Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
10) An implication of the long-run aggregate supply curve is that continuous increases in the money supply will result in continuous A) increases in price level. B) decreases in output and price level. C) decreases in output. D) increases in output and price level. Answer: A Diff: 3 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 11) Which of the following factors influence the position of the long-run aggregate supply curve? A) the supply of money B) government spending C) taxes D) the level of full-employment output Answer: D Diff: 2 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 12) In the long run A) price and output levels are mutually dependent. B) the level of output depends on the price level. C) the level of output is independent of the price level. D) the price level depends on the level of output. Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
13) Output in the long run is determined by which of the two following factors when an economy operates at full employment? A) capital and supply B) imports and exports C) capital and labor D) the "real" GDP and purchases Answer: C Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 14) The level of output determined by the intersection of the short-run aggregate supply curve and the aggregate demand curve A) is always below full-employment output. B) is always above full-employment output. C) always corresponds to full-employment output. D) may be above, below, or equal to full-employment output. Answer: D Diff: 2 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 15) Output in the short run is determined by which of the following factors when an economy operates at full employment? A) demand B) supply C) the price level D) the labor force Answer: A Diff: 1 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
Figure 9.2
16) Refer to Figure 9.2. A movement from point a to point c could be caused by a(n) A) increase in government spending. B) decrease in the price of oil. C) increase in taxes. D) increase in short-run aggregate supply. Answer: A Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 17) Refer to Figure 9.2. A movement from point c to point a could be caused by a(n) A) decrease in government spending. B) increase in the price of oil. C) decrease in taxes. D) decrease in short-run aggregate supply. Answer: A Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 18) Refer to Figure 9.2. A movement from point d to point b could be caused by a(n) A) increase in government spending. B) increase in the price of oil. C) increase in taxes. D) decrease in short-run aggregate supply. Answer: C Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 19) Refer to Figure 9.2. A movement from point b to point d could be caused by a(n) A) decrease in government spending. B) increase in the price of oil. C) decrease in taxes. D) increase in short-run aggregate supply. Answer: C Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
20) Refer to Figure 9.2. A movement from point d to point c could be caused by a(n) A) increase in government spending. B) increase in the price of oil. C) increase in taxes. D) increase in short-run aggregate supply. Answer: B Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 21) Refer to Figure 9.2. A movement from point a to point b could be caused by a(n) A) increase in government spending. B) decrease in the price of oil. C) decrease in taxes. D) decrease in short-run aggregate supply. Answer: B Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 22) Refer to Figure 9.2. A movement from point b to point a could be caused by a(n) A) increase in government spending. B) decrease in the price of oil. C) increase in taxes. D) a massive crop failure. Answer: D Diff: 2 Topic: The Short-Run Aggregate Supply Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model Recall the Application about the factors involved in causing recessions, and the causes of recessions in the United States from 1893 to 1990 to answer the following question(s). 23) Recall the Application. Recessions can occur either when there is a(n) ________ in aggregate demand or a(n) ________ in aggregate supply. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase Answer: C Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions
Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 24) According to this Application, the recession of 1929 was primarily due to A) a decrease in aggregate demand caused by the private sector. B) a decrease in aggregate demand resulting from decreases in government spending. C) a decrease in aggregate supply due to rising gold prices. D) an increase in aggregate supply resulting from European bank collapses. Answer: A Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 25) According to this Application, the recessions in 1973 and 1979 were caused by A) supply shocks. B) deflation. C) foreign monetary developments. D) arbitrage losses in the foreign exchange market. Answer: A Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
26) According to this Application, the recession in 1981 was caused by A) increasing oil prices which resulted in a decrease in aggregate supply. B) the government cutting back on aggregate demand to reduce inflation. C) an decrease in aggregate supply resulting from U.S. bank collapses. D) massive immigration from Europe to the United States. Answer: B Diff: 1 Topic: Application 2, Two Approaches to Determining the Causes of Recessions Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
Figure 9.2 27) Refer to Figure 9.2. A movement from point a to point d could be caused by a simultaneous ________ and ________. A) increase in government spending; decrease in the price of oil B) increase in taxes; increase in the price of oil C) decrease in taxes; massive crop failure D) decrease in the money supply; decrease in government spending Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
28) Refer to Figure 9.2. A movement from point c to point b could be caused by a simultaneous ________ and ________. A) decrease in government spending; decrease in the price of oil B) decrease in taxes; increase in the price of oil C) increase in taxes; decrease in government spending D) increase in government spending; increase in the money supply Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 29) Refer to Figure 9.2. A movement from point d to point a could be caused by a simultaneous ________ and ________. A) decrease in the money supply; increase in the price of oil B) increase in the money supply; massive crop failure C) decrease in taxes; decrease in the money supply D) decrease in government spending; decrease in the price of oil Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 30) Refer to Figure 9.2. A movement from point b to point c could be caused by a simultaneous ________ and ________. A) increase in the money supply; increase in the price of oil B) decrease in taxes; decrease in the price of oil C) increase in taxes; decrease in government spending D) increase in the price of oil; massive crop failure Answer: A Diff: 3 Topic: Supply Shocks, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
31) Which of the following is an example of a supply shock? A) a surprise increase of the money supply B) an increase in government spending C) a sharp increase in the price of oil D) an increase in the price level Answer: C Diff: 2 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 32) Which one of the following statements is TRUE? A) In the short run, the level of output is determined by demand. B) In the long run, the level of output is determined by demand. C) In the long run, the aggregate supply curve is horizontal. D) Where aggregate demand and aggregate supply intersect is always the fullemployment level of output. Answer: A Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 33) When there is a shift the aggregate supply curve caused by factors external to a nation's economy, it is called A) a trade imbalance. B) government control. C) a supply shock. D) an economic anomaly. Answer: C Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
34) A supply shock is an ________ event that shifts the aggregate ________ curve. A) internal; supply B) external; supply C) internal; demand D) external; demand Answer: B Diff: 1 Topic: Supply Shocks Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 35) When there is a recession (a fall in output) and prices are increasing, and this situation is caused by adverse supply shocks, the term economists use to describe it is A) aggregate shifts. B) stagnation. C) inflation. D) stagflation. Answer: D Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model Recall the Application about rising oil prices and their effect on the U.S. economy to answer the following question(s). 36) According to the Application, the U.S. imports about ________ of the petroleum products it consumes. A) 25% B) 50% C) 75% D) 38% Answer: A Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
37) According to the Application, the U.S. imports ________ than it exports of petroleum products. A) less B) more C) the same D) all of the above are correct. Answer: A Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 38) According to the Application, which of the following explains why the U.S. imports for oil has substantially decreased since 2005? A) increased production through new technologies B) more alternative energy sources C) better fuel consumption in automobiles D) All of the above are correct. Answer: D Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 39) According to the Application, why is the U.S. less vulnerable to oil supply shocks today as opposed to the 1970s? A) The U.S. is now a net exporter of oil products. B) The. U.S. is less dependent on oil as an energy source. C) The U.S. determines the price of oil in world markets. D) Only A and B are correct. Answer: D Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 40) The long-run aggregate supply curve is horizontal. Answer: FALSE Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 41) Aggregate demand determines output in the short run if prices are flexible. Answer: FALSE
Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 42) If the supply of money increases, the long-run aggregate supply curve suggests that output will not change but the price level will. Answer: TRUE Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 43) Aggregate demand and aggregate supply must be combined to determine the price level and the "real" GDP. Answer: TRUE Diff: 1 Topic: Understanding Aggregate Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 44) In the long run, output is determined solely by the supply of capital and the supply of labor, not the price level. Answer: TRUE Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 45) In the long run, the level of output depends on the price level. Answer: FALSE Diff: 1 Topic: The Long-Run Aggregate Supply Curve Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
46) In the short run, the price level is determined primarily by the supply of goods. Answer: FALSE Diff: 1 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 47) Adverse supply shocks can cause a recession with increasing price level. Answer: TRUE Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 48) The term "stagflation" is used to define an economic situation where there are adverse supply shocks which cause a fall in output but with increasing price level. Answer: TRUE Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 49) Explain why the long-run aggregate supply curve is vertical. Answer: In the long run, the economy operates at full employment, and changes in the price level do not affect employment. Because the level of full-employment output does not depend on the price level, long-run aggregate supply is unaffected by the price level, and so is vertical. Diff: 2 Topic: The Long-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 50) Explain why the short-run aggregate supply curve is a relatively flat, horizontal line. Answer: In the short run, prices are sticky and output is determined primarily by demand. Firms will adjust production to meet demand. Since firms will supply all the output to meet demand with only small changes in price, the short-run aggregate supply curve is relatively flat. Diff: 2 Topic: The Short-Run Aggregate Supply Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
51) What are supply shocks? Explain what effect adverse and favorable supply shocks have on the supply curve. Answer: Supply shocks are external events that shift the aggregate supply curve. Adverse supply shocks would cause aggregate supply to decrease, shifting the AS curve to the left. Favorable supply shocks would cause aggregate supply to increase, shifting the AS curve to the right. Diff: 2 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model 52) Name a supply shock that has affected the U.S. economy on more than one occasion. Answer: increase or decrease in the price of oil Diff: 1 Topic: Supply Shocks Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model Recall the Application about rising oil prices and their effect on the U.S. economy to answer the following question(s). 53) What does "the U.S. is a net exporter of petroleum products" mean? How can we be a net exporter when we still import oil from other countries? Answer: The U.S. being a net exporter means that the value of our exports for petroleum products is larger than the value of our imports. This is because the U.S. is an exporter of refined petroleum products to many countries, and the value of these exports are greater than our imports. Diff: 1 Topic: Application 3, Oil Price Increases and the Changing U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model
9.4 From the Short Run to the Long Run 1) During an economic boom A) actual output exceeds potential output. B) potential output exceeds quantity demanded. C) potential output exceeds actual output. D) aggregate demand exceeds aggregate supply. Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 2) During an economic boom A) the level of unemployment tends to be high. B) it is difficult for firms to recruit and retain workers. C) firms have an easier time purchasing raw materials. D) prices tend to decrease over time. Answer: B Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 3) Adjustments in ________ take the economy from the short-run equilibrium to the long-run equilibrium. A) imports and exports B) interest rates C) wages and prices D) the multiplier Answer: C Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
4) If actual output exceeds potential output, ________ shifts upward over time. A) the short-run AS curve B) the short-run AD curve C) the long-run AS curve D) the long-run AD curve Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 5) If actual output equals potential output, ________ shifts upward over time. A) neither the short-run AS curve nor the short-run AD curve B) the short-run AD curve C) the short-run AS curve D) the long-run AD curve Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 6) If ________, the short-run AS curve shifts upward over time. A) actual output exceeds potential output B) actual output is zero C) actual output equals potential output D) actual output is less than potential output Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
7) If potential output exceeds actual output, ________ shifts downward over time. A) the short-run AS curve B) the short-run AD curve C) the long-run AS curve D) the long-run AD curve Answer: A Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 8) During an economic boom, actual output exceeds potential output. Answer: TRUE Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 9) If potential output exceeds actual output, the aggregate demand curve shifts downward over time. Answer: FALSE Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 10) If actual output exceeds potential output, the short-run aggregate supply curve shifts downward over time. Answer: FALSE Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
11) Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium. Answer: For example, if the level of output exceeds the level of potential output (a boom economy), the unemployment level will be low. As firms compete for workers and for raw materials, wages and prices will increase. This will cause the short-run aggregate supply curve to shift upwards, a process that will continue as long as the economy produces at a level of output that exceeds potential output. At some point the short-run aggregate supply curve will reach the long-run equilibrium, which is where the aggregate demand curve intersects the long-run aggregate supply curve. Diff: 1 Topic: From the Short Run to the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 12) Draw an aggregate supply and aggregate demand graph which shows the economy producing an output which exceeds potential output in the short run, and the adjustment that will occur as the economy adjusts to long-run equilibrium. Answer: In the short run, the economy is at the intersection of AD and AS0, with an output of y0. In the long run, aggregate supply will decrease, shifting up from AS0 to AS1, and the equilibrium output will fall from y0 to yp, at the intersection of AD, AS1, and Long-run AS.
Diff: 2 Topic: From the Short Run to the Long Run, graphing Skill: Analytical AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 10 Fiscal Policy 10.1 The Role of Fiscal Policy 1) What are the two tools of fiscal policy that governments can use to stabilize an economy?
A) government spending and technology improvements B) government spending and taxation C) taxation and controlling imports D) taxation and controlling exports Answer: B Diff: 1 Topic: Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) Contractionary policies are policies designed to A) increase the level of real GDP. B) reduce the level of real GDP. C) increase government spending. D) increase the federal deficit. Answer: B Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 3) Expansionary policies are policies designed to A) increase the level of real GDP. B) reduce the level of real GDP. C) decrease government spending. D) reduce the federal deficit. Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
4) What are the two tools of fiscal policy that governments can use to affect the level of aggregate demand? A) government spending and taxation B) government spending and technology improvements C) taxation and controlling imports D) taxation and controlling exports Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) In order to ________, a government must increase spending and decrease taxation. A) increase aggregate demand B) decrease aggregate demand C) increase aggregate supply D) decrease aggregate supply Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 6) In order to ________, a government must decrease spending and increase taxation. A) increase aggregate demand B) decrease aggregate demand C) increase aggregate supply D) decrease aggregate supply Answer: B Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
7) As a result of an increase in the personal income tax rate, consumers are likely to A) spend less. B) spend more. C) save more. D) earn more money. Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) A decrease in the personal income tax rate ________ disposable income which ________ consumption. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases Answer: A Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 9) Tax cuts aimed at businesses can stimulate A) social spending. B) private consumption. C) investment spending. D) net exports. Answer: C Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
10) Expansionary policies are government policies that A) increase aggregate supply. B) decrease aggregate supply. C) decrease aggregate demand. D) increase aggregate demand. Answer: D Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 11) Contractionary policies are government policies that A) increase aggregate supply. B) decrease aggregate supply. C) decrease aggregate demand. D) increase aggregate demand. Answer: C Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 12) When the government develops policies to stabilize the economy A) these policies are unaffected by the multiplier effect. B) only expansionary fiscal policy is impacted by the multiplier effect. C) it needs to consider the multiplier effect for all fiscal policies. D) only contractionary fiscal policy is impacted by the multiplier effect. Answer: C Diff: 1 Topic: The Fiscal Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
13) Due to the ________ effect, the final shift in aggregate demand is larger than the initial shift in aggregate demand. A) income B) multiplier C) substitution D) crowding-out Answer: B Diff: 1 Topic: The Fiscal Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 14) The idea that a $1 increase in infrastructure spending will generate more than $1 in economic growth is a representation of A) the multiplier effect. B) an outside lag. C) an inside lag. D) an automatic stabilizer. Answer: A Diff: 1 Topic: The Fiscal Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15) Policies taken to move the economy closer to potential output A) must be expansionary policies. B) must be contractionary policies. C) are called stabilization policies. D) are lagging policies or automatic policies. Answer: C Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
16) Stabilization policies are policies designed to A) keep output constant. B) keep prices constant. C) move the economy closer to potential output. D) increase trade. Answer: C Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17) What is the reason that stabilization policies do NOT have an immediate effect on an economy? A) Consumers are slow to catch up on spending. B) There is a time lag for policies to take effect. C) Imports come into the country too fast. D) Exports often are not shipped fast enough. Answer: B Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 18) The time it takes to formulate a policy is known as A) fiscal policy. B) crowding out. C) inside lags. D) outside lags. Answer: C Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
19) The time it takes for a policy to actually work is known as A) fiscal policy. B) crowding out. C) inside lags. D) outside lags. Answer: D Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 20) The fact that it takes time for government to identify and recognize a problem is one reason for the occurrence of A) inside lags. B) outside lags. C) implementation lags. D) structural lags. Answer: A Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 21) The fact that it takes time for government to take action, even after a problem has been diagnosed, is one reason for the occurrence of A) inside lags. B) outside lags. C) crowding out. D) the multiplier effect. Answer: A Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
22) President Obama needed to get Congressional approval to enact measures to boost the economy. The time involved to formulate and get approval for these policies are called A) inside lags. B) outside lags. C) automatic stabilization. D) crowding in. Answer: A Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 23) Even when the Obama administration succeeded with its effort to gain Congressional approval for its stimulus proposals, it still took time for these policies to actually work. The time it took for these policies to work is known as A) inside lags. B) outside lags. C) automatic stabilization. D) crowding out. Answer: B Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) Taxation and government spending are examples of fiscal policy tools used to stabilize an economy. Answer: TRUE Diff: 1 Topic: Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 25) Economic advisers who fear that the economy is growing too rapidly would recommend that the government decrease spending and/or increase taxes. Answer: TRUE Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
26) Changes in government purchases affect aggregate demand only indirectly through consumption spending. Answer: FALSE Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) Stabilization policies are actions taken to bring the economy closer to full employment. Answer: TRUE Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 28) An outside lag is the time period it takes economists to formulate a stabilization policy. Answer: FALSE Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 29) An inside lag is the time period it takes for the stabilization policies to take effect after they have been implemented. Answer: FALSE Diff: 1 Topic: The Limits to Stabilization Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 30) Briefly explain how a change in the personal income tax rate affects aggregate demand. Answer: Changes in the personal income tax rate affect aggregate demand through consumption. Consumption is a major component of aggregate demand. For example, a decrease in the personal income tax rate increases disposable income, which in turn increases consumption. Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
31) Name two actions that a government could take if it wants to implement an expansionary fiscal policy. Answer: increase government spending, decrease taxes. Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) Name two actions a government could take if it wants to implement a contractionary fiscal policy. Answer: decrease government spending, increase taxes. Diff: 1 Topic: Fiscal Policy and Aggregate Demand Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 33) What is meant by the term "inside lags"? Answer: Inside lags refers to the time it takes policy makers to formulate a corrective or stabilization policy. Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 34) What is meant by the term "outside lags"? Answer: Outside lags refers to the time it takes for a stabilization policy to have an affect on an economy. Diff: 1 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 35) What are the two basic reasons inside lags occur? Answer: Inside lags occur because it takes time for policy makers to identify and recognize a problem in the economy, and once the problem has been recognized it takes more time for policy makers to take corrective actions. Diff: 2 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
36) Why is it difficult to implement fiscal policies? Answer: One reason why fiscal policies are difficult to implement is the presence of lags, which arise due to the time involved in recognizing and responding to economic changes and the time needed for the policies to operate. A second reason is economists have incomplete information about all aspects of an economy, which limits their abilities to accurately predict economic responses to fiscal policies. Diff: 2 Topic: The Limits to Stabilization Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 10.2 The Federal Budget 1) Which component of federal spending is included in GDP? A) net exports B) transfer payments C) government purchases D) capital supply Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) Why are transfer payments not included in GDP? A) The amount is too low to have any effect. B) Unemployment varies and can't be tracked. C) They do not represent payments to those who contributed resources to currently produced goods or services. D) Money companies receive from the government isn't reported. Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
3) Spending on programs that Congress authorizes ________ is known as discretionary spending. A) by prior law B) on an annual basis C) on an off-budget emergency basis D) after approval from the Federal Reserve Answer: B Diff: 1 Topic: Federal Spending Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 4) Spending on programs that Congress authorizes on an annual basis is known as ________. A) discretionary spending B) wasteful spending C) mandatory spending D) defense spending Answer: A Diff: 1 Topic: Federal Spending Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) When the government conducts activist fiscal policy, what type of spending does it usually use? A) entitlement and mandatory spending B) net interest spending C) discretionary spending D) strategic spending Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
6) Which of the following is an example of government discretionary spending? A) Social Security retirement payments B) Medicare benefits for the elderly C) defense spending D) net interest paid on government debt held by the public Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 7) Spending on programs that ________, such as Social Security and Medicare, is classified as entitlement and mandatory spending. A) is authorized by Congress on an annual basis B) has been authorized by prior law C) is authorized only in times of budget surpluses D) is authorized only in times of budget deficits Answer: B Diff: 1 Topic: Federal Spending Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) Does the term "mandatory spending" mean that spending must go on forever? A) Yes, once appropriated, spending is indefinite. B) No, once appropriated, spending is for the life of the program only or until it changes. C) Yes, the laws which authorized this spending cannot be changed. D) Yes, Congress has no right to change these spending programs. Answer: B Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
9) Who sets the rules for entitlements when spending is authorized under this category? A) the President B) the agency involved C) the Congress when it appropriates the spending D) each individual state Answer: C Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 10) What is the largest component of the federal budget? A) discretionary spending B) entitlements and mandatory spending C) net interest D) defense spending Answer: B Diff: 1 Topic: Federal Spending Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 11) Entitlements and net interest are the ________ the U.S. federal budget. A) only two declining components of B) two fastest-growing components of C) two slowest-growing components of D) only two components with negative values in Answer: B Diff: 1 Topic: Federal Spending Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
12) A White House proposal to increase infrastructure spending on roads, rail lines and runways is an example of A) expansionary fiscal policy. B) contractionary fiscal policy. C) automatic stabilization. D) insourcing policies. Answer: A Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as Social Security, Medicare and Medicaid, and examines several possible solutions to the potential problem. 13) According to this Application, current spending on federal retirement and health programs accounts for 10 percent of GDP. Experts estimate that this spending component's share of GDP ________ by the year 2075. A) is likely to shrink B) will more than double C) will remain constant D) will grow moderately initially then taper off Answer: B Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 14) According to this Application, in the year 2075, the portion of GDP devoted to spending on Social Security, Medicare and Medicaid is expected to be A) significantly less than the share of GDP devoted to these programs today. B) roughly equal to the total amount of GDP today. C) larger than total federal spending's share of GDP today. D) greater than the consumption spending component's share of GDP in 2075. Answer: C Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15) According to this Application, how will an increase in government spending on
entitlement programs affect the macroeconomy? A) It will increase aggregate demand. B) It will decrease aggregate demand. C) It will increase aggregate supply. D) It will decrease aggregate supply. Answer: A Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 16) According to this Application, one solution proposed to deal with the rising expenses of government entitlement programs is to raise taxes. An increase in taxes to help cover the rising expenses of entitlement programs would A) increase aggregate demand, shifting the AD curve to the right. B) increase aggregate demand, shifting the AD curve to the left. C) decrease aggregate demand, shifting the AD curve to the right. D) decrease aggregate demand, shifting the AD curve to the left. Answer: D Diff: 1 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17) According to this Application, one strategy proposed to deal with the rising expenses of government entitlement programs is for the government to save and invest now so as to reduce the burden on future generations. This strategy would A) increase GDP, and entitlement programs would increase along with GDP. B) increase GDP and entitlement programs would decrease. C) increase GDP and eliminate entitlement programs. D) not change GDP, but shrink entitlement programs. Answer: A Diff: 2 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
18) According to this Application, which of the following is NOT a strategy that the government can pursue to address the rising cost of federal retirement and health care programs? A) reform the health care system to encourage more competition to reduce health care expenditures B) increase the age at which retirement benefits begin to be paid C) borrow from the public to finance the programs D) promote government saving and investment to increase real GDP over time Answer: C Diff: 2 Topic: Application 1, Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 19) A White House proposal to lower business taxes by increasing tax deductions is an example of A) expansionary fiscal policy. B) contractionary fiscal policy. C) automatic stabilization. D) progressive taxation. Answer: A Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 20) Which of the following sources of revenue is used to fund government spending? A) interest B) taxation C) corporate contributions D) political party contributions Answer: B Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
21) Individual income tax is the ________ single component of federal revenue. A) largest B) second largest C) smallest D) least important Answer: A Diff: 1 Topic: Federal Revenues Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 22) The share of corporate tax in total federal revenues A) is larger than the other components of federal revenue. B) is the smallest of all the components of federal tax revenue. C) has declined over the past few decades to a relatively low level. D) has grown significantly in each of the past 10 years. Answer: C Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 23) Special taxes levied on earnings for Social Security and Medicare are called A) a withholding tax on wages. B) a social insurance tax. C) an unfair tax on low-income families. D) an exception tax for corporations. Answer: B Diff: 1 Topic: Federal Revenues Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) Proponents of the estate and gift tax argue that the tax is necessary because A) it generates a large portion of total federal revenue. B) it prevents "unfair" accumulation of wealth across generations. C) it is only applied to items that have not previously been taxed. D) it is the primary source of funding for Medicare and Medicaid. Answer: B Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 25) One school of thought that emphasizes the role that taxes play in an economy's
supply of output is known as A) demand-pull economics. B) classical economics. C) tax-and-spend economics. D) supply-side economics. Answer: D Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 26) According to supply-side economics, a(n) ________ in the tax rate tends to increase the labor supply and ________ aggregate output. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase Answer: A Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) The relationship between tax rates and tax revenues is shown on the A) IRS curve. B) Laffer curve. C) production possibilities frontier. D) Discretionary Spending curve. Answer: B Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
28) The Laffer curve illustrates that A) high tax rates could lead to lower tax revenues if economic activity is severely discouraged. B) lowering tax rates will always increase tax revenues. C) high tax rates would increase tax revenue and increase the labor supply as people work harder to maintain their standard of living. D) lowering tax rates will always decrease tax revenues. Answer: A Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 29) The curve that illustrates that higher tax rates could lead to lower tax revenues if economic activity is severely discouraged is called A) the Laffer Curve B) the Phillips Curve C) the aggregate demand curve D) the production possibility curve. Answer: A Diff: 1 Topic: Federal Revenues Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 30) An increased federal budget deficit resulting from a recession can actually help stabilize an economy through transfer payments because an increased budget deficit will ________ transfer payments and thereby ________ the income of some households. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
31) An increased federal budget deficit resulting from a recession can actually help stabilize an economy, because corporate profits tend to fall in a recession which, in turn, results in ________ corporate taxes and ________. A) higher; more tax revenue for the government B) higher; larger profits for businesses C) lower; fewer spending cuts for businesses D) lower; increases in the price level Answer: C Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) A federal budget ________ occurs when the federal government spends more than it collects in taxes. A) surplus B) deficit C) equilibrium D) ceiling Answer: B Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 33) A federal budget ________ occurs when the government spends less than it collects in taxes. A) surplus B) deficit C) equilibrium D) floor Answer: A Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
34) Suppose the government runs a budget surplus in a given year. It can reduce its overall federal debt by A) not buying anything on credit. B) buying back bonds it sold to the public. C) forcing a change in net exports. D) increasing taxes on luxury items. Answer: B Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Recall the Application the Joint Committee on Taxation and how Congress accounts for the dynamic effects of its policies to answer the following questions. 35) Recall the Application. The Joint Committee of Taxation (JCT) only started to consider the macroeconomic effects of tax cuts starting A) 2015. B) 2014. C) 2016. D) 2013. Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 36) According to the Application, the Trump Tax cuts would have increased the deficit by ________ billion, without taking into account the dynamic effects. A) $1456 B) $1591 C) $286 D) $641 Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
37) According to the Application, the Trump Tax cuts would have increased the deficit by ________ billion after taking into account the dynamic effects. A) $451 B) $159 C) $1456 D) $641 Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 38) The results highlighted in this Application shows that President Trump's tax cuts resulted in A) a decrease in tax revenue. B) an increase in tax revenue. C) no change in tax revenue. D) an increase in tax revenues early on, before tax revenues decreased in the long run. Answer: A Diff: 1 Topic: Application 2, Dynamic Scoring Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 39) When the economy slows down and national income falls, the government will have ________ tax revenue to fund programs. A) more B) less C) about the same D) a rapid increase in Answer: B Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
40) The government strives to operate at neither a deficit nor surplus budget in order to keep the federal budget A) balanced. B) equal to inflation. C) in line with the stock market. D) equal to that of other countries. Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 41) During a recession, tax revenues ________ while government transfer payments ________, thereby mitigating part of the adverse effects of a recession and stabilizing the economy. A) fall; increase B) fall; decrease C) rise; increase D) rise; decrease Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 42) Suppose initially the federal budget is balanced. The economy then enters a period of expansion. What is likely to happen to the federal budget? A) It will show a surplus. B) It will show a deficit. C) It will remain balanced. D) It will automatically stabilize. Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
43) Automatic stabilizers A) require explicit actions by policy makers to become active. B) work without the need for decisions from Congress or the White House. C) magnify fluctuations in the economy. D) increase taxes during recessions. Answer: B Diff: 1 Topic: Automatic Stabilizers Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 44) Automatic stabilizers A) minimize fluctuations in the economy. B) must be authorized by the President. C) decrease taxes during expansions. D) increase welfare payments during expansions. Answer: A Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 45) Which of the following is an example of an automatic stabilizer? A) Congress authorizes spending increases during a recession. B) Congress increases the tax rate during an expansion. C) More unemployment benefits are paid during a recession. D) Welfare payments decrease during a recession. Answer: C Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
46) Suppose an economy has a balanced federal budget, and a large increase in oil prices plunges the economy into a recession. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________. A) fall; increase; deficit B) increase; increase; surplus C) fall; fall; deficit D) increase; fall; surplus Answer: A Diff: 2 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 47) Suppose an economy has a balanced federal budget, and a favorable supply shock hits the economy. Tax revenues will ________ and expenditures on transfer payments will ________, resulting in a budget ________. A) fall; increase; deficit B) increase; increase; surplus C) fall; fall; deficit D) increase; fall; surplus Answer: D Diff: 2 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 48) When the economy is producing its potential output, an increase in government spending must necessarily reduce some component of private spending. This phenomenon is called A) fiscal policy. B) crowding out. C) the multiplier effect. D) entitlement spending. Answer: B Diff: 1 Topic: Are Deficits Bad? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
49) Suppose the economy is operating below potential output. If policy makers try to avoid a budget deficit by raising taxes or reducing government spending, these actions would A) increase inflation. B) help pull an economy out of a depression. C) make a recession worse. D) negate the multiplier effect. Answer: C Diff: 1 Topic: Are Deficits Bad? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 50) Using expansionary policies to combat a recession would A) increase a budget deficit. B) increase a budget surplus. C) decrease discretionary spending. D) increase federal revenue. Answer: A Diff: 1 Topic: Are Deficits Bad? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 51) Transfer payments are excluded from GDP. Answer: TRUE Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 52) Discretionary funds are typically used by the Executive Branch and Congress for activist fiscal policies. Answer: TRUE Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
53) Net interest payments made by the government depend on the total federal debt held and on the level of interest rates. Answer: TRUE Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 54) Taxes are the only mechanism by which the federal government earns money. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 55) The federal income tax on wages is the largest source of revenue for the federal government. Answer: TRUE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 56) Income taxes are taxes paid on wages and investment income. Answer: TRUE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 57) A higher tax rate on income will always result in higher tax revenue for the government. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
58) Social insurance taxes are paid by corporations based on their profits. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 59) Social insurance taxes are paid on wages and investment income. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 60) Unlike social insurance taxes, income taxes are paid on wages only. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 61) Estate and gift taxes account for a very small portion of total tax revenues collected by the federal government because taxes are levied only on large estates. Answer: TRUE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 62) Corporate profits are taxed by state and local governments, but not by the federal government. Answer: FALSE Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
63) Because the government has so much money, and can print more, it does not need to borrow and therefore rarely pays net interest on debt. Answer: FALSE Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 64) When federal government spending exceeds tax revenues, the federal government runs a budget surplus. Answer: FALSE Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 65) When federal government spending amounts to less than tax revenues, the federal government runs a budget deficit. Answer: FALSE Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 66) Taxes and transfer payments automatically reduce fluctuations in real GDP and thereby stabilize the economy without any need for decisions from Congress or the White House. Answer: TRUE Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 67) Fiscal actions to eliminate a recession are likely to decrease the federal budget deficit. Answer: FALSE Diff: 1 Topic: Are Deficits Bad? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
68) What are the two components of federal spending? Answer: government purchases and transfer payments. Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 69) The federal budget has three components. Name them. Answer: discretionary spending, entitlements and mandatory spending, net interest Diff: 1 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 70) Describe the three broad categories of the U.S. budget. Answer: Discretionary spending constitutes spending on all the programs that Congress authorizes on an annual basis that are not automatically funded by prior laws. Discretionary spending includes defense spending and all nondefense domestic spending. Entitlement and mandatory spending constitutes all spending that Congress has authorized by prior law. Entitlement and mandatory spending includes Social Security, Medicare and Medicaid payments. Net interest is the interest that the government pays the public on public-held government debt. Net interest payments include the payments made on U.S. Treasury bonds, bills and U.S. savings bonds. Diff: 2 Topic: Federal Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 71) What is the federal government's largest source of revenue? Answer: individual income taxes Diff: 1 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
72) Explain how a change in tax rates influences aggregate demand and aggregate supply. Answer: A change in tax rates will influence consumer spending and business investment spending, both of which are components of aggregate demand. For example, if tax rates decrease, consumers and businesses will have more income to spend, and the spending increases will increase aggregate demand. If tax rates decrease, labor supply and output will tend to increase because businesses will pay less in taxes and therefore have more to spend on labor and capital, and these changes will increase aggregate supply. Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 73) Explain how an increased federal budget deficit resulting from a recession can actually help stabilize an economy. Answer: Help in stabilizing the economy can come through three different channels: transfer payments, household incomes, and corporate taxes. Transfer payments increase during a recession, and these transfer payments increase the income of their recipients. In doing so, they partly offset the fall in household income which results from recessions and slows the decline in consumer spending. Households whose incomes are falling due to a recession pay less in taxes, which partly offsets the income decline and slows the decline in consumer spending. The corporate tax depends on corporate profits, and since profits fall in a recession, corporate taxes also fall. Lower corporate taxes enable businesses to reduce the spending cuts they would otherwise face during a recession. Diff: 3 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 74) Describe the relationship illustrated by the Laffer curve. Answer: The Laffer curve illustrates the relationship between tax rates and tax revenues. The Laffer curve shows that high tax rates could lead to lower tax revenues if economic activity is severely discouraged, and lower tax rates could actually lead to higher tax revenues. Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
75) Why do most economists believe that the Laffer argument does NOT apply to broadbased taxes? Answer: Most economists believe that the supply of labor is not as sensitive to changes in tax rates as Laffer believed, so for broad-based taxes like income taxes and payroll taxes, cutting rates would simply reduce the revenues that the government collects. Diff: 2 Topic: Federal Revenues Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 76) Explain the differences between a federal budget deficit, a federal budget surplus, and a balanced federal budget. Answer: A federal budget deficit occurs when the federal government spends more than it receives in tax revenues in a given year. A federal budget surplus occurs when the federal government receives more in tax revenues than it spends in a given year. A balanced federal budget occurs when the federal government spends the same amount that it receives in tax revenues in a given year. Diff: 1 Topic: The Federal Deficit and Fiscal Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 77) Explain how automatic stabilizers work. Answer: Taxes and transfer payments are automatic stabilizers for the economy. When income is high, the government collects more taxes and pays out less transfer payments, thus reducing consumer spending, which in turn reduces output. When output is low, such as during a recession, the government collects less in taxes and pays out more in transfer payments, increasing consumer spending and therefore increasing output. Note that this occurs without any decisions from Congress or the White House. Diff: 1 Topic: Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
10.3 Fiscal Policy in U.S. History 1) In the United States during the 1930s, politicians A) relied on government spending and taxation to pull the economy out of the depression. B) did not believe in using government spending and taxation because they feared the consequences of budget deficits. C) knew that the depression would eventually subside because of automatic stabilizers. D) deliberately relied on government spending and taxation even though they knew the depression would continue. Answer: B Diff: 1 Topic: The Depression Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) In the United States during the 1930s A) government spending and taxes both increased, resulting in zero net fiscal expansion. B) government spending and taxes both decreased, resulting in a net fiscal contraction. C) government spending increased and taxes decreased, resulting in a fiscal expansion. D) government spending decreased and taxes increased, resulting in a fiscal contraction. Answer: A Diff: 1 Topic: The Depression Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 3) In the United States, the use of fiscal policy tools to stabilize the economy gained prominence during A) the depression era. B) the Kennedy administration. C) the Reagan administration. D) the Clinton administration. Answer: B Diff: 1 Topic: The Kennedy Administration Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
4) During the Kennedy administration, what did economist Walter Heller propose to bring the economy back to full employment? A) a large government works program B) insourcing C) tax cuts D) tariffs on imported goods Answer: C Diff: 1 Topic: The Kennedy Administration Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) An estimate of a household's long-run average income is called A) "permanent income." B) "disposable income." C) "per capita income." D) "transitory income." Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 6) The 10% tax surcharge in 1968 did not have much effect on people's consumption because A) people knew the tax was temporary. B) people thought the tax was small. C) people knew the tax was permanent D) people thought the tax was for a good cause. Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
7) The 10% tax surcharge in 1968 was only for 1 year, and people deemed the tax was temporary. As a result, the tax A) did not have much effect on people's consumption. B) resulted in a large drop in people's consumption. C) resulted in a large increase in people's consumption. D) caused people's consumption to become zero. Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) In the United States during the Vietnam War era, as military spending increased A) unemployment dropped to very low levels. B) both frictional and cyclical unemployment increased. C) frictional unemployment dropped, but cyclical unemployment increased. D) overall unemployment rates did not change. Answer: A Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 9) Huge increases in government spending and record low levels of unemployment during the Vietnam War era in the late 1960s led policy makers to fear that A) the economy was growing too fast, which would increase unemployment. B) the economy was growing too fast, which would increase inflation. C) the economy was slipping into a recession, which would increase unemployment. D) the economy was slipping into a recession, which would increase inflation. Answer: B Diff: 2 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
10) In the United States, the temporary tax surcharge of 1968 A) had no impact on consumer spending. B) decreased consumer spending by less than was originally estimated. C) decreased consumer spending by more than was originally estimated. D) actually increased consumer spending. Answer: B Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 11) Fearing that the economy was overheating, policymakers instituted a temporary tax surcharge in 1968. This temporary surtax A) successfully reduced consumption sufficiently to cool down the economy. B) reduced savings but had little effect on consumption. C) drastically reduced both savings and consumption. D) increased savings and reduced consumption. Answer: B Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 12) The supply-side motivated tax cuts of 1981 during the Reagan administration were aimed at A) increasing aggregate demand. B) increasing aggregate supply. C) decreasing aggregate supply. D) balancing the federal budget. Answer: B Diff: 1 Topic: The Reagan Administration Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
13) Taxes can have an important effect on A) the labor supply. B) saving. C) economic growth. D) all of the above Answer: D Diff: 1 Topic: The Reagan Administration Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 14) The Clinton administration inherited a budget deficit from its predecessor. President Clinton instituted major tax increases that A) increased the budget deficit during his entire term. B) brought the budget into balance and eventually into a surplus. C) reduced the budget deficit but increased the federal debt. D) reduced the size of the deficit but could not eliminate it. Answer: B Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15) President George W. Bush used part of the budget surplus inherited from the Clinton administration to A) fund tax cuts. B) stimulate the economy that was slowing down following the end of the high-tech investment boom. C) increase government entitlement spending. D) both A and B. Answer: D Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
16) In 2003, the Bush administration revised the tax bill to include provisions to A) delay tax increases from the 2001 bill. B) decrease the child tax credit. C) lower taxes on dividends. D) increase taxes on capital gains. Answer: C Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17) The prospect of future deficits A) encourages government to conduct expansionary fiscal policy. B) would prompt government to vastly expand discretionary spending. C) requires a government to eliminate all entitlement spending. D) limits the ability of government to conduct fiscal policy in the near future. Answer: D Diff: 2 Topic: The Clinton and George W. Bush Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 18) The federal deficit ________ in 2006 and 2007, and ________ in 2008. A) increased; decreased B) increased, increased further C) decreased; increased D) decreased; decreased further Answer: C Diff: 2 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
19) The largest fiscal stimulus package enacted in U.S. history was done during whose administration? A) President Barack Obama B) President Bill Clinton C) President George W. Bush D) President Donald Trump Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 20) In 2017, President Trump signed a major tax cut into law when the economy was A) near full employment. B) experiencing hyperinflation. C) was in a recession. D) experiencing zero unemployment. Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 21) In 2017, President Trump's major tax cut included a cut in the corporate tax rate from A) 35 to 22 percent. B) 29 to 24 percent. C) 48 to 23 percent. D) 50 percent to zero. Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
22) Because President Trump's tax cut in 2017 occurred when the economy was near full employment, economists were worried that the tax cut would potentially cause A) higher inflation. B) lower unemployment. C) higher unemployment. D) lower inflation. Answer: A Diff: 2 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Recall the Application about the success of the 2009 stimulus package to answer the following question(s). 23) According to the Application, economist John B. Taylor found that the temporary tax cuts which were a part of the 2009 stimulus package A) were very successful in stimulating consumption spending. B) did very little to stimulate consumption spending. C) were split very evenly between consumption spending and household saving. D) were primarily used to pay off home mortgage balances. Answer: B Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) According to the Application, economist John B. Taylor found that the aid to state and local governments which were a part of the 2009 stimulus package were used primarily to A) increase spending on goods and services. B) increase spending on transfer programs, but spending on goods and services declined. C) increase spending on transfer programs, goods, and services. D) increase spending on infrastructure, but spending on transfer programs declined. Answer: B Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
25) The Obama stimulus package was implemented to assist the economy in its recovery from recession. This package was designed to shift A) aggregate demand to the right. B) aggregate demand to the left. C) aggregate supply to the left. D) aggregate demand and aggregate supply to the left. Answer: A Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 26) The Obama stimulus package included fiscal policy actions designed to assist the economy in its recovery from recession. These fiscal policy actions would include ________ government spending and ________ taxes. A) increasing; decreasing B) decreasing; increasing C) increasing; Increasing D) decreasing; decreasing Answer: A Diff: 1 Topic: Application 3, How Effective was the 2009 Stimulus? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) At the beginning of the Vietnam War, increased military spending in the United States decreased unemployment. Answer: TRUE Diff: 1 Topic: The Vietnam War Era Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 28) An estimate of a household's long-run average income is called permanent income. Answer: TRUE Diff: 1 Topic: The Vietnam War Era Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
29) Consumers often base their spending on their estimated permanent income. Answer: TRUE Diff: 1 Topic: The Vietnam War Era Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 30) Temporary tax cuts tend to stimulate consumer spending at the same rate as permanent tax cuts. Answer: FALSE Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 31) The tax cuts of 2008 were valued at approximately one percent of GDP. Answer: TRUE Diff: 1 Topic: The Clinton and George W. Bush Administrations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) Why were economists concerned about the timing of President Trump's major tax cut law that was enacted in December 2017? Answer: Economists were concerned because the major tax cut law was signed during the time when the U.S. economy was near full employment. Since the tax cut would shift the aggregate demand to the right at the time when the economy was already near its full employment level of output, the tax cut could potentially cause an increase in inflation in the economy. Diff: 1 Topic: The Obama and Trump Administrations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 11 The Income-Expenditure Model 11.1 A Simple Income-Expenditure Model 1) When prices do NOT change very much, the income-expenditure model can be used to understand economic fluctuation in the A) long run. B) short run. C) fiscal year. D) federal budget allocation.
Answer: B Diff: 1 Topic: The Income-Expenditure Model Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 2) John Maynard Keynes argued that the fundamental problem which led to the world depression was A) negative net exports on goods and services. B) a decreasing supply of goods and services. C) insufficient demand for goods and services. D) a shortage of goods and services. Answer: C Diff: 1 Topic: The Income-Expenditure Model Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 3) The income-expenditure model focuses on changes in A) output levels. B) price. C) import restrictions. D) operational lags. Answer: A Diff: 1 Topic: The Income-Expenditure Model Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
4) The total demand for goods and services at a given price level is also known as A) the consumption function. B) planned expenditures. C) equilibrium output. D) autonomous consumption. Answer: B Diff: 1 Topic: Equilibrium Output Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 5) The level of GDP at which planned expenditure equals the amount of output produced is the A) potential output. B) long-run output. C) autonomous output. D) equilibrium output. Answer: D Diff: 1 Topic: Equilibrium Output Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 6) In the income-expenditure model, the 45-degree line A) is the locus of all the points for which output equals expenditures. B) marks all equilibrium output levels. C) shows total expenditures at various price levels. D) is also called the planned expenditures line. Answer: A Diff: 1 Topic: Equilibrium Output Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
7) If an economy is producing a level of output which is higher than the equilibrium level, planned expenditures ________ total output and ________ goods and services are being produced than are being demanded. A) exceed; more B) exceed; fewer C) are less than; more D) are less than; fewer Answer: C Diff: 2 Topic: Adjusting to Equilibrium Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 8) If an economy is producing a level of output which is lower than the equilibrium level, planned expenditures ________ total output and ________ goods and services are being produced than are being demanded. A) exceed; more B) exceed; fewer C) are less than; more D) are less than; fewer Answer: B Diff: 2 Topic: Adjusting to Equilibrium Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 9) The income-expenditure model focuses on changes in price levels. Answer: FALSE Diff: 1 Topic: The Income-Expenditure Model Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 10) The income-expenditure model is best used for short-run analysis of economic fluctuations. Answer: TRUE Diff: 1 Topic: The Income-Expenditure Model Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
11) Unlike Classical economists, Keynes believed that the economy could be trapped in a depression and not return to full employment without government intervention. Answer: TRUE Diff: 1 Topic: The Income-Expenditure Model Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) The income-expenditure model assumes that the aggregate supply curve is horizontal at a given price level. Answer: TRUE Diff: 1 Topic: Equilibrium Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 13) In the income-expenditure model, firms stand ready to provide all the output that is demanded. Answer: TRUE Diff: 1 Topic: Equilibrium Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 14) If firms are producing an output greater than planned expenditures, these firms will cut back on production, which decreases GDP. Answer: TRUE Diff: 1 Topic: Adjusting to Equilibrium Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 15) When output exceeds planned expenditures, there is insufficient production in the economy. Answer: FALSE Diff: 1 Topic: Adjusting to Equilibrium Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
16) In the income-expenditure model, equilibrium output is the level of output at which the 45-degree line intersects the planned expenditures line. Explain why this output level is an equilibrium level. Illustrate your answer with a diagram of the income-expenditure model. Answer: Equilibrium refers to a position of rest or one in which there are no forces acting to cause a change. At the intersection of the spending line and the 45-degree line this is the case because spending is equal to y, which represents output and income. Therefore all income is being spent and all the output produced has been purchased. At any point other than this intersection this equality will not hold and there will be either insufficient production (based on excess demand) or excess production (based on insufficient demand) and a tendency for y to change.
Diff: 3 Topic: A Simple Income-Expenditure Model, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 17) Suppose planned expenditures exceed output. Explain how equilibrium is restored in this economy. Answer: When planned expenditures exceed output, firms find that the demand for consumption and investment goods is greater than their current production. Facing increasing backlogs of orders for their products, firms increase production to restore equilibrium in the economy. Diff: 1 Topic: Adjusting to Equilibrium Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
11.2 The Consumption Function 1) The consumption function describes the relationship between A) prices and demand. B) investment and interest rates. C) consumers and firms. D) consumer spending and income. Answer: D Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 2) The marginal propensity to consume (MPC) is the A) ratio of consumption to savings. B) fraction of additional income that is spent. C) ratio of consumption to income. D) fraction of additional consumption that is not based on the level of income. Answer: B Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 3) The marginal propensity to save (MPS) is the A) fraction of income that is saved. B) the ratio of additional savings to additional income. C) the ratio of savings to consumption. D) savings that is not based on the level of income. Answer: B Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
4) Autonomous consumption is A) the sum of consumption that depends on the level of income and consumption that does not depend on income. B) the part of consumption that depends on the level of income. C) the part of consumption that does not depend on income. D) the relationship between consumption spending and the level of income. Answer: C Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 5) Let "C = Ca + by" define the consumption function. The term "Ca" is known as A) autonomous consumption. B) induced consumption. C) the marginal propensity to consume. D) the marginal propensity to save. Answer: A Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 6) Let "C = Ca + by" define the consumption function. The term "b" is known as A) autonomous consumption. B) induced consumption. C) the marginal propensity to consume. D) the marginal propensity to save. Answer: C Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
7) Let "C = Ca + by" define the consumption function. The term "by" is A) autonomous consumption. B) current income. C) the marginal propensity to consume. D) consumption that depends on income. Answer: D Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 8) If the consumption function is C = 90 + 0.75y, then the marginal propensity to consume is A) 0.2.5. B) 0.75. C) 67.5. D) 90. Answer: B Diff: 1 Topic: Consumer Spending and Income Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 9) If the consumption function is C = 90 + 0.75y, then the level of autonomous consumption is A) 0.25. B) 0.75. C) 67.5. D) 90. Answer: D Diff: 1 Topic: Consumer Spending and Income Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 10) If the consumption function is C = 90 + 0.75y, then the marginal propensity to save is A) 0.25. B) 0.75. C) 67.5. D) 90. Answer: A Diff: 1 Topic: Consumer Spending and Income Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
11) If the consumption function is C = 25 + 0.9y and income increases by $100, then consumer spending will increase by A) $10. B) $25. C) $90. D) $115. Answer: C Diff: 1 Topic: Consumer Spending and Income Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) If the consumption function is C = 25 + 0.9y and income increases by $100, then savings will increase by A) $10. B) $25. C) $90. D) $115. Answer: A Diff: 2 Topic: Consumer Spending and Income Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 13) If the consumption function is C = 25 + 0.9y and income increases by $100, then autonomous consumption spending will be A) $10. B) $25. C) $90. D) $115. Answer: B Diff: 1 Topic: Consumer Spending and Income Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
14) The marginal propensity to consume is always A) less than one. B) greater than one. C) equal to one. D) equal to zero. Answer: A Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 15) The slope of the consumption function is equal to A) autonomous consumption. B) the marginal propensity to consume. C) the marginal propensity to save. D) zero. Answer: B Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 16) The marginal propensity to save (MPS) is equal to A) 1 - MPC. B) MPC - 1. C) MPC + 1. D) 1 + MPC. Answer: A Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 17) The marginal propensity to consume (MPC) is equal to A) MPS + 1. B) MPS - 1. C) 1 - MPS. D) 1 + MPS. Answer: C Diff: 1 Topic: Consumer Spending and Income Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 18) The sum of the marginal propensity to consume (MPC) and the marginal propensity
to save (MPS) is A) equal to one. B) greater than one. C) less than one. D) negative. Answer: A Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 19) An increase in consumer spending based on an increase in income is reflected by A) an upward rotation of the consumption function. B) an increase in the MPC. C) a downward shift in the consumption function. D) a movement up along the consumption function. Answer: D Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 20) An increase in consumer confidence will A) not change autonomous consumption and rotate the consumption function upward. B) not change autonomous consumption and rotate the consumption function downward. C) increase autonomous consumption and shift the consumption function upward. D) decrease autonomous consumption and shift the consumption function downward. Answer: C Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
21) At a fixed income level, an increase in consumption which is accompanied by a decrease in savings is reflected by A) an upward rotation of the consumption function. B) a downward rotation of the consumption function. C) an upward shift of the consumption function. D) a movement up along the consumption function. Answer: C Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 22) A decrease in consumer wealth will A) not change autonomous consumption and rotate the consumption function upward. B) not change autonomous consumption and rotate the consumption function downward. C) increase autonomous consumption and shift the consumption function upward. D) decrease autonomous consumption and shift the consumption function downward. Answer: D Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 23) Which of the following shifts the entire consumption function upwards? A) an increase in income B) a decrease in the value of consumer durables C) a decrease in consumer confidence D) an increase in consumer wealth Answer: D Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
24) Which of the following increases the slope of the consumption function? A) an increase in the marginal propensity to consume B) a decrease in the value of consumer durables C) an increase in consumer confidence D) an increase in consumer wealth Answer: A Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 25) Which of the following causes the consumption function to rotate downwards? A) a decrease in consumer tax rates B) a decrease in autonomous consumption C) a decrease in the marginal propensity to save (MPS) D) a decrease in the marginal propensity to consume (MPC) Answer: D Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 26) Which of the following causes autonomous consumption to decrease? A) a decrease in consumer income B) consumers becoming more thrifty C) consumers becoming more optimistic about future decreases in the price level D) an increase in average family size Answer: B Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 27) A movement along the consumption function is the result of a change in A) autonomous consumption. B) income. C) consumer wealth. D) expected wealth. Answer: B Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
28) In Figure 11.1, an increase in the marginal propensity to consume is represented by a change in the consumption function from A) C1 to C3. B) C3 to C1. C) C2 to C1. D) C1 to C2. Answer: D Diff: 2 Topic: Changes in the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 29) In Figure 11.1, a decrease in the marginal propensity to consume is represented by a change in the consumption function from A) C1 to C3. B) C3 to C1. C) C2 to C1. D) C1 to C2. Answer: C Diff: 2 Topic: Changes in the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 30) In Figure 11.1, an increase in the marginal propensity to save is represented by a change in the consumption function from
A) C1 to C3. B) C3 to C1. C) C2 to C1. D) C1 to C2. Answer: C Diff: 2 Topic: Changes in the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 31) In Figure 11.1, a decrease in the marginal propensity to save is represented by a change in the consumption function from A) C1 to C3. B) C3 to C1. C) C2 to C1. D) C1 to C2. Answer: D Diff: 2 Topic: Changes in the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 32) In Figure 11.1, an increase in consumer wealth is represented by a change in the consumption function from A) C1 to C3. B) C3 to C1. C) C2 to C1. D) C1 to C2. Answer: A Diff: 2 Topic: Changes in the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
33) In Figure 11.1, a decrease in consumer wealth is represented by a change in the consumption function from A) to . B) C3 to C1. C) C2 to C1. D) C1 to C2. Answer: B Diff: 2 Topic: Changes in the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income Recall the Application about the Wealthy Hand-to-Mouth and their consumption spending to answer the question(s). 34) According to the Application, the wealthy hand-to-mouth are individuals who A) have high wealth and high marginal propensity to consume. B) have high wealth and low marginal propensity to consume. C) have low wealth and high marginal propensity to consume. D) have low wealth and low marginal propensity to consume. Answer: A Diff: 1 Topic: Application 1, The Wealthy Hand-to-Mouth and Consumption Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 35) According to the Application, the average age of the wealthy hand-to-mouth individuals tend to be A) 40. B) 20. C) 87. D) 60. Answer: A Diff: 1 Topic: Application 1, The Wealthy Hand-to-Mouth and Consumption Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
36) According to the Application, because of the wealthy hand-to-mouth individuals, the average mpc of the country is A) high. B) low. C) greater than 2. D) zero. Answer: A Diff: 1 Topic: Application 1, The Wealthy Hand-to-Mouth and Consumption Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 37) According to the Application, because of the wealthy hand-to-mouth individuals live day-to-day on what they earn because A) their assets are not easily accessed for cash. B) they are compulsive spenders. C) they try to emulate the spending habits of celebrities. D) their wealth is very liquid, and can be accessed for cash. Answer: A Diff: 1 Topic: Application 1, The Wealthy Hand-to-Mouth and Consumption Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 38) According to the Application, aside from the wealthy hand-to-mouth individuals, which group of individuals tend to have high mpcs. A) very young households. B) baby boomers. C) individuals in their 40s. D) retired individuals. Answer: A Diff: 1 Topic: Application 1, The Wealthy Hand-to-Mouth and Consumption Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 39) The consumption function shows the relationship between consumer spending and the price level. Answer: FALSE Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 40) Autonomous consumption is consumer spending which is based on income levels.
Answer: FALSE Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 41) The marginal propensity to consume (MPC) is the fraction of additional income that is spent. Answer: TRUE Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 42) Individuals with high incomes tend to have higher marginal propensities to consume than individuals with low incomes. Answer: FALSE Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 43) Young people tend to have higher marginal propensities to consume than older individuals. Answer: TRUE Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 44) The slope of the consumption function is equal to the level of autonomous consumption. Answer: FALSE Diff: 1 Topic: Consumer Spending and Income Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
45) Increases in consumer wealth will cause an increase in autonomous consumption. Answer: TRUE Diff: 1 Topic: Changes in the Consumption Function Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 46) What is the difference between income and wealth? Answer: Income is money earned during a specific period of time, whereas wealth represents total net worth. Diff: 1 Topic: Changes in the Consumption Function Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 47) How does the consumption function change as the mpc increases? Answer: When the mpc rises, the consumption function becomes steeper. This is because the consumption function is drawn with income on the x axis and consumption on the y axis. When the mpc changes, the amount of consumption increases for the same change in the income. The "rise" in the consumption will increase for the same amount of "run", so the line becomes steeper. Diff: 2 Topic: Changes in the Consumption Function Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
48) Suppose autonomous consumption increases. Explain how this event will lead to a rise in equilibrium output, and illustrate this using a graph of the income-expenditure model. Answer: An increase in autonomous consumption will shift up the vertical intercept of the consumption line (C0 to C1), which will lead to an increase in output as the equilibrium level of output is moved to the right (y0 to y1).
Diff: 2 Topic: Changes in the Consumption Function, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
11.3 Equilibrium Output and the Consumption Function
1) Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. Equilibrium income is A) 40. B) 50. C) 250. D) 400. Answer: C Diff: 2 Topic: Equilibrium Output and the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 2) Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. The slope of the consumption function is A) 0.1. B) 0.2. C) 0.8. D) 0.9. Answer: C Diff: 1 Topic: Equilibrium Output and the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
3) Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. The value of autonomous consumption is A) 10. B) 40. C) 50. D) 80. Answer: B Diff: 1 Topic: Equilibrium Output and the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 4) Refer to Figure 11.2. Suppose that Ca = 40, MPC = 0.8, I = 10. What is the value of consumption in equilibrium? A) 32 B) 80 C) 240 D) 320 Answer: C Diff: 2 Topic: Equilibrium Output and the Consumption Function, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 5) Let C = 40 + 0.8y and I = 10. The value of marginal propensity to consume is A) 40 B) 0.4 C) 0.8 D) 8 Answer: C Diff: 1 Topic: Equilibrium Output and the Consumption Function Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
6) In the simple Keynesian cross model with no government or foreign sectors, at the equilibrium level of output A) saving is equal to zero. B) saving is less than investment. C) saving is equal to investment. D) saving is greater than investment. Answer: C Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 7) At the equilibrium level of income, the value of consumption is equal to A) (consumption - savings). B) (income - investment). C) (income + investment). D) (savings + investment). Answer: B Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 8) Let C = 150 + 0.5y and I = 45. At the equilibrium level of income, y*, the level of saving is A) 45. B) 75. C) 105. D) 150. Answer: A Diff: 2 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
9) Let S = y - (100 + 0.5y). Assume no government or foreign sectors. At the equilibrium level of income, y* = 800, the level of saving is A) 0. B) 50. C) 100. D) 300. Answer: D Diff: 2 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 10) Let S = y - (100 + 0.75y). Assume no government or foreign sectors. At the equilibrium level of income, y* = 400, the level of investment is A) 0. B) 75. C) 300. D) 400. Answer: A Diff: 2 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 11) Let S = y - (150 + 0.6y). Assume no government or foreign sectors. What is the consumption function? A) C = -150 + 0.4y B) C = 150 + 0.4y C) C = 150 + 0.6y D) C = -150 - 0.6y Answer: C Diff: 2 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
12) Let C = 120 + 0.8y. Assume no government or foreign sectors. At the equilibrium level of income, y* = 200, the level of saving is A) -80. B) -30. C) 96. D) 160. Answer: A Diff: 2 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 13) In the savings function S = -725 + 0.25y, 0.25 is the A) MPC. B) MPS. C) slope of the consumption function. D) vertical intercept of the savings function. Answer: B Diff: 2 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 14) In the simple Keynesian cross model with no government or foreign sectors, the value of the multiplier is defined as A) 1/MPC. B) 1/(1 - MPC). C) 1/(MPC - 1). D) 1/(MPC + 1). Answer: B Diff: 1 Topic: Understanding the Multiplier Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
15) Let C = 70 + 0.75y and I = 40. Assume no government or foreign sectors. Investment needs to increase by ________ to increase equilibrium output by a total of $600. A) $30 B) $150 C) $560 D) $600 Answer: B Diff: 2 Topic: Understanding the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 16) Let C = 550 + 0.8y and I = 75. Assume no government or foreign sectors. If investment increases by 100, the equilibrium output increases by a total of A) 60. B) 175. C) 500. D) 800. Answer: C Diff: 2 Topic: Understanding the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 17) Let C = 300 + 0.75y and I = 200. Assume no government or foreign sectors. Investment needs to decrease by ________ to decrease equilibrium output by a total of $750. A) $75 B) $100 C) $150 D) $187.50 Answer: D Diff: 2 Topic: Understanding the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
18) Let C = 800 + 0.6y and I = 100. Assume no government or foreign sectors. If investment decreases by 40, the equilibrium output decreases by a total of A) 800. B) 480. C) 100. D) 25. Answer: C Diff: 2 Topic: Understanding the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 19) Let C = 800 + 0.6y and I = 100. Assume no government or foreign sectors. If investment decreases by 40, then the value of the multiplier is A) -2.5. B) -1.67. C) 1.67. D) 2.5. Answer: D Diff: 2 Topic: Understanding the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
Figure 11.3 20) In Figure 11.3, the change in investment spending is represented as the distance between points A) C0 and C1. B) y0 and y1. C) a0 and a1. D) a1 and y1. Answer: A Diff: 1 Topic: Understanding the Multiplier, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 21) In Figure 11.3, the multiplier effect resulting from a change in investment spending is represented as the distance between points A) C0 and C1. B) y0 and y1. C) a0 and a1. D) a1 and y1. Answer: B Diff: 1 Topic: Understanding the Multiplier, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
22) In Figure 11.3, if the MPS is 0.25 and the distance between points C0 and C1 is 200, then the distance between points y0 and y1 must be A) 50. B) 200. C) 400. D) 800. Answer: D Diff: 2 Topic: Understanding the Multiplier, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 23) As the marginal propensity to consume ________, the value of the multiplier increases. A) is constant B) decreases C) increases D) decreases slightly Answer: C Diff: 1 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 24) The value of the multiplier ________ as the marginal propensity to save decreases. A) is constant B) decreases C) increases D) becomes negative Answer: C Diff: 1 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
25) All else equal, if autonomous consumption ________, the value of the multiplier remains constant. A) decreases B) increases C) remains constant D) all of the above Answer: D Diff: 1 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 26) If a policymaker wants to stimulate the economy, a ________ would be preferable to a ________. A) low MPC; high MPC B) high MPC; low MPC C) high MPS; low MPS D) lower-valued multiplier; higher valued multiplier Answer: B Diff: 1 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 27) Let C = 80 + 0.6y and I = 40. The value of the MPS is A) 0.24. B) 0.4. C) 0.48. D) 0.6. Answer: B Diff: 2 Topic: Understanding the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
28) Let C = 300 + 0.9y and I = 125. The value of the multiplier is A) 0.9. B) 9. C) 10. D) 27. Answer: C Diff: 2 Topic: Understanding the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures Recall the Application about the difficulty in estimating the size of multipliers during recessions to answer the following question(s). 29) According to this Application, a common belief is that fiscal multipliers are ________ during ________. A) smaller; recessions B) larger; recessions C) large; growth periods D) of equal size; recessions and growth periods Answer: B Diff: 1 Topic: Application 2, Multipliers in Good Times and Bad Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 30) According to this Application, economists have found that the fiscal multiplier is ________ during slack times. A) always larger B) always smaller C) sometimes larger D) none of the above Answer: C Diff: 1 Topic: Application 2, Multipliers in Good Times and Bad Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
31) According to this Application, researchers found that there is no difference in the fiscal multipliers during recessions as opposed to booms in which country? A) the USA B) China C) Japan D) Canada Answer: A Diff: 1 Topic: Application 2, Multipliers in Good Times and Bad Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 32) According to this Application, researchers found that the fiscal multipliers, during recessions were larger than in other periods in A) OECD countries, on average. B) in developing economies, on average. C) Asian countries, on average. D) in Middle Eastern countries, on average. Answer: A Diff: 1 Topic: Application 2, Multipliers in Good Times and Bad Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 33) According to this Application, three economists that studied data from the countries in the OECD found the value of the multiplier to be A) 1.3. B) 2.3. C) 3.3. D) 4.3. Answer: B Diff: 1 Topic: Application 2, Multipliers in Good Times and Bad Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 34) The relationship between the level of saving and the level of consumption is called the savings function. Answer: FALSE Diff: 1 Topic: Saving and Investment Skill: Definition AACSB: Reflective Thinking
Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 35) In the simple economy where y = C + I, equilibrium output is determined at the level of income where saving equals investment. Answer: TRUE Diff: 1 Topic: Saving and Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 36) In all economies, investment spending fluctuates. Answer: TRUE Diff: 1 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 37) Increases in investment exceed increases in output because of the multiplier effect. Answer: FALSE Diff: 1 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 38) The multiplier increases as the MPC increases. Answer: TRUE Diff: 1 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 39) Suppose that C = Ca + 0.6y and a shock decreases Ca by $50 billion. Assuming there is no government involvement, by how much will equilibrium GDP decrease? Answer: In this case the multiplier is 1/(1 - 0.6) = 2.5. So output will fall by $125 billion. Diff: 2 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
40) How does an increase in the marginal propensity to consume affect the consumption function? What happens to equilibrium output? Illustrate your answer with a graph of the income-expenditure model. Answer: A higher MPC will increase the slope of the consumption function, rotating the consumption function upwards (C0 to C1 on the graph below). Equilibrium output will increase (y0 to y1 on the graph below).
Diff: 2 Topic: Understanding the Multiplier, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 41) Explain why, in a simple economy which does not include the government or taxation, saving equals investment at the equilibrium level of output. Answer: In this simple economy, the value of output (y) equals the value of income. Households can either consume or save income, so saving equals output minus consumption (S = y - C). In this economy, output equals consumption plus investment (y = C + I). Since y = C + I and S = y - C (or, rewritten, y = C + S), this means C + I = C + S, or saving equals investment (S = I). Diff: 2 Topic: Saving and Investment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
42) Explain the logic of the multiplier effect. Answer: The idea of the multiplier effect is that a change in autonomous spending leads to a greater change in equilibrium income. For example, suppose there is a $10 million initial increase in investment spending. This additional demand will initially increase output, income, and aggregate demand by $10 million. If we assume the MPC = 0.8, the $10 million in additional income will lead to $8 million in increased consumer spending ($10 million × the MPC of 0.8). With this $8 million increase in consumer demand, output, income, and aggregate demand will increase by another $8 million. This will increase consumer spending by an additional $6.4 million ($8 million × 0.8). This increased demand will increase output, income, and aggregate demand by $6.4 million, generating further increases in consumer spending of $5.12 million. As this process continues over time, total spending will continue to increase, but in diminishing amounts. If all the spending from the (infinite) rounds is added up, the initial $10 million increase in investment spending will generate a total increase in equilibrium income of $50 million. In this case, the multiplier is 5 ($10 million × 5 = $50 million). (The value of the multiplier is calculated as 1/(1-MPC), which in this case is 1/(1-0.8) = 5.) Therefore, any change in autonomous spending has its effects "multiplied" throughout the economy. Diff: 2 Topic: Understanding the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 11.4 Government Spending and Taxation 1) The formula for the tax multiplier is A) 1 / (1 - MPC). B) -MPC / (1 - MPC). C) -MPC / (MPC + 1). D) MPC/ (1 + MPC). Answer: B Diff: 1 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
2) The tax multiplier is negative because A) increases in taxes decrease disposable personal income and lead to a reduction in consumption spending. B) increases in consumption spending have a negative impact on tax revenues. C) tax rates are inversely related to tax revenues. D) taxes always have a negative impact on the economy. Answer: A Diff: 1 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 3) The multiplier that arises from equal increases in government spending and taxes is called the A) simple multiplier. B) tax multiplier. C) balanced budget multiplier. D) government spending multiplier. Answer: C Diff: 1 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 4) The balanced-budget multiplier is equal to the A) government spending multiplier plus the tax multiplier. B) the autonomous spending multiplier. C) simple multiplier minus the tax multiplier. D) government spending multiplier plus the simple multiplier. Answer: A Diff: 1 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
5) If government increases spending and wants to maintain a balanced budget, it should A) decrease taxes by an equal amount. B) increase taxes by an equal amount. C) decrease taxes by an amount equal to the increase in spending multiplied by the tax multiplier. D) increase taxes by an amount equal to the increase in spending multiplied by the tax multiplier. Answer: B Diff: 1 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 6) If the marginal propensity to consume is 0.75, then the value of the tax multiplier is A) -2.5. B) -3. C) 1.25. D) 1.4. Answer: B Diff: 1 Topic: Fiscal Multipliers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 7) If the marginal propensity to save is 0.20, then the value of the tax multiplier is A) -5. B) -4. C) 5. D) 1.2. Answer: B Diff: 1 Topic: Fiscal Multipliers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
8) The multiplier for government spending is the same as the A) tax multiplier. B) multiplier for autonomous consumption. C) marginal propensity to import. D) marginal propensity to save. Answer: B Diff: 1 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 9) If the MPC = 0.75, the government spending multiplier would be A) 0.25. B) -7.5. C) 4. D) 25. Answer: C Diff: 1 Topic: Fiscal Multipliers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 10) Assume that GDP = $10,000 and the MPC = 0.75. If policy makers want to increase GDP by 30 percent, by how much should they increase government spending? A) $300 B) $750 C) $1,000 D) $3,000 Answer: B Diff: 2 Topic: Using Fiscal Multipliers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
11) Assume that GDP = $10,000 and the MPC = 0.75. If policy makers want to increase GDP by 30 percent, by how much should they decrease taxes? A) $300 B) $750 C) $1,000 D) $3,000 Answer: C Diff: 2 Topic: Using Fiscal Multipliers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 12) Assume that GDP = $10,000 and the MPC = 0.75. If policy makers want to increase GDP by 30 percent, and they want to change taxes and government spending by equal amounts, how much would government spending and taxes each need to increase? A) $300 B) $750 C) $1,000 D) $3,000 Answer: D Diff: 3 Topic: Using Fiscal Multipliers Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures Recall the Application about Austrian economist Henry Hazlitt and the Broken Window Fallacy to answer the following question(s). Hazlitt questioned whether a hoodlum breaking a store window was actually good for society. 13) According to the Application, Hazlitt's argument that the broken window is NOT good for society A) works in the Keynesian world when the economy is operating below full employment. B) works in the classical world when the economy is operating at full employment. C) works in both the Keynesian and classical worlds regardless of where the economy is operating relative to full employment. D) never works in the Keynesian or classical worlds regardless of where the economy is operating relative to full employment. Answer: B Diff: 1 Topic: Application 3, The Broken Window Fallacy and Keynesian Economics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
14) According to the Application, the argument that the broken window is good for society A) works in the Keynesian world when the economy is operating below full employment. B) works in the classical world when the economy is operating at full employment. C) works in both the Keynesian and classical worlds regardless of where the economy is operating relative to full employment. D) never works in the Keynesian or classical worlds regardless of where the economy is operating relative to full employment. Answer: A Diff: 1 Topic: Application 3, The Broken Window Fallacy and Keynesian Economics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 15) According to this Application, the argument that the broken window is good for society only works A) if the economy is operating below full employment where resources are underemployed. B) if the economy is operating at full employment where resources are fully employed. C) if the economy is operating above full employment where too few resources ae available. D) in theory, but never in reality. Answer: A Diff: 1 Topic: Application 3, The Broken Window Fallacy and Keynesian Economics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 16) According to this Application, the reason why the broken window may not be good for society when the economy is fully employed is because A) the money spent on fixing the window could have been spent somewhere else. B) the money spent on the window goes to a rich person. C) more money would be spent in the society installing alarm systems. D) no new money was printed. Everything was spent using the same amount of money in the economy. Answer: A Diff: 1 Topic: Application 3, The Broken Window Fallacy and Keynesian Economics Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
17) An increase in the income tax rate ________ the value of the tax multiplier. A) has no effect on B) may increase or decrease C) increases D) decreases Answer: D Diff: 1 Topic: Understanding Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 18) Raising the personal income tax rate rotates the consumption function ________ and ________ the tax-adjusted MPC. A) upward; lowers B) downward; lowers C) downward; raises D) upward; raises Answer: B Diff: 2 Topic: Understanding Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
19) Refer to Figure 11.4. Which diagram illustrates the effect of an increase in the income tax rate? A) A B) B C) C D) D Answer: B Diff: 1 Topic: Understanding Automatic Stabilizers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
20) Refer to Figure 11.4. Which diagram illustrates the effect of a decrease in the income tax rate? A) A B) B C) C D) D Answer: A Diff: 1 Topic: Understanding Automatic Stabilizers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 21) Refer to Figure 11.4. Which diagram illustrates the effect of an increase in government spending? A) A B) B C) C D) D Answer: D Diff: 1 Topic: Understanding Automatic Stabilizers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 22) Refer to Figure 11.4. Which diagram illustrates the effect of a decrease in government spending? A) A B) B C) C D) D Answer: C Diff: 1 Topic: Understanding Automatic Stabilizers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
23) Refer to Figure 11.4. Which diagram illustrates the effect of an increase in the marginal propensity to consume? A) A B) B C) C D) D Answer: A Diff: 1 Topic: Understanding Automatic Stabilizers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 24) Refer to Figure 11.4. Which diagram illustrates the effect of a decrease in the marginal propensity to consume? A) A B) B C) C D) D Answer: B Diff: 1 Topic: Understanding Automatic Stabilizers, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 25) Keynes advocated the use of taxation and government spending to influence the level of GDP in the short run. Answer: TRUE Diff: 1 Topic: Government Spending and Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 26) The tax multiplier is negative because increases in taxes lead to decreases in consumer spending. Answer: TRUE Diff: 1 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
27) An increase in taxes will increase total planned expenditures for goods and services. Answer: FALSE Diff: 1 Topic: Using Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 28) Consumers will spend a higher proportion of a one-time bonus than they would of a permanent salary increase. Answer: FALSE Diff: 1 Topic: Understanding Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 29) Raising the tax rate lowers the tax-adjusted MPC. Answer: TRUE Diff: 1 Topic: Understanding Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 30) Higher tax rates lower the value of the spending multiplier and make the economy more susceptible to shocks. Answer: FALSE Diff: 1 Topic: Understanding Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 31) Name two policies that a Keynesian economist would advocate to influence the level of GDP in the short run. Answer: changes in taxes and spending Diff: 1 Topic: Government Spending and Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
32) Why is the tax multiplier smaller (in absolute value) than the autonomous spending multiplier? Answer: An increase in taxes first reduces household income by the amount of the tax. Because the MPC is always less than one, the decrease in consumer spending resulting from the increase in taxes is less than the actual increase in taxes. Diff: 2 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 33) What would happen to an economy if the government funded an increase in spending with an equivalent increase in taxes? Answer: Because the government spending multiplier is larger than the tax multiplier, if government spending and taxes increase by equal amounts at the same time, GDP will increase. The multiplier for equal changes in government spending and taxes is called the balanced-budget multiplier, because these equal changes will not unbalance the budget. The balanced budget multiplier is always equal to one, so if government spending and taxes are both increased by the same amount, the GDP will increase by the amount of the increase in government spending. Diff: 2 Topic: Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 34) If the economy has an MPC of 0.8, by how much will a $50 billion increase in government purchases increase GDP? By how much will a $50 billion increase in taxes decrease GDP? Answer: With an MPC of 0.8, the multiplier is 1/(1 - 0.8) = 5, so an increase in spending will increase GDP by $250 billion. The tax multiplier would equal -4, so the increase in taxes would reduce GDP by $200 billion. Diff: 2 Topic: Fiscal Multipliers Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 35) Suppose policy makers want to increase GDP by $450 billion. If the marginal propensity to consume is 0.9, by how much must government spending increase to achieve this target? Answer: The multiplier would be 10 in this case, so government spending must increase by $45 billion. Diff: 2 Topic: Using Fiscal Multipliers Skill: Conceptual
AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
36) Suppose policy makers want to increase GDP by $450 billion. If the marginal propensity to consume is 0.9, by how much must taxes decrease to achieve this target? Answer: The tax multiplier would be -9 in this case, so taxes must decrease by $50 billion. Diff: 2 Topic: Using Fiscal Multipliers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 37) How do automatic stabilizers work to mitigate fluctuations in the level of economic activity? Answer: When income is high, the government collects more taxes and pays out less in transfer payments. Since the increase in taxes takes funds out of the hands of consumers, consumer spending is reduced. When output is low, as it is in a recession, the government collects less taxes and pays out more in transfer payments, putting funds into the hands of consumers and thereby increasing consumer spending. By increasing consumer spending in bad times and decreasing it in good times, the automatic stabilizers buffer fluctuations in spending. Diff: 2 Topic: Understanding Automatic Stabilizers Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 11.5 Exports and Imports 1) An increase in the level of U.S. exports ________ the demand for goods and service produced in the United States. A) decreases B) increases C) increases or decreases D) does not affect Answer: B Diff: 1 Topic: Exports and Imports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
2) All else equal, a decrease in the level of imports allowed into the United States ________ the demand for goods and service produced in the United States. A) increases or decreases B) does not affect C) decreases D) increases Answer: D Diff: 1 Topic: Exports and Imports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 3) The fraction of additional income spent on imports is called the A) import function. B) marginal propensity to import. C) marginal propensity to export. D) trade balance. Answer: B Diff: 1 Topic: Exports and Imports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 4) What happens to U.S. GDP when foreign countries experience prosperity? A) It increases because the United States will export more product to those countries. B) It decreases because the foreign countries will now buy more of their own products. C) It decreases because the foreign countries will be able to export more at a lower cost. D) It does not change because U.S. GDP is not affected by other countries' prosperity. Answer: A Diff: 1 Topic: Exports and Imports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
5) Suppose the United States is in the midst of a recession. What will happen to the value of the mpi? A) It will increase. B) It will decrease. C) It will not change. D) It will fall to zero. Answer: B Diff: 1 Topic: Exports and Imports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 6) The marginal propensity to import (mpi), where M = imports, is defined as A) ΔM * ΔY. B) M * Y. C) M - Y. D) ΔM/ΔY. Answer: D Diff: 1 Topic: Exports and Imports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 7) Suppose the overall MPC is 0.75 and the marginal propensity to import is 0.25. A $4 billion increase in U.S. exports will lead to a ________ increase in GDP. A) $6 billion B) $8 billion C) $12 billion D) $16 billion Answer: B Diff: 1 Topic: Exports and Imports Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
8) Suppose the overall MPC is 0.9. If a $2 billion increase in imports to the United States will lead to a $10 billion decrease in GDP, the value of the marginal propensity to import must be A) 0.1. B) 0.2. C) 0.5. D) 0.8. Answer: A Diff: 1 Topic: Exports and Imports Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
9) Refer to Figure 11.5. An increase in exports is best illustrated by diagram A) A. B) B. C) C. D) D. Answer: C Diff: 1 Topic: Exports and Imports, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
10) Refer to Figure 11.5. A decrease in exports is best illustrated by diagram A) A. B) B. C) C. D) D. Answer: B Diff: 1 Topic: Exports and Imports, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 11) Refer to Figure 11.5. A decrease in the marginal propensity to import is best illustrated by diagram A) A. B) B. C) C. D) D. Answer: D Diff: 1 Topic: Exports and Imports, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 12) Refer to Figure 11.5. An increase in the marginal propensity to import is best illustrated by diagram A) A. B) B. C) C. D) D. Answer: A Diff: 2 Topic: Exports and Imports, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
13) Refer to Figure 11.5. An increase in the level of investment is best illustrated by diagram A) A. B) B. C) C. D) D. Answer: C Diff: 2 Topic: Exports and Imports, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 14) Refer to Figure 11.5. A decrease in the level of investment is best illustrated by diagram A) A. B) B. C) C. D) D. Answer: B Diff: 2 Topic: Exports and Imports, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures Recall the Application about "The Locomotive Effect: How Foreign Demand Affects a Country's Output," to answer the following question(s). 15) According to this Application, as the U.S. economy grew from the early 1990s, U.S. exports also increased as our demand for foreign products promoted growth in foreign countries. This increase in exports would tend to A) increase U.S. GDP and reduce unemployment in the short run. B) increase U.S. GDP and increase unemployment in the short run. C) decrease U.S. GDP and reduce unemployment in the short run. D) decrease U.S. GDP and increase unemployment in the short run. Answer: A Diff: 1 Topic: Application 4, The Locomotive Effect: How Foreign Demand Affects a Country's Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
16) According to this Application, from the early 1990s until quite recently, the U.S. economy grew. This growth in the U.S economy A) caused the level of U.S. exports to decline. B) decreased foreign investment in the U.S. C) increased the U.S. demand for foreign products. D) decreased imports to the United States. Answer: C Diff: 1 Topic: Application 4, The Locomotive Effect: How Foreign Demand Affects a Country's Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 17) According to this Application, growth in China and India caused U.S. exports to increase. Because of this increase in U.S. exports, U.S. income will A) increase by the same amount. B) increase by a larger amount. C) decrease by the same amount. D) decrease by a larger amount. Answer: B Diff: 1 Topic: Application 4, The Locomotive Effect: How Foreign Demand Affects a Country's Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 18) According to the Application, was the U.S. the locomotive that helped pull the recent world economic growth? A) No. Many foreign countries experienced robust growth and are the true locomotives. B) Yes. It was the U.S. economy that pulled the rest of the world out of a worldwide recession in 2017. C) Yes. It was the U.S. economy that pulled itself out of a worldwide recession in 2017. D) No. Only China is the true locomotive that is pulled and continues to pull all the other countries. Answer: A Diff: 1 Topic: Application 4, The Locomotive Effect: How Foreign Demand Affects a Country's Output Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
19) The fraction of additional income spent on imports is called the marginal propensity to import. Answer: TRUE Diff: 1 Topic: Exports and Imports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 20) A nation's exports are NOT impacted by the multiplier effect. Answer: FALSE Diff: 1 Topic: Exports and Imports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 21) Define the marginal propensity to import. Answer: The marginal propensity to import is the fraction of additional income that is spent on imported goods and services. Diff: 1 Topic: Exports and Imports Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 22) Why do our political leaders favor exports of U.S. goods and "buy American" policies? Answer: In the open economy model exports are an added component of total demand, thus an increase in exports will shift the planned expenditures line up and increase equilibrium income by a multiple amount. The multiplier in this case is the MPC adjusted for the propensity to import. Thus imports affect the multiplier; if U.S. residents become more attracted to foreign goods the marginal propensity to import will increase, causing the multiplier to fall and reducing the slope of the planned expenditures line. This will cause output to decrease. Hence political leaders favor increased exports (because it increases GDP and reduces unemployment) and reduced imports (because to the extent that U.S. residents buy U.S. goods rather than imports, output will be higher). Diff: 1 Topic: Exports and Imports Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
11.6 The Income-Expenditure Model and the Aggregate Demand Curve 1) In the income-expenditure model, for each price level there is a different equilibrium output level. If we plot one such equilibrium output and price combination, we obtain A) the aggregate demand curve. B) a point on the aggregate demand curve. C) the slope of the entire aggregate demand curve. D) the slope of the planned expenditures line. Answer: B Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 2) In the income-expenditure model, for each price level there is a different equilibrium output level. These various price level and equilibrium output combinations are used to derive A) the aggregate demand curve. B) a point on the aggregate demand curve. C) the aggregate supply curve. D) the slope of the planned expenditures line. Answer: A Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 3) As we move along a planned expenditures line A) price level rises. B) price level falls. C) price level is held constant. D) price level fluctuates depending on whether the economy is expanding or contracting. Answer: C Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
4) An upward shift of the planned expenditure line resulting from a decrease in the price level corresponds to A) aggregate demand shifting to the right. B) aggregate demand shifting to the left. C) a movement down along the aggregate demand curve. D) a movement up along the aggregate demand curve. Answer: C Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 5) A downward shift of the planned expenditure curve resulting from an increase in the price level corresponds to A) an increase in aggregate demand. B) a decrease in aggregate demand. C) a movement down along the aggregate demand curve. D) a movement up along the aggregate demand curve. Answer: D Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 6) A decrease in price level will A) shift the planned expenditures curve upward. B) shift the planned expenditures curve downward. C) cause a movement down along the planned expenditures curve. D) cause a movement up along the planned expenditures curve. Answer: A Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
7) In the income expenditures model, a decrease in the price level will result in A) an increase in C0 and I0. B) an increase in C0 and a decrease in I0. C) a decrease in C0 and a decrease in I0. D) a decrease in C0 and an increase in I0. Answer: A Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 8) In the income expenditure model, an increase in the price level will result in A) an increase in C0 and I0. B) an increase in C0 and a decrease in I0. C) a decrease in C0 and a decrease in I0. D) a decrease in C0 and an increase in I0. Answer: C Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 9) In the income expenditure model, an increase in planned investment by firms (holding the price level constant) will result in A) a downward shift in the aggregate expenditures line and a lower equilibrium output level. B) an upward shift in the aggregate expenditures line and a lower equilibrium output level. C) an upward shift in the aggregate expenditures line and a higher equilibrium output level. D) a downward shift in the aggregate expenditures line and a higher equilibrium output level. Answer: C Diff: 2 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
10) In the income expenditure model, a decrease in planned investment by firms (holding the price level constant) will result in A) a downward shift in the aggregate expenditures line and a lower equilibrium output level. B) an upward shift in the aggregate expenditures line and a lower equilibrium output level. C) an upward shift in the aggregate expenditures line and a higher equilibrium output level. D) a downward shift in the aggregate expenditures line and a higher equilibrium output level. Answer: A Diff: 2 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 11) An increase in the price level shifts the planned expenditures curve upward. Answer: FALSE Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 12) The price level is held constant when moving along the planned expenditures curve. Answer: TRUE Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 13) The aggregate demand curve shows the equilibrium output level at different price levels determined from the income-expenditures model. Answer: TRUE Diff: 1 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures
14) In the income-expenditure model, why does an increase in government spending (holding the price level constant) result in a shift in the aggregate demand curve to the right? Answer: In the income-expenditure model, as the government spending increases, planned expenditures increase, causing an increase in the equilibrium output. The higher equilibrium output, at the same price level, should imply that the aggregate demand curve has shifted to the right. Diff: 2 Topic: The Income-Expenditure Model and the Aggregate Demand Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-8: Investigate the relationship between income and expenditures 11.7 Appendix: Formulas for Equilibrium Income and the Multiplier 1) What does the investment spending multiplier measure? A) ΔI / ΔY B) ΔI * ΔY C) ΔY / ΔI D) ΔI + ΔY Answer: C Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 2) The formula for the government spending multiplier is A) (1 + b) / (1 - b). B) b / (1 - b). C) 1 / (1 - b). D) -b / (1 - b). Answer: C Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
3) The formula for the tax multiplier is A) (1 + b) / (1 - b). B) b / (1 - b). C) 1 / (1 - b). D) -b / (1 - b). Answer: D Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 4) The balanced-budget multiplier is equal to A) the government spending multiplier minus the tax multiplier. B) the government spending multiplier plus the tax multiplier. C) the government spending multiplier times the tax multiplier. D) the government spending multiplier divided by the tax multiplier. Answer: B Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 5) If the government spending multiplier is 7, the tax multiplier must be A) -6. B) -3. C) 3. D) 7. Answer: A Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 6) In an open economy including the government, planned expenditures equals A) C + I + G. B) C + I + G + X - M. C) C + I + G + X + M. D) C + I + G - X + M. Answer: B Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 7) A $50 billion increase in both government spending and taxes will
A) increase GDP by more than $50 billion. B) increase GDP by $50 billion. C) increase GDP by less than $50 billion. D) not change the level of GDP. Answer: B Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 8) A $300 billion decrease in both government spending and taxes will A) decrease GDP by more than $300 billion. B) decrease GDP by $300 billion. C) decrease GDP by less than $300 billion. D) not change the level of GDP. Answer: B Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income C = 400 + 0.75(y - T) I = 150 G = 200 T = 160 X = 80 M = 0.15y Table 11.1 9) Refer to Table 11.1. What is the value of the marginal propensity to import? A) 0.15 B) 0.25 C) 0.6 D) 0.9 Answer: A Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
10) Refer to Table 11.1. What is the value of the marginal propensity to consume? A) 0.15 B) 0.6 C) 0.75 D) 0.9 Answer: C Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 11) Refer to Table 11.1. What is the value of the marginal propensity to save? A) 0.15 B) 0.25 C) 0.75 D) 0.9 Answer: B Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 12) Refer to Table 11.1. What is the value of the government spending multiplier? A) 1.67 B) 2.5 C) 3.33 D) 4 Answer: B Diff: 2 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 13) Refer to Table 11.1. What is the value of the tax multiplier? A) -0.67 B) -1.875 C) 2.33 D) 3 Answer: B Diff: 2 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 14) Refer to Table 11.1. What is the equilibrium level of output, y*?
A) 1,775 B) 2,375 C) 7,100 D) 9,500 Answer: A Diff: 3 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 15) Refer to Table 11.1. At the equilibrium level of output, y*, what is the level of imports? A) 266.25 B) 356.25 C) 1065.00 D) 1425.00 Answer: A Diff: 2 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 16) Refer to Table 11.1. At the equilibrium level of output, y*, what is the trade balance? A) -1,345.00 B) -985.00 C) -276.25 D) -186.25 Answer: D Diff: 2 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
17) Refer to Table 11.1. If exports increase by 20 (X = 100), what is the new equilibrium level of output? A) 1,825 B) 2,425 C) 7,300 D) 9,700 Answer: A Diff: 3 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 18) Refer to Table 11.1. If exports decrease by 30, what is the new equilibrium level of output? A) 1,700 B) 2,300 C) 6,800 D) 9,200 Answer: A Diff: 3 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 19) Refer to Table 11.1. If the marginal propensity to import increases to 0.5 (mpi = 0.5), what is the new equilibrium level of output? A) 568.00 B) 760.00 C) 946.67 D) 1,266.67 Answer: C Diff: 3 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income
20) Refer to Table 11.1. If the marginal propensity to consume decreases to 0.05 (MPC = 0.05), what is the new equilibrium level of output? A) 2,366.67 B) 3,166.67 C) 3,550.00 D) 4,750.00 Answer: A Diff: 3 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 21) The multiplier for investment represents the ratio of the change in income to the change in investment spending. Answer: TRUE Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 22) For an economy, the government spending multiplier is equal to the investment multiplier. Answer: TRUE Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 23) The balanced-budget multiplier is calculated as the government spending multiplier minus the tax multiplier. Answer: FALSE Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 24) The government spending multiplier is equal to the tax multiplier. Answer: FALSE Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income 25) The tax multiplier is calculated as 1 / (1 - b).
Answer: FALSE Diff: 1 Topic: Appendix: Formulas for Equilibrium Income and the Multiplier Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-2: Explain the relationship between expenditure and income Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 12 Investment and Financial Markets 12.1 An Investment: A Plunge Into the Unknown 1) Which of the following is an example of an investment, as described in Chapter 12 of your textbook (unlike what was described in Chapter 5)? A) A firm builds a new plant. B) A student attends college. C) The government builds a dam to have a source of hydroelectric power. D) all of the above Answer: D Diff: 1 Topic: Investment and Financial Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 2) Which of the following is an example of an investment, as described in Chapter 12 of your textbook? A) United Airlines buy 4 new planes from Boeing. B) You open a savings account at Bank of America. C) You buy a new car today and make payments for the next 60 months. D) You hide $ 100 under your bed for safe keeping. Answer: A Diff: 1 Topic: Investment and Financial Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 3) The term investment refers, in general, to A) only large projects, such as building a new factory, undertaken by private firms. B) only the creation of capital goods undertaken by private firms or the government. C) any action today that has costs today but provides expected benefits in the future. D) any action today that has costs today. Answer: C Diff: 1 Topic: Investment and Financial Markets Skill: Definition
AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
4) The payoffs resulting from new investment A) occur in the future and are known with certainty. B) occur in the present and are known with certainty. C) occur in the future but are not known with certainty. D) depend only on current profits. Answer: C Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 5) Keynes referred to the sharp, often irrational, changes in the outlook of investors as the ________ of investors. A) animal spirits B) primal needs C) chaotic behavior D) crowd psychology Answer: A Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 6) The theory of investment that emphasizes the role of expected growth in real GDP on investment spending is known as A) real business cycle theory. B) the theory of animal spirits. C) the accelerator theory. D) the multiplier theory. Answer: C Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
7) Accelerator theory refers to the theory of A) investment that emphasizes that current investment spending depends positively on the expected future growth of government spending. B) investment that emphasizes that current investment spending depends positively on the expected future growth of GDP. C) consumption that emphasizes that current consumer spending depends positively on the expected future growth of GDP. D) consumption that emphasizes that increases in consumption spending will result, through the multiplier effect, in greater increases in GDP. Answer: B Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 8) If firms receive an economic forecast predicting future increases in the growth of real GDP, they are likely to respond by A) decreasing their level of investment spending to decrease future production capacity. B) increasing their level of investment spending to increase current production capacity. C) increasing their level of investment spending to increase future production capacity. D) decreasing their level of investment spending to decrease current production capacity. Answer: C Diff: 2 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 9) If firms receive an economic forecast predicting future decreases in the growth of real GDP, they are likely to respond by A) decreasing their level of investment spending to decrease future production capacity. B) increasing their level of investment spending to increase current production capacity. C) increasing their level of investment spending to increase future production capacity. D) decreasing their level of investment spending to decrease current production capacity. Answer: A Diff: 2 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
10) Ceteris paribus, as real GDP expected growth ________, investment spending ________. A) increases; decreases B) increases; increases C) decreases; increases D) changes; does not usually change Answer: B Diff: 2 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 11) Investment spending tends to be A) procyclical. B) anticyclical. C) unrelated to GDP. D) a periodic variable. Answer: A Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 12) Procyclical variables ________ during expansions and ________ during recessions. A) fall; fall B) rise; rise C) fall; rise D) rise; fall Answer: D Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 13) ________ variables are variables that rise during booms and fall during recessions. A) Procyclical B) Counterintuitive C) Countercyclical D) Proactive Answer: A Diff: 2 Topic: Investment and Financial Markets Skill: Conceptual
AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 14) Of the 4 components of GDP, which component is most volatile? A) Investment B) Consumption C) Government Purchases D) Net Exports Answer: A Diff: 2 Topic: Investment and Financial Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 15) Compared to consumption, investment is a much ________ component of GDP and is much more ________. A) larger; stable B) smaller; stable C) larger; volatile D) smaller; volatile Answer: D Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 16) The multiplier-accelerator model A) suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. B) links investment spending to stock prices. C) emphasizes that current investment spending depends negatively on the expected future growth of GDP. D) emphasizes the role of real interest rates and taxes. Answer: A Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
17) The multiplier-accelerator model was developed by A) John Maynard Keynes. B) Paul Samuelson. C) classical economists. D) Walter Heller. Answer: B Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 18) Optimistic investors tend to ________ their investment spending. A) reduce B) increase C) defer D) not change Answer: B Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 19) When investors reduce their investment spending, it is a sign that they are ________ about the economy. A) optimistic B) pessimistic C) ill-advised D) taking risks Answer: B Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
20) What is most affected by the expected rate or pace of economic growth? A) unemployment B) investment spending C) government purchases D) exports Answer: B Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 21) From the beginning of the 1990s to the year 2000, investment spending as a share of U.S. GDP has tended to A) increase. B) decrease. C) remain the same. D) fluctuate wildly. Answer: A Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system Recall the Application about energy price uncertainty and its impact on investment spending and GDP growth to answer the following question(s). Increases in oil prices can lead to a drop in GDP. However, uncertainty about oil prices is also an important factor. The volatility of oil prices creates uncertainty for firms making investment decisions, and adversely affects GDP growth. 22) This application addresses the idea that A) financial intermediaries facilitate investment spending. B) government spending is needed to pull an economy out of a recession. C) investment spending is the least stable component of GDP. D) consumer spending is the most stable component of GDP. Answer: C Diff: 1 Topic: Application 1, Energy Price Uncertainty Reduces Investment Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
23) According to this Application, the volatility of energy prices can contribute to uncertainty in the economy. An increasingly uncertain future will tend to cause firms to A) delay their investment decisions. B) wait for significant GDP growth before reducing investments. C) rely on the government to make their investment decisions for them. D) continue with a stable flow of investment spending so as not to get trapped by a downturning economy. Answer: A Diff: 1 Topic: Application 1, Energy Price Uncertainty Reduces Investment Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 24) According to this Application, if the volatility of energy prices led to expectations of declining real GDP, investment spending at that time would tend to decrease. This relationship between the decrease in investment spending and the expected decline in real GDP would be expressed by the A) liquidity principle. B) accelerator theory. C) present value theory. D) real-nominal principle. Answer: B Diff: 1 Topic: Application 1, Energy Price Uncertainty Reduces Investment Spending Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 25) Investments are actions that incur costs in the future but provide expected benefits today. Answer: FALSE Diff: 1 Topic: Investment and Financial Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 26) When individuals or firms make an investment, they incur costs today in the hope of future gains. Answer: TRUE Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial
system
27) Investment spending tends to be closely related to the current pace of economic growth. Answer: TRUE Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 28) Investment is a smaller component of GDP than consumption, but it is a more stable component. Answer: FALSE Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 29) Investment spending is countercyclical. Answer: FALSE Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 30) Investment, a key component of aggregate demand, can cause recessions and booms based on fluctuations in its levels. Answer: TRUE Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 31) Why does investment spending rise and fall with the overall level of GDP in the economy? Answer: If firms believe that GDP will continue to increase into the future, they may want to invest in anticipation of high future demand for their products. Similarly, if GDP falls and firms believe that this will continue into the future, they are less likely to invest, as their expectation of the future seems less lucrative. Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Conceptual AACSB: Reflective Thinking
Learning Outcome: Macro-5: Describe the key components and functions of a financial system
32) What is a broad definition for an investment? Answer: An investment is an action that creates a cost today but is expected to provide benefits in the future. Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 33) What is the difference between investment in Chapter 5 and the broad definition here in Chapter 12? Answer: In Chapter 5, investment expenditures are expenditures that result in new capital formation (new capital needs to be built). In this chapter (Chapter 12), the broad definition of investment is any action that creates a cost today but is expected to provide benefits in the future. Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 34) Is investing in one's self through education an example of investment as defined in Chapter 5, Chapter 12 or both? Answer: Investing in one's self is not an investment consistent with the definition provided in Chapter 5 because it does not result in new capital formation. On the other hand, investing in education is consistent with the broad definition of investment in this chapter because students incur a cost today (with tuitions and books) but expect benefits in the future through higher salaries once they are done with their education. Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 35) What is the accelerator theory of investment spending? Answer: The accelerator theory of investment spending says that current investment spending is positively related to the expected real growth of GDP. Diff: 1 Topic: An Investment: A Plunge into the Unknown Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
12.2 Evaluating the Future 1) The opportunity cost of something is A) what you sacrifice to get it. B) the price you must pay to purchase it. C) the real rate of interest. D) what you get when you give something up. Answer: A Diff: 1 Topic: Understanding Present Value Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) The maximum amount a person is willing to pay today to receive a payment in the future is known as A) nominal interest. B) present value. C) real interest. D) retained earnings. Answer: B Diff: 1 Topic: Understanding Present Value Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 4%. The firm should A) invest in the project because the opportunity cost is less than the return on the investment. B) invest in the project because the opportunity cost is greater than the return on the investment. C) invest in the project because the opportunity cost is the same as the return on the investment. D) not invest in the project because the opportunity cost is less than the return on the investment. Answer: A Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
4) Suppose that a firm can invest $100 today in a project and receive $105 a year from today. There is no inflation, and the annual interest rate in the economy is 6%. The firm should A) invest in the project because the opportunity cost is less than the return on the investment. B) invest in the project because the opportunity cost is greater than the return on the investment. C) invest in the project because the opportunity cost is the same as the return on the investment. D) not invest in the project because the opportunity cost is greater than the return on the investment. Answer: D Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) If interest rates increase, the present value of a given payment in the future will A) remain the same. B) increase. C) decrease. D) cause an inflation. Answer: C Diff: 1 Topic: Understanding Present Value Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) The present value of a given payment in the future ________ when the interest rates fall. A) increases B) decreases C) remains the same D) reverts to the original value Answer: A Diff: 1 Topic: Understanding Present Value Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
7) The present value of a payment K that is schedule to be received t periods from now is A) K / (1 + i)t. B) K - i / (1 + i)t. C) K / (1 - i)k. D) K / (K + i)t. Answer: A Diff: 1 Topic: Understanding Present Value Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) If you want to purchase a new sailboat in two years for $9,000, how much would you presently need to have in your bank account to have $9,000 in two years? Assume your bank account pays 3 percent interest. A) $8,484 B) $8,613 C) $8,738 D) $8,822 Answer: A Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) If you want to purchase a new sports car in four years for $75,000, how much would you need to have in your bank account now, so after four years you will have $75,000 to buy the car? Assume your bank pays 6 percent interest. A) $51,226 B) $59,408 C) $60,484 D) $70,755 Answer: B Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
10) At an interest rate of 4 percent, what would be the present value of receiving $4,000 four years from now? A) $3,420 B) $3,637 C) $3,704 D) $3,847 Answer: A Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) At an interest rate of 6 percent, what would be the present value of receiving $22,000 twelve years from now? A) $10,934 B) $18,645 C) $19,643 D) $20,755 Answer: A Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation Recall the Application about the low investment rates following the last recession that ended in 2009 answer the following question(s). 12) According to the Application, how does the U.S. rank relative to other countries with respect to its investment as a share of GDP? A) The U.S. investment as a share of GDP is low relative to other countries. B) The U.S. investment as a share of GDP is high relative to other countries. C) The U.S. investment as a share of GDP is exactly the same as in other countries. D) The U.S. investment as a share of GDP is exactly double relative to other countries. Answer: A Diff: 1 Topic: Application 2, Explaining Low Investment Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
13) According to the Application, what accounted for 1/3 of the drop of the measured investment in the United States since the last recession? A) U.S. firms investing in more intangible assets that do not show up as physical investment. B) U.S. firms have been investing more of its profits overseas. C) U.S. interest rates have been very high and rising in the United States since 2009. D) The U.S. has fewer banks than in 2009, making it harder for firms to borrow for investment. Answer: A Diff: 2 Topic: Application 2, Explaining Low Investment Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 14) According to the Application, what are some of the examples of intangible assets that U.S. firms have been spending more on since the end of the last recession in 2009? A) software B) management practices C) new technology D) all of the above are correct Answer: D Diff: 2 Topic: Application 2, Explaining Low Investment Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 15) According to the Application, what are the expected effects of the Trump administration's tax bill that took effect in 2018 to have on new investment? A) The new tax bill may have no effect, as the new tax bill only benefits large corporations. B) The new tax bill may decrease investment because it forces firms to pay more taxes on its investments. C) The new tax bill may decrease investment because it provides generous incentives for new investments. D) The new tax bill may increase investment because it provides generous incentives for new investments. Answer: D Diff: 2 Topic: Application 2, Explaining Low Investment Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
16) If the interest rate is 4 percent, how much interest would the retiree earn the first year if she opted for the lump sum payment, and chose to invest the entire payment at this interest rate? A) $1,400 B) $20,000 C) $55,000 D) $235,000 Answer: B Diff: 1 Topic: Application 2, Explaining Low Investment Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 17) Assume the retiree had a third option: receive a lump sum of $750,000 five years from now. If the interest rate is 4 percent, approximately how much is the future $750,000 to be received in 5 years worth today? A) $586,445 B) $616,445 C) $630,000 D) $646,555 Answer: B Diff: 2 Topic: Application 2, Explaining Low Investment Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
Scenario 12.1: Jennifer has decided to give up her pack-a-day smoking habit and invest the money she would have spent on cigarettes in a retirement account. At $6.00 a pack, Jennifer is currently spending $2,190 per year on cigarettes. Jennifer is 25 years old and plans to retire in 35 years, at age 60. She has chosen a retirement account that will earn a long-term average return of 5 percent per year. Jennifer is currently earning $40,000 annually. Assume that the average annual inflation rate will be 5 percent per year, that the cost of cigarettes will increase with inflation, and that Jennifer's income will also rise with the inflation rate. 18) This Scenario addresses the economic concept of A) deposit insurance. B) present value. C) financial intermediaries. D) retained earnings. Answer: B Diff: 1 Topic: Understanding Present Value Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 19) Refer to Scenario 12.1. Assume Jennifer gave up smoking for only one year and invested that money ($2,190) at the 5 percent interest rate. How much would the investment be worth in 35 years? A) $2,300 B) $12,080 C) $32,445 D) $80,483 Answer: B Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
20) Refer to Scenario 12.1 At the assumed annual inflation rate of 5 percent, approximately how much will the $6.00 pack of cigarettes cost in 10 years, when Jennifer reaches the age of 35? A) $8 B) $10 C) $16 D) $23 Answer: B Diff: 2 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 21) Refer to Scenario 12.1 At the assumed annual inflation rate of 5 percent, approximately how much will the $6.00 pack of cigarettes cost in 30 years, when Jennifer reaches the retirement age of 60? A) $16 B) $21 C) $33 D) $47 Answer: C Diff: 2 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 22) Refer to Scenario 12.1. By what approximate percentage will Jennifer's income increase from age 25 to age 60? A) 287 percent B) 400 percent C) 452 percent D) 561 percent Answer: C Diff: 3 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
23) Nominal interest rates are the A) interest rates quoted in the market minus the inflation rate. B) interest rates quoted in the market plus the expected inflation rate. C) interest rates quoted in the market. D) real interest rates less the inflation rate. Answer: C Diff: 1 Topic: Real and Nominal Interest Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 24) Real interest rates are the A) interest rates quoted in the market minus the inflation rate. B) interest rates quoted in the market plus the expected inflation rate. C) interest rates quoted in the market. D) nominal interest rates plus the inflation rate. Answer: A Diff: 1 Topic: Real and Nominal Interest Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 25) Which of the following equations is correct? A) real interest rate = nominal interest rate - inflation B) real interest rate = nominal interest rate + inflation C) nominal interest rate = real interest rate - inflation D) real interest rate = nominal interest rate x inflation Answer: A Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
26) The real-nominal principle can be stated as A) production generates income. B) only final goods and services should be counted in GDP. C) what matters to people is the purchasing power of money or income. D) only the manufacture of real goods is production. Answer: C Diff: 2 Topic: Real and Nominal Interest Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27) If the nominal interest rate is 2 percent and the inflation rate is 4 percent, then the real rate of interest is A) -2 percent. B) 2 percent. C) 3 percent. D) 6 percent. Answer: A Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 28) If the nominal interest rate is 4 percent and the inflation rate is 1 percent, then the real rate of interest is A) 1 percent. B) 3 percent. C) 4 percent. D) 5 percent. Answer: B Diff: 2 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
29) If the real interest rate is 4 percent and the inflation rate is 3 percent, then the nominal interest rate is A) -1 percent. B) 1 percent. C) 3.5 percent. D) 7 percent. Answer: D Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 30) If the real interest rate is 7 percent and the inflation rate is 7 percent, then the nominal interest rate is A) 0 percent. B) 3.5 percent. C) 7 percent. D) 14 percent. Answer: D Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 31) If the real interest rate is 4 percent and the nominal interest rate is 7 percent, this implies an expected inflation rate of A) 3 percent. B) 4 percent. C) 5.5 percent. D) 11 percent. Answer: A Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
32) If the real interest rate is 5 percent and the nominal interest rate is 2 percent, this implies an expected inflation rate of A) -7 percent. B) -3 percent. C) 3.5 percent. D) 7 percent. Answer: B Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 33) Suppose you have $400 to invest at a nominal interest rate of 7 percent, and the investment's term to maturity is 1 year. If the inflation rate is 2 percent, then the real return on your investment is approximately A) $8. B) $20. C) $28. D) $36. Answer: B Diff: 2 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 34) Suppose you have $400 to invest at a nominal interest rate of 5 percent. If the inflation rate is 2 percent, then the real return on your investment is approximately A) $12. B) $20. C) $28. D) $36. Answer: A Diff: 2 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
35) Suppose you have $400 and the inflation rate is 4 percent. In order to earn a real return of $20 on your investment, the nominal interest rate must be A) 1 percent. B) 5 percent. C) 9 percent. D) 12 percent. Answer: C Diff: 3 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 36) Suppose you have $400 and the inflation rate is 5 percent. In order for your investment to earn a real return of $16, the nominal interest rate needs to be A) 0 percent. B) 4 percent. C) 6 percent. D) 9 percent. Answer: D Diff: 3 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 37) Expected real interest rates are the A) interest rates quoted in the market minus the expected inflation rate. B) interest rates quoted in the market plus the expected inflation rate. C) expectations of future interest rates. D) interest rates quoted in the market. Answer: A Diff: 1 Topic: Real and Nominal Interest Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
38) Borrowers and lenders make transactions based on the A) real interest rate. B) expected real interest rate. C) expected nominal interest rate. D) expected real interest rate less the expected rate of inflation. Answer: B Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 39) It is difficult to determine expected real rates of interest because A) we cannot measure the inflation rate. B) we cannot measure the nominal interest rate. C) the inflation rate is a subjective measurement. D) we never know exactly what inflation rates people anticipate. Answer: D Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 40) The real interest rate is the rate at which borrowers or lenders ________ to make transactions when issuing or receiving loans. A) are required B) expect C) refuse D) can only obtain from a financial intermediary Answer: B Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
Expected Real Rates of Interest for Five Countries Nominal Interest Inflation Rate Expected Real Country Rate Forecast Rate of Interest Australia 4.5% 3.1% Japan 0.1% 1% Brazil 4.6% 6.15% South Africa 6.5% 4.2% United States 1.2% -0.95% Source: Trading Economics, September, 2010 Table 12.1 41) Refer to Table 12.1. The expected real rate of interest for Australia is A) -1.4%. B) 1.4%. C) 6.9%. D) It cannot be determined from the information provided. Answer: B Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 42) Refer to Table 12.1. The inflation rate forecast for Japan is A) -0.9%. B) 0.9%. C) 1.1%. D) It cannot be determined from the information provided. Answer: A Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
43) Refer to Table 12.1. The nominal interest rate for the United States is A) -0.25%. B) 0.25%. C) 2.15%. D) It cannot be determined from the information provided. Answer: B Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 44) Refer to Table 12.1. Assuming the inflation rate forecast to be accurate, which nation would pay the highest nominal rate of return? A) South Africa B) Australia C) Brazil D) the United States Answer: C Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 45) Refer to Table 12.1. Assuming the inflation rate forecast to be accurate, which nation has the lowest real rate of return? A) Japan B) Australia C) South Africa D) the United States Answer: D Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
46) The opportunity cost of funds is the interest that can be earned by lending the funds. Answer: TRUE Diff: 1 Topic: Understanding Present Value Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 47) If a project costs $600 today and returns $630 next year, the highest interest rate at which the project should still be undertaken is five percent. Answer: TRUE Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 48) The rate of interest that a bank states as its interest rate is the real rate of interest. Answer: FALSE Diff: 1 Topic: Real and Nominal Interest Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 49) If inflation is eight percent, a nominal interest rate of six percent translates into a real interest rate of two percent. Answer: FALSE Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 50) As real rates of interest increase in the economy, real investment spending increases. Answer: FALSE Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 51) Both the nominal rate of interest and the real return on investment increase with the inflation rate.
Answer: FALSE Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 52) When the nominal rate of interest and the rate of inflation are the same, the real interest rate is zero. Answer: TRUE Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 53) If you want to have $50,000 in 5 years, how much would you need to put in your savings account now if the savings account pays 3 percent interest? Answer: $50,000 / (1.03)5 = $43,130.44 Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 54) If you invest $4,000 in a savings account paying 3 percent interest, how much will your investment be worth in 25 years? Answer: ($4,000)(1.03)25 = $8,375.11 Diff: 1 Topic: Understanding Present Value Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
55) A business borrows from a bank at 7 percent but expects 3 percent general inflation in the economy. What are the nominal and real rates of interest facing this borrower? Answer: The borrower's nominal interest rate is 7 percent and the real interest rate is 4 percent. Diff: 1 Topic: Real and Nominal Interest Rates Skill: Analytical AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 56) Explain why it is difficult to determine expected real rates of interest. Answer: It is difficult to determine expected real rates of interest because we never know exactly what inflation rates people anticipate. One approach is to use the judgments of professional forecasters, such as those that appear in The Economist magazine. Diff: 1 Topic: Real and Nominal Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 12.3 Understanding Investment Decisions 1) The relationship between interest rates and investment spending is graphed as A) an upward sloping curve. B) a downward sloping curve. C) a horizontal line. D) a vertical line. Answer: B Diff: 1 Topic: Understanding Investment Decisions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
2) As the real interest rate ________, real investment spending ________. A) increases; increases B) decreases; decreases C) increases; decreases D) changes; does not change Answer: C Diff: 2 Topic: Understanding Investment Decisions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 3) If a project costs $3,500 today and pays a return of $4,200 next year, what is the highest interest rate at which the project should be undertaken? A) 7 percent B) 14 percent C) 20 percent D) 70 percent Answer: C Diff: 2 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 4) If a project costs $800 today and pays a return of $864 next year, what is the highest interest rate at which the project should be undertaken? A) 6.4 percent B) 7 percent C) 8 percent D) 8.64 percent Answer: C Diff: 2 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
5) The theory of investment that emphasizes the roles of real interest rates and taxes is known as the A) accelerator model. B) neoclassical theory of investment. C) multiplier model. D) Q-theory of investment. Answer: B Diff: 1 Topic: Understanding Investment Decisions Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 6) The neoclassical theory of investment was pioneered by A) Paul Samuelson. B) John Maynard Keynes. C) James Tobin. D) Dale Jorgenson. Answer: D Diff: 1 Topic: Understanding Investment Decisions Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 7) The neoclassical theory of investment A) suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. B) links investment spending to stock prices. C) emphasizes that current investment spending depends positively on the expected future growth of GDP. D) emphasizes the role of real interest rates and taxes as determinants of investment. Answer: D Diff: 1 Topic: Understanding Investment Decisions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
Returns on Investment Returns Investment Cost (One period later) A $100 103 B $100 105 C $200 208 D $200 216 E $300 327 Table 12.2 8) Referring to Table 12.2, if the nominal interest rate is 3.5 percent and there is no inflation, which investments will be undertaken? A) B, C, D and E B) B, D and E C) D and E only D) C and E only Answer: A Diff: 2 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 9) Referring to Table 12.2, if the nominal interest rate is 9.5 percent and there is no inflation, which investments will be undertaken? A) E B) E and D C) C, D, E D) none of the above Answer: D Diff: 2 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
10) Referring to Table 12.2, if the nominal interest rate is 8.5 percent and there is no inflation, which investments will be undertaken? A) E B) D and E C) C and E D) none of the above Answer: A Diff: 2 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 11) If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 4.5 percent and there is no inflation, what will be the level of investment in the economy? A) $200 B) $500 C) $600 D) $800 Answer: C Diff: 3 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 12) If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 10 percent and there is no inflation, what will be the level of investment in the economy? A) $0 B) $200 C) $300 D) $500 Answer: A Diff: 3 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
13) If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 2.5 percent and there is no inflation, what will be the level of investment in the economy? A) $0 B) $200 C) $600 D) $900 Answer: D Diff: 3 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 14) All other things being equal, when the level of the stock market is ________, investment spending ________. A) high; tends to be high B) high; tends to be low C) low; tends to be high D) high or low; does not seem to change Answer: A Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 15) The theory of investment that links investment spending to stock prices is known as the A) accelerator model. B) neoclassical theory of investment. C) multiplier model. D) Q-theory of investment. Answer: D Diff: 1 Topic: Investment and the Stock Market Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
16) The Q-theory of investment was originally developed by A) Paul Samuelson. B) John Maynard Keynes. C) James Tobin. D) Dale Jorgenson. Answer: C Diff: 1 Topic: Investment and the Stock Market Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 17) The Q-theory of investment A) suggests that a downturn in real GDP will lead to a sharp fall in investment, which leads to further reductions in GDP through the multiplier. B) links investment spending to stock prices. C) emphasizes that current investment spending depends positively on the expected future growth of GDP. D) emphasizes the role of real interest rates and taxes. Answer: B Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 18) The Q-theory of investment explains why A) higher stock prices usually leads to higher levels of investment. B) higher stock prices usually leads to lower levels of investment. C) higher levels of investment causes lower stock prices. D) higher levels of investment causes higher stock prices. Answer: A Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
19) According to the Q-theory of investment, higher stock prices cause higher levels of investments because A) the cost to the firm of the project it wants to undertake falls as the stock price rises because the firm needs fewer shares of stock to sell to raise capital. B) the cost to the firm of the project it wants to undertake rises as the stock price rises because the firm needs fewer shares of stock to sell to raise capital. C) the cost to the firm of the project it wants to undertake falls as the stock price rises because the firm needs more shares of stock to sell to raise capital. D) the cost to the firm of the project it wants to undertake rises as the stock price rises because the firm needs more shares of stock to sell to raise capital. Answer: A Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 20) When a firm has earnings it has not yet paid out to the owners, those earnings are called A) surplus capital. B) cash reserves. C) retained earnings. D) unearned income. Answer: C Diff: 1 Topic: Investment and the Stock Market Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 21) If a firm wants to finance a new project, it can obtain financing by A) issuing and selling new shares of stock. B) selling corporate bonds to the public. C) using its retained earnings. D) all of the above. Answer: D Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
22) From 1997 to 2003, stock prices based on the Standard and Poor's index and the share of investment spending as a component of GDP tended to A) move in opposite directions. B) move in the same direction. C) both remain relatively unchanged. D) be unrelated to each other. Answer: B Diff: 1 Topic: Investment and the Stock Market Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 23) The neoclassical theory of investment says both real interest rates and taxes are important determinants of investment. Answer: TRUE Diff: 1 Topic: Understanding Investment Decisions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 24) You should invest in a project if the cost you incur today is greater than the present value of the future payments from the project. Answer: FALSE Diff: 1 Topic: Understanding Investment Decisions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 25) There is a negative relationship between the real rate of interest and investment spending. Answer: TRUE Diff: 1 Topic: Understanding Investment Decisions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
26) The price of a stock is equal to the present value of expected future dividend payments from the stock. Answer: TRUE Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 27) The Q-theory of investment is based on high investments being funded by high stock prices of a company. Answer: TRUE Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 28) Retained earnings are corporate earnings that are paid as dividends to stockholders. Answer: FALSE Diff: 1 Topic: Investment and the Stock Market Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 29) When the level of the stock market is high, investment spending tends to be high, ceteris paribus. Answer: TRUE Diff: 1 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
30) Explain why high nominal interest rates in an economy does not necessarily mean real interest rates in the same economy are also high. Answer: Real interest rates have been adjusted for inflation and are calculated as nominal interest rates minus the inflation rate. The higher the inflation rate, the lower the real rate of interest, so high nominal interest rates do not always mean high real interest rates. For example, if the nominal interest rate is 12 percent, and the inflation rate is 9 percent, the real interest rate is only 3 percent. Diff: 1 Topic: Understanding Investment Decisions Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 31) Consider the following five investments. If the nominal interest rate is five percent, which projects should be undertaken? (Note: The returns are for one period later.) Investment Cost Returns A $100 $106 B 300 313 C 200 218 D 50 55 E 400 418 Answer: At an interest rate of five percent, projects A, C and D have returns that exceed the five percent threshold. Diff: 2 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
32) Suppose that the following table represents all of the possible investments in the economy. If the nominal interest rate is six percent, what is the total amount of investment in the economy? (Note: The Returns are for one period later.) Investment Cost Returns A $100 $105 B 300 321 C 200 216 D 50 55 E 400 416 Answer: At an interest rate of six percent, projects B, C and D are still worthwhile. So there will be $550 worth of investment in the economy. Diff: 2 Topic: Understanding Investment Decisions Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 33) What are three options a company has when it wants to finance a new project? Answer: 1. It can use its retained earnings, those earnings which have not been paid to owners. 2. It can borrow funds from a bank or sell corporate bonds to the public. 3. It can issue and sell new shares of stock. Diff: 2 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision 34) According to the Q-theory of investment, why does investment rise when stock prices increase? Answer: Higher stock prices raises investments because the cost to the firm of the project it wants to undertake falls as the stock price rises because the firm needs fewer shares of stock to sell to raise capital. Diff: 2 Topic: Investment and the Stock Market Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision
12.4 How Financial Intermediaries Facilitate Investment 1) Financial intermediaries are A) salespersons who collect money from customers purchasing goods and services. B) firms that receive funds from savers and channel them to investors. C) firms that receive funds from investors and channel them to savers. D) persons that advise households on investment decisions. Answer: B Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 2) Financial intermediaries A) increase the risks associated with investment. B) increase the costs associated with investment. C) allow for a greater volume of investment in the economy. D) only provide services for the wealthy. Answer: C Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 3) Financial intermediaries A) increase the risks associated with investment. B) reduce the costs associated with investment. C) allow for a smaller volume of investment in the economy. D) only provide services for the wealthy. Answer: B Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
4) Assets that are easily convertible into money on short notice are referred to as being A) adaptable. B) liquid. C) diversified. D) durable. Answer: B Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 5) Financial intermediaries are institutions that facilitate the movement of funds from savers to investors because they A) eliminate the costs of negotiating such transactions. B) eliminate risks. C) provide liquidity. D) guarantee positive returns on investments. Answer: C Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 6) Financial intermediaries reduce risk by A) limiting the diversity of their investment portfolios. B) gaining expertise in evaluating and monitoring investments. C) investing in a large number of projects with independent returns. D) investing in a small number of projects with independent returns. Answer: C Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
7) Financial intermediaries reduce the costs of negotiation by A) pooling funds. B) gaining expertise in evaluating and monitoring investments. C) investing in a large number of projects with independent returns. D) investing in a small number of projects with independent returns. Answer: A Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 8) Insurance companies can reduce risk by accepting premiums from A) many people to insure against independent events. B) few people to insure against independent events. C) many people to insure against dependent events. D) few people to insure against dependent events. Answer: A Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 9) Which of the following activities does NOT diversify risk? A) writing earthquake insurance policies for the entire Western United States B) writing hurricane insurance policies only in Florida C) investing in real estate in various states across the United States D) purchasing the stock of a variety of different companies Answer: B Diff: 2 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 10) Which of the following is an example of risk diversification? A) an insurance company writing earthquake insurance only for the Los Angeles area B) an individual investing all of her savings in a single, new firm C) an individual purchasing only IBM stock D) a lumber mill purchasing trees from various forests across the western United States Answer: D Diff: 2 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking
Learning Outcome: Macro-5: Describe the key components and functions of a financial system 11) Diversification ________ the risks of investing in the stock market. A) increases B) eliminates C) can reduce but not eliminate D) is unrelated to Answer: C Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 12) In the United States, runs on banks are prevented because A) banks keep 100 percent of their deposits on hand. B) the government guarantees bank accounts for up to $250,000. C) banks have the option of denying depositors access to their funds. D) banks are forbidden to make unprofitable loans. Answer: B Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 13) Runs on banks occur when A) banks make an unusually high number of profitable loans. B) depositors are confident that the bank will not go bankrupt. C) many depositors attempt to withdraw their funds simultaneously. D) banks keep 100 percent of their deposits on hand. Answer: C Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
14) The Great Depression was made more severe because A) the Federal Reserve increased the money supply after the stock market crashed. B) depositors left their money in banks instead of increasing spending, which would have increased GDP. C) depositors made runs on banks, thereby destroying the banking system in large parts of the nation. D) the government lowered tariffs against imported goods. Answer: C Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 15) In the late 1970s, savings and loans institutions were in financial trouble because they A) had to pay high interest rates to attract depositors, but were earning low interest rates from past investments. B) had to pay low interest rates to attract depositors, but were earning low interest rates from past investments. C) had to pay high interest rates to attract depositors, but were earning high interest rates from past investments. D) had to pay low interest rates to attract depositors, but were earning high interest rates from past investments. Answer: A Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 16) Deposit insurance indirectly helped to create the savings and loan crisis in the United States because A) the government, without warning, eliminated deposit insurance for savings and loans, thereby causing a run on these institutions. B) depositors were not concerned with the types of investments made because they were insured, while at the same time savings and loans were aggressively investing in risky projects. C) depositors were not concerned with the types of investment made because savings and loans were making very conservative investments. D) depositors, believing that the government would not secure their deposits, were very concerned with the types of investments made at savings and loans. Answer: B Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial
system 17) Which one of the following statements is TRUE? A) The savings and loan crisis of the 1990s was due to the big U.S. budget deficit. B) Deposit insurance guarantees savings up to $1,000,000. C) Savings and loan institutions were very profitable during the 1970s when there was high inflation. D) Deposit insurance was created to prevent bank runs from occurring. Answer: D Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 18) The security provided by the federal government on money in banks is called A) Social Security. B) deposit insurance. C) investment equity. D) a hedge fund. Answer: B Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 19) Who suffers primarily when the federal government has to bail out a financial intermediary through the deposit insurance system? A) the bank officers B) the bank shareholders C) the taxpayers D) the U.S. Treasury Answer: C Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
Recall the Application about the number of homeowners in the year 2012 who owed more on their homes than their homes were worth to answer the following question(s). 20) This Application addresses the concept of A) the down-side of leverage. B) increases in consumer wealth. C) inflation and the housing boom. D) the dangers of high interest rates. Answer: A Diff: 1 Topic: Application 3, Underwater Homeowners and Debt Forgiveness Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 21) According to this Application, for approximately 12 million homeowners in 2012, the amount owed on mortgages was higher than the actual value of the homes. Homeowners who find themselves in this situation are said to be A) "subprime borrowers." B) "shadow mortgage holders." C) "underwater." D) "financially grounded." Answer: C Diff: 1 Topic: Application 3, Underwater Homeowners and Debt Forgiveness Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 22) According to this Application, for approximately 12 million homeowners in 2012, the amount owed on mortgages was higher than the actual value of the homes. These homeowners used borrowed funds to purchase their homes, a practice known as A) securitization. B) leverage. C) liquidity. D) acceleration. Answer: B Diff: 1 Topic: Application 3, Underwater Homeowners and Debt Forgiveness Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
23) Recall the Application. Assume that immediately before the housing bubble burst, you purchased a $250,000 home and took out a $225,000 mortgage to make the purchase. When the bubble burst, the value of your home fell by 20 percent. The value of the home is now ________ and you owe the mortgage company ________. A) $200,000; $225,000 B) $180,000; $225,000 C) $200,000; $180,000 D) $180,000; $200,000 Answer: A Diff: 2 Topic: Application 3, Underwater Homeowners and Debt Forgiveness Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 24) Recall the Application. Assume that immediately before the housing bubble burst, you purchased a $250,000 home and took out a $225,000 mortgage to make the purchase. When the bubble burst, the value of your home fell by 20 percent. If you immediately sold the home for its new, current value, you will still owe the mortgage company an additional ________ and your total loss incurred from this entire process will be ________. A) $50,000; $75,000 B) $25,000; $50,000 C) $18,000; $25,000 D) $50,000; $25,000 Answer: B Diff: 2 Topic: Application 3, Underwater Homeowners and Debt Forgiveness Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
Recall the Application about the key components of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to answer the following question(s). 25) According to the Application, which of the following is a major component of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010? A) The creation of the Federal Stability Oversight Council B) large financial institutions must develop "living wills" that spell out how they would dismantle their firms in an orderly manner in the event of severe financial distress. C) The creation of the Consumer Financial Protection Bureau D) All of the above are major components of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Answer: D Diff: 2 Topic: Application 4, New Regulations for Financial Security Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 26) According to the Application, which component of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was most controversial? A) The creation of the Federal Stability Oversight Council B) large financial institutions must develop "living wills" that spell out how they would dismantle their firms in an orderly manner in the event of severe financial distress. C) The creation of the Consumer Financial Protection Bureau D) The restriction on the ability of large banks to make trades in financial markets on their own accounts. Answer: C Diff: 1 Topic: Application 4, New Regulations for Financial Security Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 27) According to the Application, what was controversial about the creation of the Consumer Financial Protection Bureau? A) It has limited oversight from Congress and the Executive Branch. B) It gave consumers too much financial protection. C) It gave banks too much financial protection. D) It gave members of the House of Representatives too much financial protection. Answer: A Diff: 2 Topic: Application 4, New Regulations for Financial Security Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
28) Financial intermediaries reduce individual risk because they pool the funds of savers. Answer: TRUE Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 29) Risk can often be reduced by investing in a large number of projects. Answer: TRUE Diff: 2 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 30) The risk of investing in the stock market can be eliminated by diversification. Answer: FALSE Diff: 2 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 31) Deposit insurance indirectly helped to create the savings and loan crisis in the United States during the 1980s. Answer: TRUE Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 32) Deposit insurance is a protection for bank depositors up to a certain amount which is guaranteed by the federal government. Answer: TRUE Diff: 1 Topic: When Financial Intermediaries Malfunction Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
33) How do financial intermediaries reduce risk? Answer: Financial intermediaries reduce risk by diversifying investors' assets. One way intermediaries do this is by investing in a large number of projects whose returns are independent of one another. Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 34) Explain why financial intermediaries are necessary to facilitate the movement of funds from savers to investors and how they provide benefits to both groups. Answer: There are some fundamental differences between savers and investors. Savers tend to have small sums that they wish to keep liquid. They are concerned about the risk of losing their funds. Investors are risk takers and generally need large sums for longterm projects. Financial intermediaries benefit both sides; for savers they provide reduced risk through diversification and their monitoring of investments. They also provide liquidity. For investors they eliminate the need to negotiate with a large number of savers and thus reduce the cost of negotiation. Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system 35) Why are some insurance companies interested in programs for nationwide disaster insurance for floods, earthquakes, and hurricanes? Answer: Disasters are often regional, specific disasters are localized, and disasters occur at different times. By insuring for more risks together, companies can reduce the risks they would face in any single market. Diff: 1 Topic: How Financial Intermediaries Facilitate Investment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system
36) Explain how deposit insurance contributed indirectly to the savings and loan crisis of the 1980s. Answer: In the early 1970s, savings and loan institutions made mortgage loans to households at low interest rates. In the late 1970s nominal interest rates rose sharply as inflation increased. The savings and loans were in trouble; they had to pay high interest rates to attract depositors and were earning low interest rates on their past investments. Many S&Ls went bankrupt. The government tried to assist them by reducing the regulations that restricted the range of their investments and allowing them to make investments other than in housing in the hope that they would gain more profits. Depositors were not concerned about the investments being made because their savings were insured. Savings and loans became aggressive investors in speculative real estate and other risky projects, many of which ultimately collapsed forcing the government to provide funds to bail out the S&Ls. The implication is that had depositors not been insured they would have more carefully scrutinized the activities of the S&Ls where they had their deposits and that in turn might have limited the risky behavior of at least some of the institutions. Diff: 2 Topic: When Financial Intermediaries Malfunction Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-5: Describe the key components and functions of a financial system Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 13 Money and the Banking System 13.1 What Is Money? 1) The supply of money in the U.S. economy is determined primarily by A) decisions made by the Federal Reserve and the U.S. Treasury. B) the actions of the Federal Reserve and the banking system. C) consumers and the banking system. D) the demand for money in the economy. Answer: B Diff: 1 Topic: Money and the Banking System Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 2) In the ________ increases in the supply of money will ________. A) short run; raise total demand and output B) long run; raise total demand and output C) long run; lead to lower prices D) short run; decrease total demand and output Answer: A Diff: 2 Topic: Money and the Banking System
Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 3) Money is A) anything that is regularly used and generally accepted in economic transactions or exchanges. B) necessary to conduct economic transactions. C) facilitates specialization in production. D) anything the government declares to have value. Answer: A Diff: 1 Topic: What is Money? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
4) Which of the following can be used as money? A) checks B) cigarettes C) precious stones D) all of the above Answer: D Diff: 1 Topic: What is Money? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 5) When money is accepted as payment for a good or service, it is being used as a A) medium of exchange. B) store of value. C) unit of account. D) mechanism for transforming current purchases into future purchases. Answer: A Diff: 1 Topic: Three Properties of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 6) Money solves the dilemma of a double coincidence of wants by serving as a A) medium of exchange. B) store of value. C) symbol of value. D) unit of account. Answer: A Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
7) When money is used to express the value of goods and services, it is functioning as a A) medium of exchange. B) store of value. C) unit of account. D) store of purchasing power. Answer: C Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 8) If the prices of goods and services were expressed in terms of carved wooden beads, then the carved wooden beads would be serving as a A) medium of exchange. B) store of value. C) unit of account. D) mechanism for transforming present purchases into future purchases. Answer: C Diff: 2 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 9) If money is used as a mechanism to hold purchasing power for a period of time it is functioning as a A) standard of value. B) store of value. C) medium of exchange. D) unit of account. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
10) As inflation rates increase, money becomes less useful as a A) unit of account. B) store of value. C) medium of exchange. D) double coincidence of wants. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 11) Suppose after the semester ends, you take a trip to a tropical island. Upon arriving at the island, you make a stop at one of the markets and notice that everyone is carrying around jars full of little turtles. You also notice the person in line in front of you just paid for a bottle of rum with 6 turtles. Someone else just bought a straw hat for 2 turtles. Thinking back to your economics class, you would conclude that A) this is a barter economy. B) those little turtles are being used as money. C) turtles are valueless. D) turtle soup is a delicacy. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 12) Which of the following is/are example(s) of "mediums of exchange"? A) money used to buy goods B) goods used to obtain other goods C) pigs used to obtain chickens D) all of the above Answer: D Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
13) In order for a barter transaction to be successful, there must be a A) market for the goods. B) high demand for a certain item. C) double coincidence of wants. D) federal tax law in effect. Answer: C Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 14) The stored value of money over time should not change significantly as long as the level of inflation is A) high. B) low. C) adjusted by the government. D) less than your pay increases. Answer: B Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 15) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit currency which is spent and circulated in the marketplace is an example of the counterfeit currency being used as a A) medium of exchange. B) commodity money. C) store of value. D) bank reserve. Answer: A Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
16) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. As long as counterfeit U.S. currency remains undetected and in circulation, an increase in the U.S. inflation rate would essentially A) decrease the real value of the counterfeit currency. B) increase the real value of the counterfeit currency. C) decrease the nominal value of the counterfeit currency. D) increase the nominal value of the counterfeit currency. Answer: A Diff: 2 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 17) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. The U.S. government is continually adding security features to its paper currency to help make counterfeit money easier to detect. If counterfeit currency remained undetected, a vast increase in the supply of counterfeit U.S. currency would A) decrease aggregate demand in the short run. B) lead to inflation. C) reduce the amount of M1. D) lower the nominal income of the average U.S. worker. Answer: B Diff: 2 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 18) Money that has no intrinsic value and is created by a government decree is called A) barter money. B) commodity money. C) fiat money. D) asset money. Answer: C Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
19) What gives money value under a fiat system? A) Fiat money is backed by gold. B) The supply of fiat money is controlled by the government. C) Fiat money is also a commodity. D) Fiat money is the same as Treasury bonds. Answer: B Diff: 1 Topic: Different Types of Monetary Systems Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 20) M1 A) is the sum of currency plus traveler's checks. B) is the narrowest definition of the money supply. C) includes small time deposits. D) includes credit cards. Answer: B Diff: 2 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 21) Checking account balances are included in A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
22) Currency is included in A) M1 only. B) M2 only. C) neither M1 nor M2. D) both M1 and M2. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 23) Which of the following are also known as demand deposits? A) checking deposits B) savings deposits C) time deposits D) money market mutual fund accounts. Answer: A Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 24) Traveler's checks are included in A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
25) Which of the following is NOT included in M1? A) savings accounts B) deposits in checking accounts C) deposits in checking accounts that pay interest D) traveler's checks Answer: A Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 26) About 42 percent of M1 is composed of A) demand deposits. B) savings deposits. C) money market mutual funds. D) currency held by the public. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 27) The smallest single component of M1 is A) demand deposits. B) savings account balances. C) other checkable deposits. D) traveler's checks. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
28) The largest single component of M2 is A) demand deposits. B) savings deposits. C) money market mutual funds. D) currency held by the public. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 29) In the 1980s, a new category called ________ was added to M1. A) traveler's checks B) demand deposits C) other checkable deposits D) money market mutual fund deposits Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 30) Checking accounts that pay interest are included in the A) "demand deposits" part of M1. B) "other checkable deposits" part of M1. C) "savings deposits" part of M2. D) "money market mutual funds deposits" part of M2. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
31) Deposits in savings accounts are included in A) M1. B) M2. C) both M1 and M2. D) neither M1 nor M2. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 32) Money market mutual funds are included in A) M1. B) M2. C) both M1 and M2. D) neither M1 nor M2. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 33) Which of the following is NOT included in M1 or M2? A) checking account balances B) currency in circulation outside of commercial banks C) traveler's checks D) credit card balances Answer: D Diff: 2 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
34) Which of the following is included in M2? A) commercial paper B) U.S. Treasury bonds C) savings accounts D) stocks Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 35) Which of the following appears in M2 but NOT M1? A) currency B) checking account balances C) money market mutual funds D) traveler's checks Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 36) Suppose Bob withdraws money from his checking account and deposits it into his savings account. What happens to M1? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: A Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
37) Suppose Bob withdraws money from his checking account and deposits it into his savings account. What happens to M2? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 38) Suppose Bob withdraws money from his savings account and deposits it into his checking account. What happens to M2? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 39) Suppose Bob withdraws money from his savings account and deposits it into his checking account. What happens to M1? A) It decreases. B) It increases. C) It stays the same. D) The effect is unknown. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
Currency held by the public Demand deposits Other checkable deposits Traveler's checks Savings deposits Small time deposits Money market mutual funds
$450 billion 220 billion 170 billion 2 billion 800 billion 50 billion 170 billion
Table 13.1 40) According to the information in Table 13.1, M1 is equal to A) $620 billion. B) $672 billion. C) $842 billion. D) $1,012 billion. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 41) According to the information in Table 13.1, M2 is equal to A) $840 billion. B) $1,062 billion. C) $1,692 billion. D) $1,862 billion. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
42) Economists use different definitions of money because A) there are differences in the frequency with which depositors use their accounts. B) deposits can be domestic or international. C) deposits may be held at banks or savings and loans. D) it is not always clear which assets are used primarily as money. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 43) A reason that economists keep an eye on both M2 and M1 is because A) M2 is more accurate than M1. B) both fluctuate widely and frequently in total dollar value. C) money market accounts are sometimes used like checking accounts and sometimes used like savings accounts. D) during a recession, M1 is meaningless. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 44) In the United States economy, what is the basic measure of money? A) wealth B) M1 C) disposable income D) commodities Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
45) Along with currency not in banks and deposits in checking accounts, what is another component of the M1 measure of money? A) credit cards B) debit cards C) traveler's checks D) prepaid accounts Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 46) Financial monetary assets which often cannot be readily used in commercial exchanges are included in A) M1. B) M2. C) credit cards. D) prepaid accounts. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 47) Small time deposits of $100,000 or less are classified as A) part of M1. B) part of M2. C) FDIC insured. D) highly liquid. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
48) Before they can be used in regular exchanges, the assets that make up M2 must often A) have their interest computed. B) be converted to M1 assets. C) be paid off if they are credit cards. D) have reached term if they are insurance policies. Answer: B Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 49) An example of money is A) a dollar bill. B) a checking account balance. C) a traveler's check. D) all of the above. Answer: D Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 50) According to the U.S. Secret Service, approximately $2.6 billion of U.S. paper currency in circulation is counterfeit. Undetected counterfeit U.S. currency being held by the public both at home and abroad will impact the level of A) the reserve ratio. B) the money multiplier. C) M1. D) commodity money. Answer: C Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
Recall the Application about how Greek citizens began to hold large amounts of cash in 2015 to answer the following question(s). 51) According to this Application, which of the following is a reason for holding cash? A) for convenience B) to make a purchase when you cannot use a debit or credit card C) fear of financial catastrophe D) all of the above Answer: D Diff: 1 Topic: Application 1, Cash as a Sign of Trust Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 52) According to this Application, residents of Greece in 2015 ________ withdrawals of funds from their banks in order to hold ________ cash. A) increased; less B) increased; more C) decreased; less D) decreased; more Answer: B Diff: 1 Topic: Application 1, Cash as a Sign of Trust Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 53) According to this Application, the main concern of Greek residents was that A) hyperinflation could occur in the economy. B) banks would convert their accounts to drachmas and they would suffer financial losses. C) the country would switch to a gold standard. D) the Prime Minister of Greece would be impeached. Answer: B Diff: 1 Topic: Application 1, Cash as a Sign of Trust Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
54) Money is the standard of exchange by which any type of goods can be purchased. Answer: TRUE Diff: 1 Topic: What is Money? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 55) In order for money to be an effective medium of exchange, it is important to have it serve as a unit of account. Answer: TRUE Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 56) Money solves the problem of double coincidence of wants that would regularly occur under a system of credit. Answer: FALSE Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 57) Inflation makes money an imperfect store of value. Answer: TRUE Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 58) Fiat money refers to a monetary system in which gold backs up paper money. Answer: FALSE Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 59) In the United States today, the government will exchange gold or silver for paper money.
Answer: FALSE Diff: 1 Topic: Different Types of Monetary Systems Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 60) Credit cards are regularly used in economic exchanges, so credit card balances are included in the definition of money. Answer: FALSE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 61) Economists use M2 to measure the amount of money that is regularly used in transactions. Answer: FALSE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 62) M1 is larger than M2. Answer: FALSE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 63) Checking deposits are also known as demand deposits. Answer: TRUE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
64) Money market mutual funds are hard to classify because they are used both for making transactions and for savings. Answer: TRUE Diff: 2 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 65) Credit cards are NOT a part of the M1 or M2 money supply. Answer: TRUE Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 66) Define "money." Answer: Money is anything that is used in economic transactions or exchanges. Diff: 1 Topic: What is Money? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 67) What are the three properties of money? Answer: Money serves as a medium of exchange that avoids the problem of double coincidence of wants; it is a unit of account that makes it easier to conduct economic transactions; and it is a store of value that is preserved between transactions. Diff: 1 Topic: Three Properties of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
68) What is a commodity money system? Answer: A commodity money system is a monetary system in which the actual money is a commodity, such as gold or silver. Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 69) What is a gold standard? Answer: A gold standard is a monetary system in which gold backs up paper money. In a traditional gold standard, a person can present paper money to the government and receive its stated value in gold. Diff: 1 Topic: Different Types of Monetary Systems Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 70) Distinguish M1 from M2. Answer: M2 is a broader definition of money that includes assets that are less likely to be used in economic exchanges. M2 includes all the assets in M1 but also includes savings deposits, money market mutual funds and time deposits. Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 71) What are the four components of M1? Answer: currency held by the public; demand deposits; other checkable deposits; traveler's checks Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
72) What are the components of M2? Answer: money market mutual funds; deposits in savings accounts; small time deposits; M1 Diff: 1 Topic: Measuring Money in the U.S. Economy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 13.2 How Banks Create Money 1) One of the essential functions that a bank performs is A) purchasing government bonds. B) creating deposits by lending required reserves. C) transferring money from savers to lenders. D) owning assets like real estate. Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) Loans are examples of a bank's A) assets. B) liabilities. C) net worth. D) balance sheet. Answer: A Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
3) Deposits are examples of a bank's A) assets. B) liabilities. C) net worth. D) balance sheet. Answer: B Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 4) Which of the following is a bank liability? A) reserve deposits held at the Fed B) loans made to customers C) required reserves D) demand deposit balances Answer: D Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) Which of the following is a bank asset? A) demand deposits B) savings account deposits C) certificates of deposit held by the public D) loans made to customers Answer: D Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
6) Which one of the following statements is TRUE? A) Demand deposits are assets of a bank. B) A bank's assets plus its liabilities equals must equal zero. C) A bank's reserves can only be kept as cash in its vault. D) Assets generate income for a bank. Answer: D Diff: 2 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 7) The fraction of deposits that banks are required by law to hold and not lend out are called its A) reserves. B) excess reserves. C) required reserves. D) net worth. Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 8) A bank's reserves A) are the sum of its excess and required reserves. B) can be held as cash in its vault. C) can be held as deposits with the Federal Reserve. D) all of the above. Answer: D Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
9) Given the following information about AAA bank: Bank Deposits $200,000 Loans 100,000 Required Reserves 40,000 Excess Reserves 60,000 What is the reserve ratio? A) 50 percent B) 40 percent C) 20 percent D) 10 percent Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 10) Given the following information about AAA bank: Bank Deposits $50,000 Loans 25,000 Required Reserves 15,000 Excess Reserves 10,000 What is the reserve ratio? A) 50 percent B) 30 percent C) 20 percent D) 15 percent Answer: B Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
11) By law, banks are required to A) hold 100 percent of customer deposits as reserves. B) hold a fraction of their reserves at the Federal Reserve bank. C) hold a fraction of demand deposits as reserves. D) lend out no more than the amount of their required reserves. Answer: C Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 12) Suppose that while vacationing in Switzerland, you won 9,375 Swiss francs, which is the equivalent of $8,000. When you return to the United States, you deposit the $8,000 into your checking account. If the required reserve ratio is 15 percent, this would increase your bank's A) liabilities by $8,000. B) excess reserves by $8,000. C) required reserves by $8,000. D) assets by $1,200. Answer: A Diff: 2 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 13) Logan finds $10 in his jacket pocket and deposits it into a bank. As a result of this single transaction, M1 has A) increased by $10. B) increased by more than $10. C) increased by less than $10. D) not changed. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
14) Given the following information about Gotham Bank: Bank Deposits $50,000 Loans 34,000 Reserves 12,000 Reserve Requirement 20 percent Gotham Bank is holding ________ in excess reserves. A) $22,000 B) $12,000 C) $2,000 D) -$2,000 Answer: C Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 15) Given the following information about Metropolis Bank: Bank Deposits $50,000 Loans 17,500 Required Reserves 30,000 Excess Reserves 2,500 The required reserve ratio must be A) 75 percent. B) 60 percent. C) 30 percent. D) 15 percent. Answer: B Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
16) Suppose a bank has $200,000 in deposits and a reserve ratio of 15 percent. Its required reserves are A) $350. B) $1,500. C) $3,000. D) $30,000. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 17) Suppose a bank has $8 million in deposits and a reserve ratio of 20 percent. Its required reserves are A) $40,000. B) $400,000. C) $1,600,000. D) $16,000,000. Answer: C Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) Suppose a bank has $200,000 in deposits, a reserve ratio of 10 percent, and reserves of $45,000. This bank has excess reserves of A) $155,000. B) $25,000. C) $10,000. D) $5,000. Answer: B Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
19) Suppose a bank has $1 million in deposits, a reserve ratio of 25 percent, and reserves of $250,000. This bank has excess reserves of A) $250,000. B) $125,000. C) $62,500. D) $0. Answer: D Diff: 1 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 20) Suppose a bank has $600,000 in deposits, a reserve ratio of 20 percent, and bank reserves of $240,000. This bank can make new loans in the amount of A) $840,000. B) $360,000. C) $120,000. D) $12,000. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) Suppose a bank has $300,000 in deposits, a reserve ratio of 5 percent, and bank reserves of $45,000. This bank can make new loans in the amount of A) $345,000. B) $45,000. C) $30,000. D) $15,000. Answer: C Diff: 2 Topic: How Banks Create Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
22) Suppose Diego deposits $4,000 in his bank. If the reserve ratio is 10 percent, this will lead to a maximum increase of ________ in checking account balances throughout all banks. A) $0 B) $4,000 C) $10,000 D) $40,000 Answer: D Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 23) Suppose Ariana deposits $75,000 in her bank. If the reserve ratio is 20 percent, this will lead to a maximum increase of ________ in checking account balances throughout all banks. A) $15,000 B) $375,000 C) $750,000 D) $1,500,000 Answer: B Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 24) Suppose Darrell has $4,000 in currency which he deposits in his bank. If the reserve ratio is 25 percent, this will lead to a maximum increase of ________ in M1 throughout all banks. A) $0 B) $4,000 C) $6,000 D) $12,000 Answer: D Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
25) Suppose Jennifer has $42,000 in currency which she deposits in her bank. If the reserve ratio is 50 percent, this will lead to a maximum increase of ________ in M1 throughout all banks. A) $0 B) $21,000 C) $42,000 D) $84,000 Answer: C Diff: 2 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 26) If the banking system has a required reserve ratio of 40 percent, then the money multiplier is A) 2. B) 2.5. C) 4. D) 8. Answer: B Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 27) If the banking system has a required reserve ratio of 25 percent, then the money multiplier is A) 2. B) 4. C) 5. D) 10. Answer: B Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
28) The money multiplier is equal to A) the government spending multiplier. B) the marginal propensity to consume. C) the reserve ratio. D) 1/(reserve ratio). Answer: D Diff: 1 Topic: How the Money Multiplier Works Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 29) A bank may make loans until its A) required reserves are exhausted. B) excess reserves are exhausted. C) total assets are exhausted. D) total liabilities are exhausted. Answer: B Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 30) The money multiplier tends to be greater when A) individuals hold less cash. B) individuals hold more cash. C) banks hold more excess reserves. D) the reserve ratio increases. Answer: A Diff: 1 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
31) The money multiplier will be smaller when A) bank customers prefer to hold a bigger amount of their money as cash (instead of in their checking account). B) banks prefer to lend out 9 percent of their excess reserves instead of 90 percent. C) when the marginal propensity to save declines. D) when the reserve ratio decreases. Answer: A Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 32) If people never withdrew money, how much money could the banking system create given a new amount of deposits, assuming that excess reserves were zero? A) zero B) as much as the new deposits C) the amount of new deposits multiplied by the reserve ratio D) the amount of new deposits multiplied by the money multiplier Answer: D Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system Recall the Application about Bitcoin and other cryptocurrencies to answer the following question(s). 33) According to the Application, Bitcoin is a currency A) that is not backed by any government. B) that can be used anonymously. C) can be used to transfer money without the use of traditional banks. D) all of the above are correct. Answer: D Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
34) According to the Application, Bitcoin and other cryptocurrencies A) require a special method to encode or encrypt transactions. B) are cleared using systems of the Federal Reserve. C) are backed by gold or silver only. D) all of the above are correct. Answer: A Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 35) According to the Application, which of the following functions of money does Bitcoin perform? A) medium of exchange only B) store of value only C) unit of account only D) Bitcoin performs all functions of money. Answer: A Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 36) According to the Application, the disadvantage to using Bitcoin is A) that is not backed by any government. B) that it can be used anonymously. C) can be used to transfer money without the use of traditional banks. D) the value of Bitcoin has varied sharply over time. Answer: D Diff: 1 Topic: Application 2, Bitcoin and Cryptocurrencies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
37) Suppose Kaylee withdraws $4,000 from her bank. If the reserve ratio is 25 percent, then this will lead to a decrease in M1 of A) $1,000. B) $4,000. C) $8,000. D) $12,000. Answer: D Diff: 2 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 38) Suppose George withdraws $60,000 from his bank. If the reserve ratio is 25 percent, then this transaction will lead to a decrease of ________ in checking account balances. A) $15,000 B) $45,000 C) $90,000 D) $180,000 Answer: D Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 39) Isabel receives a check for $7,000 from Kermit and deposits it in her bank. Suppose that the reserve ratio is 10 percent. As a result of this transaction the money supply will A) increase by $70,000. B) decrease by $63,000 and then increase by $70,000. C) decrease by $70,000 and then increase by $63,000. D) not change. Answer: D Diff: 2 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
40) Mr. Garrison has recently obtained a bank card from South Park National Bank. Excited about the concept of using a little plastic card to get money from a machine, he quickly runs down to the nearest ATM and withdraws $500. This action has A) increased the money supply by $500. B) reduced the money supply by $500. C) reduced the bank's required reserves by $25 assuming the reserve ratio is 5 percent. D) not changed the money supply. Answer: C Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 41) Which one of the following would lead to an eventual change in the total money supply? A) a customer's cash withdrawal from an ATM B) a customer moves funds from her checking account to her savings account C) using a credit card to purchase a new television D) depositing a paycheck in a bank Answer: A Diff: 2 Topic: How the Money Multiplier Works in Reverse Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 42) Banks prefer to make loans than keep reserves because they earn interest on loans and must pay interest on reserves. Answer: FALSE Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 43) A bank's required reserves are the fraction of deposits they are required by law to hold as reserves. Answer: TRUE Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
44) A bank's excess reserves are the fraction of a bank's deposits held at the Federal Reserve. Answer: FALSE Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 45) If cash is deposited into a checking account, the supply of money increases. Answer: FALSE Diff: 1 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 46) U.S. banks are required by law to keep most of their assets as reserves. Answer: FALSE Diff: 1 Topic: How the Money Multiplier Works Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 47) If the reserve ratio is 0.3 and a deposit of $1,000 is made to the bank, the bank can lend out $700. Answer: TRUE Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 48) Banks will never hold any additional reserves beyond what is required. Answer: FALSE Diff: 1 Topic: How the Money Multiplier Works Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 49) If the reserve ratio is 0.9, the money multiplier will be 10. Answer: FALSE
Diff: 1 Topic: How the Money Multiplier Works Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 50) When one individual writes a check to another individual the money supply will not be changed. Answer: TRUE Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 51) Explain liabilities and assets as they relate to a bank's balance sheet. Answer: Liabilities are the source of funds for a bank. Included in a bank's liabilities are deposits in the bank and owner's equity. Assets are the uses of the funds of a bank. Assets generate income for a bank. A bank's assets include its loans and reserves. Diff: 1 Topic: A Bank's Balance Sheet: Where the Money Comes From and Where it Goes Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 52) Explain why depositing cash into a checking account does NOT change the money supply. Answer: The deposited cash reduces the currency being held by the public by the same amount as the increase in the checking account. Since currency held by the public and checking accounts are both included in the supply of money, the total money supply does not change—only the location of the money has changed. Diff: 2 Topic: How Banks Create Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
53) Suppose that someone deposits $10,000 into a bank. Assuming a reserve requirement ratio of 20 percent, what will be the eventual increase in checking account balances? Answer: The short way to figure this out is to multiply the initial cash deposit amount by the reciprocal of the reserve ratio (the money multiplier). Therefore, the eventual increase in account balances will be $50,000. Diff: 1 Topic: How the Money Multiplier Works Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 54) Why is the money multiplier in the United States smaller than the inverse of the required reserve ratio? Answer: The formula for the money multiplier assumes that all loans make their way directly into checking accounts. In reality, people hold part of their loans as cash, and that cash is therefore not available for the banking system to lend out. Also, banks hold excess reserves rather than lending all of them out. For both of these reasons the multiplier is smaller in reality than in the illustrations in this chapter. Diff: 2 Topic: How the Money Multiplier Works Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 55) Explain why the money supply does NOT change when one individual writes a check to another. Answer: When one individual writes a check to another there is an offsetting increase and decrease to the money supply. The bank into which the check is deposited begins to expand the money supply but the bank that has lost a deposit begins to contract it. The net result is no change. Diff: 1 Topic: How the Money Multiplier Works in Reverse Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
13.3 A Banker's Bank: The Federal Reserve 1) The Federal Reserve was created in A) 1893. B) 1913. C) 1921. D) 1933. Answer: B Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) Which of the following serves as the central bank for the United States? A) the Federal Reserve System B) the Department of Treasury C) the Federal Deposit Insurance Corporation D) the Congress Answer: A Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 3) The Federal Reserve System was created by the A) U.S. Treasury. B) President. C) Congress. D) Supreme Court. Answer: C Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
4) When checks are exchanged between banks, the Fed oversees the banks to ensure the appropriate funds have been transferred. This is known as A) check kiting. B) check clearing. C) check floating. D) check balancing. Answer: B Diff: 1 Topic: Functions of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) Which of the following is NOT a subgroup of the Federal Reserve System? A) the Federal Reserve Banks B) the Federal Funds Market C) the Board of Governors D) the Federal Open Market Committee Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 6) There are ________ Federal Reserve Banks located in different parts of the United States. A) 10 B) 12 C) 15 D) 50 Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
7) Members of the Federal Reserve Board of Governors A) are appointed to 4 year terms. B) are confirmed by the House of Representatives. C) frequently need to deal with political pressures. D) are members of the Federal Open Market Committee. Answer: D Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 8) The chairperson of the Federal Reserve Board of Governors A) sits on the Federal Open Market Committee. B) is appointed by the President and confirmed by the Treasury. C) serves a fourteen year term as chairman. D) is always the president of the Federal Reserve Bank of New York. Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 9) Which of the following serves as the chairperson of the Federal Open Market Committee? A) The chairperson of the Board of Governors B) The President of the Federal Reserve Bank of New York C) The U.S. Secretary of Treasury D) The Vice President of the United States Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
10) Members of the Board of Governors are A) appointed by the President of the United States and confirmed by the Senate. B) appointed by the President of the United States and confirmed by the House of Representatives. C) appointed by the U.S. Secretary of Treasury and confirmed by the President of the United States. D) appointed by member-banks and confirmed by the House of Representatives. Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 11) The chairperson of the Board of Governors serves ________ years as the main spokesperson for monetary policy in the United States. A) 4 B) 7 C) 12 D) 14 Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 12) Each member of the Board of Governors are appointed for a nonrenewable ________ term. A) 14-year B) 7-year C) 12-year D) 4-year Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
13) The group responsible for making decisions regarding monetary policy is the A) Federal Open Market Committee. B) Board of Governors only. C) Federal Advisory Council. D) group of 12 Federal Reserve Bank presidents only. Answer: A Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 14) The voting members of the Federal Open Market Committee are A) all of the members of the Board of Governors and all of the presidents of the 12 Federal Reserve banks. B) all of the members of the Board of Governors and five of the presidents of the 12 Federal Reserve banks. C) the presidents of the 12 Federal Reserve banks and three members of the Board of Governors. D) only the members of the Board of Governors. Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 15) The president of the Federal Reserve Bank of ________ is always a member of the FOMC. A) Minneapolis B) Boston C) Washington, D.C. D) New York Answer: D Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
16) There are ________ members of the FOMC. A) 5 B) 7 C) 12 D) 19 Answer: C Diff: 1 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 17) The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to A) ensure that the governors become well-experienced at policymaking. B) insulate the governors' policy decisions from the influence of presidential elections and politics. C) promote unity of opinion from shared time together. D) establish long-standing ties with high-level officials of other nations' central banks. Answer: B Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) The Federal Reserve is ________ the U.S. Treasury. A) independent of B) a part of C) a creation of D) under the control of Answer: A Diff: 1 Topic: The Independence of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
19) Studies by economists have tended to show that countries with more independent central banks have A) more inflation. B) less inflation. C) higher unemployment. D) lower unemployment. Answer: B Diff: 1 Topic: The Independence of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 20) The Federal Reserve System is the central bank of the United States. Answer: TRUE Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) Monetary policy refers to the actions taken by the Treasury Department to set the level of the money supply. Answer: FALSE Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 22) In practice, the Board of Governors and the chairperson of the Federal Reserve have the real control over monetary policy. Answer: TRUE Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
23) Every country in the world has an independent central bank. Answer: FALSE Diff: 2 Topic: The Structure of the Federal Reserve Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 24) Headquartered in Washington, D.C., the Board of Governors of the Federal Reserve determines monetary policies and strategies based on the state of the economy. Answer: TRUE Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 25) The Federal Reserve is a branch of the Treasury Department, and is therefore subject to significant government control. Answer: FALSE Diff: 1 Topic: The Independence of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 26) List four of the Federal Reserve's key functions. Answer: The Fed supplies currency to the economy. The Fed provides a system of check collecting and clearing. The Fed holds reserves from banks and regulates banks. The Fed conducts monetary policy. Diff: 1 Topic: A Banker's Bank: The Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
27) List and explain the three subgroups of the Federal Reserve System. Answer: The 12 Federal Reserve banks are the regional banks from each of the 12 Federal Reserve districts. The Board of Governors of the Federal Reserve is the sevenperson governing body of the Federal Reserve System. The Federal Open Market Committee decides on monetary policy, and consists of the seven members of the Board of Governors plus 5 of the 12 regional bank presidents. Diff: 1 Topic: The Structure of the Federal Reserve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 28) Describe the relationship between the Federal Reserve and the legislative and executive branches of the U.S. government. Answer: Although the Fed operates with independence from the U.S. Treasury, it is a creation of Congress and the chairperson of the Board of Governors is required to report to Congress on a regular basis. In practice, the Fed takes its actions first and later reports those actions to Congress. The chairperson of the Fed often will meet with members of the executive branch to discuss economic affairs. Presidents and members of Congress can bring political pressures on the Board of Governors of the Fed but 14-year terms provide some insulation from external pressures. Diff: 2 Topic: The Independence of the Federal Reserve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
13.4 What the Federal Reserve Does During a Financial Crisis Recall the Application about how policymakers use stress tests to protect the financial system to answer the following question(s). 1) According to this Application, after the financial crisis of 2008, former Treasury Secretary Timothy Geithner and his staff made a proposal that major banks and financial institutions be subjected to A) yearly audits. B) stress tests. C) regulation by Congress. D) none of the above. Answer: B Diff: 1 Topic: Application 3, Stress Tests for the Financial System Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) According to this Application, a bank will be required to develop an analytical model to determine what would happen if there was a ________ change in economic conditions, such as a large ________ in unemployment. A) positive; increase B) positive; decrease C) negative; increase D) negative; decrease Answer: C Diff: 1 Topic: Application 3, Stress Tests for the Financial System Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 3) According to this Application, if a bank does NOT pass the test, the Fed can A) prevent the bank from paying out dividends to its shareholders. B) make the bank raise additional capital from the financial markets. C) force the bank to close. D) Both A and B are correct. Answer: D Diff: 1 Topic: Application 3, Stress Tests for the Financial System Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system Recall the Application about the Fed's response to the collapse of the investment
house Bear Stearns as well as its handling of the 2008 financial crisis with respect to other financial institutions to answer the following question(s). 4) According to this Application, the Fed increased its lending by hundreds of billions of dollars to financial institutions as a response to the ongoing financial crisis. This increase in loans to financial institutions increased the supply of money in the economy. When the supply of money increases, the money supply curve will A) shift to the right, increasing the interest rate. B) shift to the right, decreasing the interest rate. C) shift to the left, increasing the interest rate. D) shift to the left, decreasing the interest rate. Answer: B Diff: 1 Topic: Application 4, Coping with the Financial Chaos Caused by the Mortgage Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) According to the Application, in response to the financial crisis, the Fed implemented a new policy in which it began to pay interest on deposits held at the Fed. This move would ________ deposits held at the Fed and ________ the Fed's ability to make loans. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase Answer: D Diff: 2 Topic: Application 4, Coping with the Financial Chaos Caused by the Mortgage Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
6) According to this Application, the Fed responded to the financial crisis by continuing to develop new programs. One example of this was its announcement that it would now purchase commercial paper, which is the short-term debt of corporations. This is an example of the Fed acting as a A) medium of exchange. B) lender of last resort. C) store of value. D) unit of account. Answer: B Diff: 1 Topic: Application 4, Coping with the Financial Chaos Caused by the Mortgage Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 13.5 Appendix: Formula for Deposit Creation 1) Assuming that banks have loaned all excess reserves, then an increase in checking account balances brought about by an increase in deposits is equal to A) (the initial deposit) × (the reserve ratio). B) (the initial deposit) × (1 / reserve ratio). C) (total reserves) × (1 / reserve ratio). D) (total reserves) × ( the reserve ratio). Answer: B Diff: 1 Topic: Formula for Deposit Creation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 2) The formula for an infinite sum is A) 1 + b + b2 + b3 + b4 + ... = 1 / b. B) 1 + b + b2 + b3 + b4 + ... = 1 / (1 + b). C) 1 + b + b2 + b3 + b4 + ... = 1 / (1 - b). D) 1 + b + b2 + b3 + b4 + ... = b / (1 - b). Answer: C Diff: 2 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
3) If the reserve ratio is designated by "r," how much of a deposit can banks lend out? A) 1 / r B) (1 - r) C) 1 / (1 - r) D) r / (1 - r) Answer: B Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 4) Using the formula for an infinite sum, if "r" designates the reserve ratio, the 1 / reserve ratio would equal A) (1 - r). B) 1 / (1 - r). C) 1 / [1 - (1 - r)]. D) r / (1 - r). Answer: C Diff: 2 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 5) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 20 percent, an initial deposit of $850 will lead to total deposits of A) $425. B) $850. C) $4,250. D) $42,500. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
6) Assuming all excess reserves are loaned out, if the reserve ratio is 40 percent, the money multiplier will be equal to A) 2. B) 2.5. C) 4. D) 6. Answer: B Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 7) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 5 percent, an initial deposit of $10,000 will lead to a total increase in deposits of A) $500. B) $10,000. C) $50,000. D) $200,000. Answer: D Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 8) Assuming all excess reserves are loaned out, if the reserve ratio is 3.33 percent, the money multiplier will be equal to A) 0.67. B) 3.33. C) 6.67. D) 30. Answer: D Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
9) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 25 percent, an initial deposit of $3,000 will lead to a total increase in deposits of A) $750. B) $2,250. C) $12,000. D) $36,000. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 10) Assuming all excess reserves are loaned out, if the reserve ratio is 25 percent, the money multiplier will be equal to A) 0.5. B) 2.5. C) 4. D) 5. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 11) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 2 percent, an initial deposit of $500 will lead to a total increase in deposits of A) $250. B) $5,000. C) $25,000. D) $50,000. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
12) Assuming all excess reserves are loaned out, if the reserve ratio is 1 percent, the money multiplier will be equal to A) 1. B) 10. C) 11. D) 100. Answer: D Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 13) Assuming all excess reserves are loaned out, currency holdings by the public are zero, and a reserve ratio of 20 percent, an initial deposit of $6,000 will lead to a total increase in deposits of A) $12,000. B) $24,000. C) $30,000. D) $36,000. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 14) Assuming all excess reserves are loaned out, if the reserve ratio is 8 percent, the money multiplier will be equal to A) 2. B) 8. C) 12.5. D) 16.67. Answer: C Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
15) An increase in checking account balances equals the initial deposit multiplied by total reserves. Answer: FALSE Diff: 1 Topic: Formula for Deposit Creation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 16) The formula for an infinite sum is 1 / (1 - b), where b = (1 - reserve ratio). Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 17) If the reserve ratio is designated by "r," the amount of deposits a bank can lend out is equal to [D × (1 - r)]. Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) If the reserve ratio is designated by "r," the amount of deposits a bank can hold as excess reserves is equal to 1 / (1 - r). Answer: FALSE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 19) If the reserve ratio is 4 percent, the money multiplier is equal to 25. Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 20) If the reserve ratio is 10 percent, the money multiplier is equal to 10.
Answer: TRUE Diff: 1 Topic: Formula for Deposit Creation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 14 The Federal Reserve and Monetary Policy 14.1 The Money Market 1) In the short run when prices don't have enough time to change, the Federal Reserve A) can influence the level of interest rates in the economy. B) cannot influence the level of interest rates in the economy. C) can influence the level of interest rates in the economy but generally will not because it would be destabilizing. D) can only affect the amount of money in the economy. Answer: A Diff: 1 Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 2) Generally, when the Federal Reserve lowers interest rates, investment spending ________ and GDP ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases Answer: B Diff: 1 Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 3) When the Federal Reserve increases interest rates, investment spending ________ and GDP ________. A) increases; decreases B) increases; increases C) decreases; decreases D) decreases; increases Answer: C Diff: 1
Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 4) The nominal interest rate is determined in the A) stock market. B) money market. C) exchange market. D) bond market. Answer: B Diff: 1 Topic: The Money Market Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 5) The transaction demand for money comes mostly from the fact that A) money is a store of value. B) money is a medium of exchange. C) money is a unit of account. D) money has low opportunity cost. Answer: B Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 6) The opportunity cost of holding money is A) heavy and awkward. B) the probability of theft or loss. C) the ease of conducting everyday business. D) the return that could have been earned from holding wealth in other assets. Answer: D Diff: 1 Topic: The Demand for Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
7) Suppose that the interest rate available to you on a long-term bond is 4 percent. If you hold $1,000 of your wealth in currency instead of in the form of a bond, the annual opportunity cost is A) $0.04. B) $4. C) $40. D) $400. Answer: C Diff: 1 Topic: The Demand for Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 8) At higher interest rates the A) money supply is higher. B) money supply is indeterminate. C) quantity of money demanded is higher. D) quantity of money demanded is lower. Answer: D Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 9) At lower interest rates the A) money supply is indeterminate. B) money supply is lower. C) quantity of money demanded is higher. D) quantity of money demanded is lower. Answer: C Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
10) An increase in the price level in the economy leads to A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: B Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 11) A decrease in the price level in the economy leads to A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: A Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 12) An increase in the level of real GDP in the economy leads to A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: B Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
13) A decrease in the level of real GDP in the economy leads to A) a leftward shift in the demand for money curve. B) a rightward shift in the demand for money curve. C) a leftward movement along the demand for money curve. D) a rightward movement along the demand for money curve. Answer: A Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 14) Which of the following factors does NOT shift the demand curve for money? A) changes in the interest rate B) changes in the price level in the economy C) changes in real income D) changes in real GDP Answer: A Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 15) The demand for money that arises so that individuals or firms can make purchases on quick notice is called the A) real demand for money. B) transaction demand for money. C) liquidity demand for money. D) speculative demand for money. Answer: C Diff: 1 Topic: The Demand for Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
16) The demand for money that arises because holding money over short periods of time is less risky than holding stocks or bonds is called the A) transactions demand for money. B) liquidity demand for money. C) opportunity cost demand for money. D) speculative demand for money. Answer: D Diff: 1 Topic: The Demand for Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 17) If your wealth is held as currency, in checking accounts, or other assets that you can convert to money on short notice, your assets are considered to be A) abundant. B) fast moving. C) interest bearing. D) liquid. Answer: D Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 18) What is the motivation for individuals to hold money? A) to reduce risk B) to have liquidity C) to facilitate transactions D) all of the above Answer: D Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced
Recall the Application about the Fed's policy of quantitative easing to answer the following question(s). 19) This Application refers to quantitative easing, a policy that occurs when the Fed A) changes the reserve requirement. B) sells mortgage-backed securities. C) purchases long-term securities. D) raises the discount rate. Answer: C Diff: 1 Topic: Application 1, Quantitative Easing and the Fed's Balance Sheet Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 20) Recall the Application. By the end of the last phase of quantitative easing in late 2014, that value of the Fed's assets was A) $1 trillion. B) $2 trillion. C) $3 trillion. D) $4.5 trillion. Answer: D Diff: 1 Topic: Application 1, Quantitative Easing and the Fed's Balance Sheet Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) Recall the Application. The Fed's goal of this policy was to ________ the prices of government bonds and mortgage securities and ________ the interest rates on both bonds and mortgages. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 1 Topic: Application 1, Quantitative Easing and the Fed's Balance Sheet Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
22) The Fed has immense power and there are no limits to the extent to which it can effectively control the economy. Answer: FALSE Diff: 1 Topic: The Federal Reserve and Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 23) We use interest rates to measure the opportunity cost of holding money. Answer: TRUE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 24) The quantity of money demanded will increase as interest rates increase. Answer: FALSE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 25) Both increases in the price level and increases in real GDP will decrease the demand for money. Answer: FALSE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 26) If your assets are highly liquid, this means you can make transactions on short notice. Answer: TRUE Diff: 1 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 27) What three factors affect the demand for money? Answer: the interest rate, the price level, and the level of real GDP
Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 28) Explain the three different types of money demand. Answer: Transaction demand refers to the demand for money based on the desire to facilitate transactions, because money makes it easier to conduct everyday transactions. Liquidity demand refers to the desire to hold money to make transactions on quick notice without incurring excessive costs. Speculative demand refers to holding money during periods of economic volatility when money is believed to be a safer asset than stocks or bonds. Diff: 2 Topic: The Demand for Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced 14.2 How the Federal Reserve Can Change the Money Supply 1) The one organization that has the power to change the total amount of reserves in the banking system is the A) Congress. B) Executive Branch of the Federal Government. C) U.S. Treasury. D) Federal Reserve System. Answer: D Diff: 1 Topic: How the Federal Reserve Can Change the Money Supply Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
2) Increased investment spending in the economy would be a possible result of A) an increase in interest rates. B) an open market purchase of bonds by the Fed. C) an open market sale of bonds by the Fed. D) a decrease in the money supply. Answer: B Diff: 2 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 3) Decreased investment spending in the economy would be a possible result of A) a decrease in interest rates. B) an open market purchase of bonds by the Fed. C) an open market sale of bonds by the Fed. D) an increase in the money supply. Answer: C Diff: 2 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 4) From time to time, the Federal Reserve buys back government bonds from the private sector through a process called A) bond recall procedures. B) open market purchases. C) backflip bond investments. D) voluntary redemption procedures. Answer: B Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
5) From time to time, the Federal Reserve sells various quantities of government bonds to the private sector through a process called A) bond recall procedures. B) backflip bond investments. C) open market sales. D) voluntary redemption procedures. Answer: C Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 6) Selling government bonds through open market operations allows the Federal Reserve to A) decrease money in the Treasury. B) decrease the money supply in the private sector. C) receive discounts on future sales. D) receive a high rate of interest on the bonds. Answer: B Diff: 2 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 7) How can the Federal Reserve actually increase the money supply? A) by delaying transfer of money among banks B) by raising the discount rate C) by doubling the reserve requirement D) by purchasing more government bonds in the open market Answer: D Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
8) What would be a way for the Federal Reserve to stimulate a sluggish economy? A) print more money B) buy government bonds on the open market C) sell more government bonds D) encourage the stock market Answer: B Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 9) What would be a way for the Federal Reserve to slow down the economy when it is growing too quickly or is inflationary? A) print more money B) buy back government bonds on the open market C) sell more government bonds D) encourage the stock market Answer: C Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 10) An open market purchase by the Fed A) increases the total amount of reserves in the banking system. B) decreases the total amount of reserves in the banking system. C) does not change the total amount of reserves in the banking system. D) causes the reserve requirement to fall. Answer: A Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
11) The most commonly used tool in monetary policy is A) changes in required reserve ratios. B) changes in the discount rate. C) open market operations. D) express lending transactions. Answer: C Diff: 2 Topic: Open Market Operations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 12) To increase the money supply using the reserve requirements, what would the Fed typically do? A) increase the reserve requirement for banks B) reduce the reserve requirement for banks C) make each bank set its own reserve levels D) let each bank get more currency from the Treasury Answer: B Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 13) To decrease the money supply using the reserve requirements, what would the Fed typically do? A) raise the reserve requirement for banks B) reduce the reserve requirement for banks C) make each bank voluntarily set its own reserve levels D) let each bank get less currency from the Treasury Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
14) If the Federal Reserve wanted to change the money supply in the economy, it would be least likely to A) buy bonds on the open market. B) sell bonds on the open market. C) change the level of reserves required to be held by banks. D) change the federal funds rate. Answer: C Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 15) By raising the discount rate, the Federal Reserve ________ banks from borrowing more reserves. A) encourages B) discourages C) prohibits D) short-changes Answer: B Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 16) A change in the reserve requirement is used infrequently by the Fed because it A) is disruptive to the banking system. B) does not influence the money supply. C) does not affect bank reserves. D) does not affect the money multiplier. Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
17) The rate of interest charged to commercial banks by the Fed for loans is called the ________ rate. A) federal funds B) discount C) prime D) commercial paper Answer: B Diff: 1 Topic: Other Tools of the Fed Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 18) The federal funds rate is the interest rate that A) the Fed charges to banks that borrow from it. B) banks charge the Fed for using their reserves. C) the Fed pays on bank reserves. D) banks charge each other for borrowed money. Answer: D Diff: 1 Topic: Other Tools of the Fed Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 19) An increase in the discount rate A) reduces the cost of reserves borrowed from the Fed. B) signals the Fed's desire to increase the money supply. C) signals the Fed's desire to lend increased reserves to banks. D) increases the cost of reserves borrowed from the Fed. Answer: D Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
20) A decrease in the discount rate A) reduces the cost of borrowing from the Fed. B) signals the Fed's desire to decrease the money supply. C) signals the Fed's desire to reduce lending to commercial banks. D) increases the cost of reserves borrowed from the Fed. Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 21) An increase in the discount rate will A) decrease the money supply. B) not affect the money supply. C) increase the money supply. D) have an unclear effect on the money supply. Answer: A Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 22) A decrease in the discount rate will A) decrease the money supply. B) not affect the money supply. C) increase the money supply. D) have an unclear effect on the money supply. Answer: C Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
23) Which action could the Fed use to decrease the money supply? A) an open market purchase B) an increase in the required reserve ratio C) a tax increase D) a decrease in the discount rate Answer: B Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 24) In addition to lowering the discount rate to increase the money supply, the Fed could also A) purchase bonds on the open market and raise reserve requirements. B) sell bonds on the open market and raise reserve requirements. C) purchase bonds on the open market and lower reserve requirements. D) sell bonds on the open market and lower reserve requirements. Answer: C Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 25) In practice, the Federal Reserve keeps the discount rate close to the ________ rate in order to avoid large swings in borrowed reserves by banks. A) inflation B) six-month Treasury bill C) federal funds D) prime Answer: C Diff: 1 Topic: Other Tools of the Fed Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
26) What impact does the Fed's raising the interest rate have on the money supply and on the price level? A) An increase in interest rates raises the money supply and eventually reduces prices. B) An increase in interest rates reduces the money demand which will slow the growth in prices. C) An increase in interest rates lowers the money supply and raises the money demand, which will neutralize price increases. D) An increase in interest rates will increase investment spending and GDP, which will lower prices. Answer: B Diff: 3 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27) What impact would the Fed's raising the interest rate have on any inflationary pressure in the economy? A) An increase in interest rates decreases the money demand, which could slow increases in the price level. B) An increase in interest rates increases the money supply, which could cause the price level to increase. C) An increase in interest rates decreases the exchange rate, which causes net exports to rise, generating inflation. D) An increase in interest rates increases real GDP, which creates inflation in an economy. Answer: A Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 28) The Fed can change the money supply by buying or selling long-term Treasury bonds. Purchasing long-term securities is commonly called A) open market operations. B) discount operations. C) federal funds speculation. D) quantitative easing. Answer: D Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
29) When the Fed makes higher interest payments on bank reserves, banks will hold ________ reserves which will ________ the money supply. A) more; increase B) more; decrease C) less; increase D) less; decrease Answer: B Diff: 2 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 30) When the Federal Reserve buys bonds on the open market, it decreases the money supply. Answer: FALSE Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 31) An open market sale of bonds by the Federal Reserve will lead to an increase of reserves in banks. Answer: FALSE Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 32) When the Federal Reserve decreases the money supply, it generally does so by purchasing bonds. Answer: FALSE Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
33) Banks can obtain funds to make loans by borrowing reserves from other banks through the federal funds market. Answer: TRUE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 34) If the Federal Reserve raises the discount rate, banks will be inclined to borrow additional reserves and the money supply will increase. Answer: FALSE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 35) The prime rate is the interest rate at which banks can borrow from the Fed. Answer: FALSE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 36) The Fed has recently paid interest on the required and excess reserves that banks hold. Answer: TRUE Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
37) If the Federal Reserve is interested in conducting contractionary policy, what types of policies should it consider? Answer: Examples of contractionary monetary policy include open market sales, increasing the reserve requirements for banks and increasing the discount rate. In all three instances, the money supply decreases. Diff: 1 Topic: How the Federal Reserve Can Change the Money Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 38) How would the Fed's sale of government bonds on the open market affect the money supply? Answer: The Fed, by selling bonds, is decreasing the supply of money, because it is taking money out of the hands of people who would otherwise deposit it in a bank, which would in turn loan it out. Diff: 1 Topic: Open Market Operations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 39) How would the Fed's reduction of the reserve ratio requirement affect the money supply? Answer: Since banks would rather loan out deposits than hold them as reserves, banks would respond to this policy change by loaning more, thereby increasing the money supply. Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system 40) How would the Fed's changing the discount rate affect the money supply? Answer: When the Fed changes the discount rate, it changes the amount banks must pay to borrow money from the Fed. If the Fed raises the discount rate, it charges banks more to borrow money, making banks less likely to borrow and therefore, giving banks less money to loan out, which would reduce the money supply. Conversely, if the Fed lowers the discount rate, banks would borrow and loan out more money, which would increase the money supply. Diff: 1 Topic: Other Tools of the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system
14.3 How Interest Rates Are Determined: Combining the Demand and Supply of Money 1) The Federal Reserve influences the level of interest rates in the short run by changing the A) demand for money through open market operations. B) demand for money through changes in reserve requirements. C) supply of money through open market operations. D) supply of money through changes in stock market operations. Answer: C Diff: 2 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) The ________ determines the supply of money. A) Congress B) President C) Federal Reserve D) banking system Answer: C Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) Equilibrium in the money market occurs when A) the quantity of money demanded equals the quantity of money supplied. B) the quantity of money demanded is less than the quantity of money supplied. C) the quantity of money demanded is more than the quantity of money supplied. D) the interest rate equals the money supply. Answer: A Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
4) If the quantity of money demanded exceeds the quantity of money supplied, then the A) equilibrium interest rate stays the same. B) equilibrium interest rate will increase. C) equilibrium interest rate will decrease. D) effect on the equilibrium interest rate is indeterminate. Answer: B Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) If the quantity of money demanded is less than the quantity of money supplied, then the A) interest rate stays the same. B) interest rate will increase. C) interest rate will decrease. D) effect on the interest rate is indeterminate. Answer: C Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) If the Federal Reserve conducts an open market purchase, the A) interest rate will not change. B) interest rate will increase. C) interest rate will decrease. D) money supply is decreased. Answer: C Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
7) If the Federal Reserve conducts an open market sale, the A) interest rate will not change. B) interest rate will increase. C) interest rate will decrease. D) money supply is increased. Answer: B Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) Based on the model of the money market, if prices in the economy decrease, the equilibrium interest rate should A) stay the same. B) increase. C) decrease. D) increase to the same extent that the supply of money increases. Answer: C Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) Based on the model of the money market, when real GDP increases, the equilibrium interest rate should A) stay the same. B) increase. C) decrease. D) increase to the same extent that the supply of money increases. Answer: B Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
10) Based on the model of the money market, when real income decreases, the equilibrium interest rate should A) stay the same. B) increase. C) decrease. D) increase to the same extent that the supply of money increases. Answer: C Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) Based on the model of the money market, if the Federal Reserve increases the reserve requirement, the equilibrium interest rate should A) stay the same. B) increase. C) decrease. D) increase to the same extent that the demand for money increases. Answer: B Diff: 3 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 12) As interest rates fall, the A) price of bonds rises. B) price of bonds falls. C) face values of bonds fall. D) promised payments of bonds fall. Answer: A Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
13) If a bond was to pay off one year from now for $440 and the interest rate is 10 percent, what is the price of the bond? A) $44 B) $400 C) $440 D) $484 Answer: B Diff: 1 Topic: Interest Rates and Bond Prices Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) If a bond was to pay off one year from now for $321 and the interest rate is 7 percent, what is the price of the bond? A) $147 B) $279 C) $300 D) $342 Answer: C Diff: 1 Topic: Interest Rates and Bond Prices Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) If a bond was to pay off one year from now for $630 and was purchased for $600, what is the interest rate? A) 3 percent B) 5 percent C) 15 percent D) 30 percent Answer: B Diff: 1 Topic: Interest Rates and Bond Prices Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
16) If a bond was to pay off one year from now for $840 and was purchased for $800, what is the interest rate? A) 4 percent B) 5 percent C) 20 percent D) 40 percent Answer: B Diff: 1 Topic: Interest Rates and Bond Prices Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 17) If a one-year bond is purchased for $400 and the interest rate is 8 percent, what will it pay in one year? A) $48 B) $368 C) $400 D) $432 Answer: D Diff: 1 Topic: Interest Rates and Bond Prices Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) If a one-year bond is purchased for $700 and the interest rate is 5 percent, what will it pay in one year? A) $35 B) $665 C) $735 D) $770 Answer: C Diff: 1 Topic: Interest Rates and Bond Prices Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
19) As the Federal Reserve ________ bonds, interest rates fall and the price of bonds ________. A) buys; rises B) sells; rises C) buys; falls D) sells; falls Answer: A Diff: 2 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 20) As the Federal Reserve ________ bonds, interest rates rise and the price of bonds ________. A) buys; rises B) sells; rises C) buys; falls D) sells; falls Answer: D Diff: 2 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 21) When the Fed ________ interest rates, bond prices ________. A) raises; rise B) lowers; rise C) raises; do not change D) lowers; do not change Answer: B Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
22) When the economy is experiencing a boom, it causes the money demand to ________ and the bond prices to ________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: A Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 23) When the economy is a recession, it causes the money demand to ________ and the bond prices to ________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: C Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 24) When the economy is experiencing a boom, it causes the interest rates to ________ and the bond prices to ________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: A Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
25) When the economy is a recession, it causes the interest rates to ________ and the bond prices to ________. A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease Answer: C Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation Recall the Application about the possible link between interest rates and commodity prices worldwide to answer the following question(s). 26) According to this Application, some economists noticed that commodity prices such as oil increased since the summer of 2010. They suggested that the increase in the commodity prices was caused by A) expansionary monetary policy used by the U.S. and other major economies. B) expansionary fiscal policy used by the U.S. and other major economies. C) contractionary monetary policy used by the U.S. and other major economies. D) contractionary fiscal policy used by the U.S. and other major economies. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
27) According to this Application, which of the following is a theoretical explanation for why commodity prices rise with expansionary monetary policy? A) lower interest rates lower the cost of holding commodities in inventories, resulting in an increase in the commodity demand. B) lower interest rates raise the cost of holding commodities in inventories, resulting in an increase in the commodity demand. C) higher interest rates lower the cost of holding commodities in inventories, resulting in an increase in the commodity demand. D) lower interest rates lower the cost of holding commodities in inventories, resulting in an decrease in the commodity demand. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 28) According to this Application, which of the following is a theoretical explanation for why commodity prices rise with expansionary monetary policy? A) lower interest rates raise bond prices, so investors invest less in bonds and more in commodities. B) higher interest rates raise bond prices, so investors invest less in bonds and more in commodities. C) lower interest rates raise bond prices, so investors invest more in bonds and more in commodities. D) lower interest rates lower bond prices, so investors invest less in bonds and more in commodities. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
29) According to the Application, what is the conclusion regarding the link between monetary policy and commodity prices? A) We should be cautious in linking monetary policy and commodity prices because there is no simple relationship between the two. B) It is certain that there is a negative relationship between monetary policy and commodity prices. Expansionary policy lowers commodity prices. C) It is certain that there is a positive relationship between monetary policy and commodity prices. Expansionary policy raises commodity prices. D) It is certain that there is no relationship between monetary policy and commodity prices. Expansionary policy does not change commodity prices. Answer: A Diff: 2 Topic: Application 2, Commodity Prices and Interest Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 30) The supply of money is determined by the Federal Reserve and is dependent on the demand for money. Answer: FALSE Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 31) Interest rates will increase if the Fed conducts an open market purchase. Answer: FALSE Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 32) If the actual interest rate in the money market is higher than the equilibrium interest rate, there would be an excess supply of money. Answer: TRUE Diff: 1 Topic: How Interest Rates are Determined: Combining the Demand and Supply of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
33) Typically, bond prices fall as interest rates rise. Answer: TRUE Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 34) Suppose that a bond promises to pay $107 next year but the interest rate falls from 7 percent to 3 percent per year. How much will the price of the bond be and why? Answer: At 7% interest the price of the bond would have been $100 because you would need $100 invested at 7% to receive $107 next year. If the interest rate falls to 3% we can use the formula that says the price of the bond is the promised payment divided by one plus the interest rate to calculate that the price would now be $103.88. The price of the bond has risen because at the lower interest rate you would need to invest a larger sum in order to receive $107 next year. Diff: 2 Topic: Interest Rates and Bond Prices Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 35) Explain why higher interest rates result in lower bond prices. Answer: The price of a bond is calculated as promised payment/(1+interest rate). As the interest rate rises, it will take less money in the present (the price of the bond) to get the same amount of promised value in the future. Diff: 2 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 36) Explain how expansionary monetary policy will cause a higher bond price. Answer: When the Fed conducts expansionary monetary policy, it is buying bonds to increase the money supply. Since the policy increases the demand for bonds, the price of the bonds will increase and the interest rates will fall. Diff: 2 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
37) Explain why a recession is good news for "bond prices." Answer: When real GDP decreases during a recession, the demand for money will decrease. The lower demand for money will decrease interest rates. Since bond prices move in the opposite direction from interest rates, when interest rates decrease, as they do when real GDP is falling, bond prices will rise. Diff: 2 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 38) Explain why "good news for the economy is bad news for bond prices." Answer: When real GDP increases, the demand for money will increase. The increased demand for money will increase interest rates. Since bond prices move in the opposite direction from interest rates, when interest rates increase, as they do when real GDP is growing, bond prices will decrease. Diff: 1 Topic: Interest Rates and Bond Prices Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14.4 Interest Rates and How They Change Investment and Output (GDP) 1) An open market ________ by the Fed increases the money supply, which leads to ________ interest rates and increased GDP. A) purchase; increased B) purchase; decreased C) sale; increased D) sale; decreased Answer: B Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
2) An open market ________ by the Fed decreases interest rates and ________ investment. A) purchase; increases B) purchase; decreases C) sale; increases D) sale; decreases Answer: A Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) An open market purchase by the Fed A) increases investment and increases output. B) increases investment and decreases output. C) decreases investment and increases output. D) decreases investment and decreases output. Answer: A Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 4) An open market ________ by the Fed decreases the money supply, which leads to ________ interest rates and a fall in investment spending. A) sale; increased B) sale; decreased C) purchase; increased D) purchase; decreased Answer: A Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
5) An open market ________ by the Fed increases interest rates and ________ output. A) sale; increases B) sale; decreases C) purchase; increases D) purchase; decreases Answer: B Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) An open market sale by the Fed A) increases the money supply and increases output. B) increases the money supply and decreases output. C) decreases the money supply and increases output. D) decreases the money supply and decreases output. Answer: D Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 7) Actions by the Federal Reserve to influence the level of GDP are known as A) monetary policy. B) fiscal policy. C) cyclical policy. D) procyclical policy. Answer: A Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
8) An increase in the reserve requirement A) increases the money supply, which leads to increased interest rates and a decrease in GDP. B) increases the money supply, which leads to decreased interest rates and a decrease in GDP. C) decreases the money supply, which leads to increased interest rates and a decrease in GDP. D) decreases the money supply, which leads to decreased interest rates and a decrease in GDP. Answer: C Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) A decrease in the reserve requirement A) increases the money supply, which leads to increased interest rates and a fall in investment spending. B) increases the money supply, which leads to decreased interest rates and a rise in investment spending. C) decreases the money supply, which leads to increased interest rates and a fall in investment spending. D) decreases the money supply, which leads to decreased interest rates and a rise in investment spending. Answer: B Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 10) If the Fed wished to decrease GDP, it could A) increase the reserve requirement or conduct an open market sale. B) increase the reserve requirement or conduct an open market purchase. C) decrease the reserve requirement or conduct an open market sale. D) decrease the reserve requirement or conduct an open market purchase. Answer: A Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
11) If the Fed wished to decrease interest rates, it could A) increase the reserve requirement or conduct an open market sale. B) increase the reserve requirement or conduct an open market purchase. C) decrease the reserve requirement or conduct an open market sale. D) decrease the reserve requirement or conduct an open market purchase. Answer: D Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 12) If the Fed wished to decrease inflation, it could A) increase the reserve requirement or conduct an open market sale. B) increase the reserve requirement or conduct an open market purchase. C) decrease the reserve requirement or conduct an open market sale. D) decrease the reserve requirement or conduct an open market purchase. Answer: A Diff: 3 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 13) The exchange rate is A) the rate at which banks can borrow from the Fed. B) the slope of the investment function. C) the price at which one currency trades for another currency. D) the rate at which one can translate money into consumption goods. Answer: C Diff: 1 Topic: Monetary Policy and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
14) Lower U.S. interest rates cause the value of the dollar to A) rise, making U.S. goods relatively cheaper on world markets. B) rise, making U.S. goods relatively more expensive on world markets. C) fall, making U.S. goods relatively cheaper on world markets. D) fall, making U.S. goods relatively more expensive on world markets. Answer: C Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) Higher U.S. interest rates cause the value of the dollar to A) rise, making U.S. goods relatively cheaper on world markets. B) rise, making U.S. goods relatively more expensive on world markets. C) fall, making U.S. goods relatively cheaper on world markets. D) fall, making U.S. goods relatively more expensive on world markets. Answer: B Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 16) An open market purchase by the Fed causes the value of the dollar to A) rise, increasing net exports. B) rise, reducing net exports. C) fall, increasing net exports. D) fall, reducing net exports. Answer: C Diff: 3 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
17) An open market sale by the Fed causes the value of the dollar to A) rise, increasing net exports. B) rise, reducing net exports. C) fall, increasing net exports. D) fall, reducing net exports. Answer: B Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) A rise in the value of a currency is called a(n) A) depreciation. B) appreciation. C) consolation. D) integration. Answer: B Diff: 1 Topic: Monetary Policy and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 19) A decrease in the value of a currency is called a(n) A) depreciation. B) appreciation. C) consolation. D) integration. Answer: A Diff: 1 Topic: Monetary Policy and International Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
20) The appreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents. A) more expensive; more expensive B) cheaper; cheaper C) more expensive; cheaper D) cheaper; more expensive Answer: C Diff: 1 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 21) The depreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents. A) more expensive; more expensive B) cheaper; cheaper C) more expensive; cheaper D) cheaper; more expensive Answer: D Diff: 1 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 22) A U.S. company that wishes to sell more to other countries would favor A) an appreciation of the dollar. B) a depreciation of the dollar. C) neither an appreciation nor a depreciation of the dollar. D) higher interest rates. Answer: B Diff: 2 Topic: Monetary Policy and International Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
Recall the Application about the effectiveness of committees in making decisions about monetary policy to answer the following question(s). Former Fed vicechairman Alan Blinder developed an experiment to see whether individuals or groups make better decisions, and who makes them more rapidly. The experiment tested how quickly individuals and groups could distinguish changes in underlying trends from random events, such as if a one-month unemployment rate increase was a temporary aberration or the possible beginning of a recession, and their decisions as to changing monetary policy as a reaction to the events. 23) Recall the Application. If the Federal Reserve was making a decision on changing interest rates A) the chairperson, acting alone, would typically make a better decision than the Board of Governors. B) the Board of Governors would typically make a better decision than the chairperson acting on his/her own. C) the Board of Governors would typically make an equally good decision as would the chairperson acting on his/her own. D) neither the Board of Governors nor the chairperson, acting alone, would tend to make accurate predictions. Answer: B Diff: 2 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 24) Recall the Application. The experiment conducted by Blinder showed that the actual process of having committee meetings and discussions A) tended to polarize the group into two distinct factions. B) improved the group's overall performance. C) magnified the individual group member's differences. D) related to the average performance of the individual group members. Answer: B Diff: 1 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
25) If the monthly unemployment rate increase mentioned in the Application was a temporary aberration, the best economic decision by the committee would be to A) increase the money supply to stimulate the economy. B) decrease the money supply to stimulate the economy. C) decrease the money supply to slow the economy down. D) not change monetary policy. Answer: D Diff: 2 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 26) If the monthly unemployment rate increase mentioned in the Application wound up being a permanent and not temporary change, the best economic decision by the committee would most likely be to A) increase the money supply to stimulate the economy. B) decrease the money supply to stimulate the economy. C) decrease the money supply to slow the economy down. D) not change monetary policy. Answer: A Diff: 2 Topic: Application 3, The Effectiveness of Committees Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27) A decrease in the money supply will tend to reduce investment. Answer: TRUE Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 28) When the Fed increases the money supply, it leads to lower interest rates. Answer: TRUE Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 29) Spending on consumer durables decreases as the interest rate increases. Answer: TRUE
Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 30) When the Fed conducts an open market sale, it leads to a higher level of investment and output in the economy. Answer: FALSE Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 31) To increase the level of output, the Fed should conduct an open market sale. Answer: FALSE Diff: 1 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 32) An increase in the money supply will appreciate a country's currency. Answer: FALSE Diff: 1 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 33) An increase in the reserve requirement will lead to increased net exports. Answer: FALSE Diff: 2 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
34) Explain what happens to the money supply, interest rates, investment spending and GDP when the Fed makes open market bond purchases. Answer: When the Fed purchases bonds in the open market, they transfer money to the market, so the money supply increases. When the money supply increases, money becomes less expensive to obtain, which means interest rates are lower. Lower interest rates will encourage more investment spending, and when investment spending increases, GDP will increase. Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 35) Describe the channels through which an open market purchase of bonds by the Fed affects output in a closed economy. Answer: An open market purchase of bonds by the Fed leads to a rightward shift in the money supply. As a result, interest rates decrease, which in turn increases investment. The higher levels of investment translate into higher output levels. Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 36) Describe the channels through which an open market sale of bonds by the Fed affects output in a closed economy. Answer: An open market sale of bonds leads to a leftward shift in the money supply. As a result, interest rates increase, which in turn reduce investment. The lower levels of investment translate into lower output levels. Diff: 2 Topic: Interest Rates and How They Change Investment and Output (GDP) Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
37) Describe the channels through which open market purchases by the Fed affects output in an open economy. Answer: Open market purchases lead to an increase in money supply. As a result, interest rates decrease, which not only leads to increased investment but also depreciates the exchange rate and raises net exports. The higher levels of net exports, in addition to the higher levels of investment, result in higher output levels. Diff: 3 Topic: Monetary Policy and International Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 38) What is the "good news" and the "bad news" about a lower value of the U.S. dollar? Answer: The "good news" about a lower value of the dollar is that U.S. goods become less expensive to residents of other countries and so they buy more of them and U.S. exports increase. The "bad news" is that a lower value of the dollar will make it more expensive for U.S. residents to buy foreign goods. Diff: 2 Topic: Monetary Policy and International Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 39) What is the "good news" and the "bad news" about a higher value of the U.S. dollar? Answer: The "good news" about a higher value of the dollar is that a higher value will make it less expensive for U.S. residents to buy foreign goods. The "bad news" is that U.S. goods become more expensive to residents of other countries, so they buy less of them and U.S. exports decrease. Diff: 2 Topic: Monetary Policy and International Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
14.5 Monetary Policy Challenges for the Fed 1) If the current level of GDP exceeds full employment, the level of GDP can be reduced by A) reducing taxes. B) increasing spending. C) reducing the money supply. D) lowering interest rates. Answer: C Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) If the current level of GDP is below full employment, the level of GDP can be raised by A) increasing the money supply. B) raising taxes. C) reducing government spending. D) raising the interest rates. Answer: A Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) A lag occurs in monetary policy because A) it takes time to implement a policy. B) once policy is implemented, it takes time for a policy to work. C) Republicans and Democrats fight over every policy. D) Both A and B are true. Answer: D Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
4) The time it takes the Fed to formulate a policy is referred to as A) the inside lag for monetary policy. B) the inside lag for fiscal policy. C) the outside lag for monetary policy. D) the outside lag for fiscal policy. Answer: A Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) The time it takes the firms to respond to a higher or a lower interest rate is referred to as A) the inside lag for monetary policy. B) the inside lag for fiscal policy. C) the outside lag for monetary policy. D) the outside lag for fiscal policy. Answer: C Diff: 1 Topic: Monetary Policy Challenges for the Fed Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) An inside lag is A) a lag in implementing policy. B) the period of time it takes for policies to work. C) a policy aimed at increasing GDP. D) a policy aimed at reducing GDP. Answer: A Diff: 1 Topic: Lags in Monetary Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
7) An outside lag is A) a lag in implementing policy. B) the period of time it takes for policies to work. C) a policy aimed at increasing GDP. D) a policy aimed at reducing GDP. Answer: B Diff: 1 Topic: Lags in Monetary Policy Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) Inside lags are A) longer for monetary policy than for fiscal policy. B) longer for fiscal policy than for monetary policy. C) the same for fiscal policy and monetary policy. D) more variable for monetary policy than for fiscal policy. Answer: B Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) Outside lags for monetary policy occur because A) firms must change investment plans before monetary policy can be effective. B) it takes time to identify a problem. C) once a problem is diagnosed, it still takes time to implement policy changes. D) once changes are finally diagnosed and implemented, policies are immediately effective. Answer: A Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
10) The Fed can directly control all of the following EXCEPT A) the discount rate. B) reserve requirements. C) long-term interest rates. D) the federal funds rate. Answer: C Diff: 1 Topic: Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) Once the Fed decides on the interest rate it wants in the federal funds market, its most common method of achieving this rate is by A) conducting open market operations. B) changing reserve requirements. C) changing tax rates. D) altering exchange rates. Answer: A Diff: 1 Topic: Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 12) The inside lags for monetary policy are relatively long compared to those for fiscal policy. Answer: FALSE Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 13) The outside lags related to monetary policy tend to be quite long. Answer: TRUE Diff: 1 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) The Fed directly controls long-term interest rates.
Answer: FALSE Diff: 1 Topic: Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) The Fed can directly control the federal funds rate. Answer: TRUE Diff: 1 Topic: Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 16) Why might economic policies aimed at stabilization actually increase the magnitudes of economic fluctuations? Answer: Well-timed economic policies can reduce the magnitudes of economic fluctuations. But if the policies are poorly timed, they might work in the opposite direction of the desired outcome. The poor timing can come from lags in implementation, for instance, the delay between the time that the policies are implemented and the time they take effect. Diff: 2 Topic: Lags in Monetary Policy Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 15 Modern Macroeconomics: From the Short Run to the Long Run 15.1 Linking the Short Run and the Long Run 1) In the long run A) prices are sticky. B) the economy operates at full employment. C) increases in government spending do not affect other uses of output. D) increases in the money supply increase the level of output. Answer: B Diff: 2 Topic: The Difference Between the Short and Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to
explain aggregate fluctuations in output and inflation 2) In macroeconomics, the short run is a period where A) prices are constant or do not change very much. B) output is constant or does not change very much. C) prices have fully adjusted to economic changes. D) prices and output fully have adjusted to economic changes. Answer: A Diff: 2 Topic: The Difference Between the Short and Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 3) In the long run A) prices have fully adjusted to economic changes while output is constant. B) output has fully adjusted to economic changes while prices are constant. C) prices and output have fully adjusted to economic changes. D) prices and output are constant. Answer: A Diff: 2 Topic: The Difference Between the Short and Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
4) In the long run, any decreases in aggregate demand A) decrease the level of prices and output. B) decrease the level of prices. C) decrease the level of output. D) have no effect on either the level of prices or of output. Answer: B Diff: 1 Topic: The Difference Between the Short and Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 5) In the short run A) the level of GDP is determined by the demand and supply for labor, the supply of capital, and technological progress. B) increases in the money supply increase GDP. C) prices are flexible. D) the economy always operates at full employment. Answer: B Diff: 2 Topic: The Difference Between the Short and Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 6) In the short run, ________ in the supply of money ________ the level of output. A) increases; decrease B) increases; do not change C) increases; increase D) decreases; do not change Answer: C Diff: 1 Topic: The Difference Between the Short and Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
7) In the short run, decreases in government spending will A) increase the level of prices and GDP. B) decrease the level of GDP. C) increase the level of prices. D) have no effect on either the level of prices or GDP. Answer: B Diff: 2 Topic: The Difference Between the Short and Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 8) If GDP is ________ potential output, the economy is in a ________ and prices and wages will tend to decrease. A) below; recession B) below; boom C) above; recession D) above; boom Answer: A Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 9) If potential output is ________ than the current level of GDP, the unemployment rate is ________ the natural rate. A) greater; above B) greater; below C) less; above D) less; at Answer: A Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
10) Suppose GDP ________ the level of potential output. We would expect to see ________ unemployment, rising wages, and rising prices. A) exceeds; high B) exceeds; low C) is below; high D) is below; low Answer: B Diff: 2 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 11) Suppose the unemployment rate is ________ the natural rate. We would expect to see GDP ________ potential output, falling wages, and falling prices. A) above; below B) above; above C) below; below D) below; above Answer: A Diff: 2 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 12) When GDP is below potential output, prices fall because A) firms can easily find new workers and are forced to offer higher wages, which decreases the costs of production. B) firms can easily find new workers and can offer lower wages, which decreases the costs of production. C) firms find it difficult to hire and retain workers and are forced to offer higher wages, which increases the costs of production. D) firms find it difficult to hire and retain workers and can offer higher wages, which decreases the costs of production. Answer: B Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
13) A wage-price spiral occurs when A) rising wages cause higher prices, which in turn cause higher wages. B) rising wages cause higher prices, which in turn cause lower wages. C) falling wages cause higher prices, which in turn cause lower wages. D) falling wages cause falling prices, which in turn cause higher wages. Answer: A Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 14) Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later exceeds potential output, prices generally will begin to rise at A) a rate of 4 percent. B) a rate greater than 4 percent. C) a rate less than 4 percent. D) a rate of 0 percent. Answer: B Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 15) Suppose an economy that has been operating at full employment has been experiencing 4 percent annual inflation. If output later falls to a level that is less than potential output, prices generally will begin to rise at A) a rate of 4 percent. B) a rate greater than 4 percent. C) a rate less than 4 percent. D) a rate of 0 percent. Answer: C Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
16) When employees demand higher wages as a result of price increases which were caused by higher wages being paid by companies, it is called A) economic inflation. B) the wage-price spiral. C) out of kilter fiscal policies. D) a recession. Answer: B Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 17) Can a downward wage-price spiral occur? A) Yes, this occurs when the economy is below full employment. B) Yes, this occurs when the economy is above full employment. C) Yes, this occurs when the economy is at its long run equilibrium. D) No, wages and prices never move downwards. Answer: A Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 18) Wages and prices throughout an economy will rise above previous inflation rates when A) imports increase dramatically. B) fewer goods are exported abroad. C) output exceeds potential output. D) unemployment has highs and lows. Answer: C Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
19) Wages and prices throughout an economy are less than previous inflation rates when what occurs? A) Imports increase dramatically. B) More goods are exported abroad. C) Output exceeds potential output. D) Output is less than potential output. Answer: D Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 20) The level of GDP is determined by the same factors in the long run as in the short run. Answer: FALSE Diff: 1 Topic: The Difference Between the Short and Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 21) In the short run, the level of GDP is determined primarily by the aggregate supply. Answer: FALSE Diff: 1 Topic: The Difference Between the Short and Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 22) In macroeconomics, the period of time in which prices have fully adjusted to any economic changes is called the short run. Answer: FALSE Diff: 1 Topic: The Difference Between the Short and Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
23) The long run in macroeconomics is the period of time in which prices do not change or do not change very much. Answer: FALSE Diff: 1 Topic: The Difference Between the Short and Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 24) The short run in macroeconomics is the period of time in which prices do not change or do not change very much. Answer: TRUE Diff: 1 Topic: The Difference Between the Short and Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 25) For most firms, wages are the smallest cost of production. Answer: FALSE Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 26) Wages and prices will decrease when unemployment is below the natural rate. Answer: FALSE Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 27) When the economy is producing below full employment, the wage-price spiral cannot occur. Answer: TRUE Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 28) As output exceeds potential output, wages and prices throughout an economy will
rise above previous inflation rates. Answer: TRUE Diff: 1 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 29) What is the difference in how GDP is determined in the short run and in the long run? Answer: In the short run, GDP is determined by the current demand for goods and services in the economy. In the long run, GDP is determined by the supply of labor, the stock of capital, and technological progress. Diff: 2 Topic: The Difference Between the Short and Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 30) Explain what is meant by the "wage-price spiral." Does it always work in one direction? Answer: The wage-price spiral refers to the process by which changes in wages cause changes in prices which in turn cause changes in wages. As prices rise workers will demand higher wages; thus the spiral. If the economy had been producing at a level below full employment the process would work in reverse with falling wages, thus causing falling prices causing falling wages. Diff: 2 Topic: Wages and Prices and Their Adjustment over Time Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
15.2 How Wage and Price Changes Move the Economy Naturally Back to Full Employment 1) In an aggregate supply and aggregate demand diagram, the short-run aggregate supply curve is represented by A) a downward sloping line relating prices and output. B) a steeply upward sloping line relating prices and output. C) an upward sloping but relatively flat line. D) a vertical line at full employment. Answer: C Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 2) In an aggregate supply and aggregate demand diagram, the long-run aggregate supply curve is represented by A) a downward sloping line relating prices and output. B) an upward sloping line relating prices and output. C) a horizontal line at the current level of price. D) a vertical line at full employment. Answer: D Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 3) The short-run aggregate supply curve is relatively flat because A) in the short run, prices are flexible but output is equal to potential output. B) in the long run, prices are flexible but output is equal to potential output. C) in the short run, prices do not change very much but output may be above, below, or equal to potential output. D) in the long run, prices are fixed and output is equal to potential output. Answer: C Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
4) The long-run aggregate supply curve is vertical because A) in the short run, prices are flexible but output is equal to potential output. B) in the long run, prices are flexible but output is equal to potential output. C) in the short run, prices are fixed but output may be above, below, or equal to potential output. D) in the long run, prices are fixed and output is equal to potential output. Answer: B Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
5) Refer to Figure 15.1. In the long run, this economy will be at equilibrium at point A) a. B) b. C) c. D) y0. Answer: A Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
6) Refer to Figure 15.1. The short-run equilibrium is at point A) a. B) b. C) c. D) yF. Answer: B Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 7) Refer to Figure 15.1. At point b A) GDP is above potential output. B) GDP is below potential output. C) unemployment is above the natural rate. D) the economy is in long-run equilibrium. Answer: A Diff: 2 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 8) Refer to Figure 15.1. At point a A) unemployment is above the natural rate. B) unemployment is below the natural rate. C) GDP is equal to potential output. D) GDP is below potential output. Answer: C Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
9) Assuming an upward-sloping short-run aggregate supply curve, ________ in aggregate demand will result in a new equilibrium at a greater level of output and ________ price level. A) an increase; a higher B) an increase; a lower C) a decrease; a lower D) a decrease; no change in the Answer: A Diff: 2 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 10) Assuming an upward-sloping short-run aggregate supply curve, an increase in the money supply results in ________ in equilibrium output and ________ in equilibrium prices in the short run. A) an increase; an increase B) a decrease; a slight decrease C) a decrease; no change D) no change; an increase Answer: A Diff: 2 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 11) Assuming an upward-sloping short-run aggregate supply curve, a decrease in government spending results in ________ in equilibrium output and ________ in equilibrium prices in the short run. A) a decrease; a slight decrease B) an increase; no change C) an increase; a slight increase D) no change; a decrease Answer: A Diff: 2 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
12) Assuming an upward-sloping short-run aggregate supply curve, a decrease in taxes results in ________ in equilibrium output and ________ in equilibrium prices in the short run. A) an increase; an increase B) a decrease; an increase C) a decrease; no change D) no change; a decrease Answer: A Diff: 2 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 13) What is meant when economists use the term "overheating of the economy"? A) Consumers have dramatically increased spending. B) GDP is higher than potential output. C) The stock market is experiencing heavy trading. D) The balance of trade is affecting the GDP too much. Answer: B Diff: 1 Topic: How Wage and Price Changes Move the Economy Naturally Back to Full Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 14) Consider an aggregate demand / aggregate supply diagram. The intersection of the vertical aggregate supply curve and the aggregate demand curve determines the A) short-run levels of prices and output. B) short-run and long-run levels of prices and output. C) long-run levels of prices and output. D) short-run level of output and the long-run level of prices. Answer: C Diff: 1 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
15) Consider an aggregate demand / aggregate supply diagram. The intersection of the relatively flat, upward-sloping aggregate supply curve and the aggregate demand curve determines the A) short-run levels of prices and output. B) short-run and long-run levels of prices and output. C) long-run levels of prices and output. D) short-run level of prices and the long-run level of output. Answer: A Diff: 1 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 16) If GDP is ________ potential output, adjustment to the long-run equilibrium requires that output rises and prices ________. A) above; rise B) above; fall C) below; rise D) below; fall Answer: D Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 17) If GDP is above potential output, then we expect to see A) increasing wages, causing the short-run aggregate supply curve to shift up. B) increasing wages, causing the short-run aggregate supply curve to shift down. C) falling wages, causing the short-run aggregate supply curve to shift up. D) falling wages, causing the short-run aggregate supply curve to shift down. Answer: A Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
18) If the unemployment rate is below the natural rate, then we expect to see A) falling wages, causing the short-run aggregate supply curve to shift up. B) falling wages, causing the short-run aggregate supply curve to shift down. C) increasing wages, causing the short-run aggregate supply curve to shift up. D) increasing wages, causing the short-run aggregate supply curve to shift down. Answer: C Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 19) Suppose Venezuela experiences economic growth in 2013, yet its unemployment rate is 15 percent, which is above the South American country's natural rate. This indicates that Venezuela's 2013 output is A) below potential output. B) above potential output. C) above actual output. D) below actual output. Answer: A Diff: 1 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 20) Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent. All else equal, if this unemployment rate is above the natural rate of unemployment, what will tend to happen over time? A) Wages and prices will fall. B) Wages and prices will rise. C) Wages will rise and prices will fall. D) Wages will fall and prices will rise. Answer: A Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
21) Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent, and economists have estimated that the natural rate of unemployment in Venezuela is also approximately 15 percent. All else equal, if this is the case, what will tend to happen in the Venezuelan economy over time? A) Wages and prices will fall. B) Wages and prices will rise. C) Wages will rise and prices will fall. D) Wages and prices will remain close to their current levels. Answer: D Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 22) Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent, and economists have estimated that the natural rate of unemployment in Venezuela is also approximately 15 percent. If this is the case, then for the Venezuelan economy in 2013 A) actual output is significantly above potential output. B) potential output is significantly above actual output. C) actual output is roughly equal to potential output. D) None of the above are correct because there is no relationship between actual output and potential output in the short run. Answer: C Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
23) Refer to Figure 15.2. The economy is at full employment and the unemployment rate is at the natural rate at point A) a. B) b. C) c. D) d. Answer: B Diff: 1 Topic: Returning to Full Employment from a Recession, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 24) Refer to Figure 15.2. The unemployment rate is above the natural rate at point A) a. B) b. C) c. D) d. Answer: A Diff: 1 Topic: Returning to Full Employment from a Recession, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
25) Refer to Figure 15.2. Output is likely to rise and prices are likely to fall if the economy is at point A) a. B) b. C) c. D) d. Answer: A Diff: 1 Topic: Returning to Full Employment from a Recession, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 26) Refer to Figure 15.2. A decrease in wages is represented by a movement from point ________ to point ________. A) d; c B) c; b C) a; b D) a; e Answer: C Diff: 1 Topic: Returning to Full Employment from a Recession, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 27) Refer to Figure 15.2. A movement from point a to point b would be the result of the A) unemployment rate exceeding the natural rate, causing wages to rise. B) unemployment rate exceeding the natural rate, causing wages to fall. C) natural rate exceeding the unemployment rate, causing wages to rise. D) natural rate exceeding the unemployment rate, causing wages to fall. Answer: B Diff: 2 Topic: Returning to Full Employment from a Recession, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
28) Refer to Figure 15.2. Adjustment from a short-run equilibrium to the long-run equilibrium is represented by a movement from point ________ to point ________. A) a; e B) a; c C) e; b D) a; b Answer: D Diff: 2 Topic: Returning to Full Employment from a Recession, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 29) Refer to Figure 15.2. The unemployment rate is below the natural rate at point A) a. B) b. C) c. D) d. Answer: C Diff: 1 Topic: Returning to Full Employment from a Boom, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 30) Refer to Figure 15.2. Output is likely to fall and prices are likely to rise if the economy is at point A) a. B) b. C) c. D) d. Answer: C Diff: 1 Topic: Returning to Full Employment from a Boom, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
31) Refer to Figure 15.2. An increase in wages is represented by a movement from point ________ to point ________. A) c; d B) c; b C) a; b D) e; a Answer: B Diff: 1 Topic: Returning to Full Employment from a Boom, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 32) Refer to Figure 15.2. A movement from point c to point b would be the result of the A) unemployment rate being higher than the natural rate, causing wages to rise. B) unemployment rate being higher than the natural rate, causing wages to fall. C) natural rate being higher than the unemployment rate, causing wages to rise. D) natural rate being higher than the unemployment rate, causing wages to fall. Answer: C Diff: 2 Topic: Returning to Full Employment from a Boom, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 33) Refer to Figure 15.2. Adjustment from a short-run equilibrium to the long-run equilibrium is represented by a movement from point ________ to point ________. A) b; e B) c; b C) b; c D) c; d Answer: B Diff: 2 Topic: Returning to Full Employment from a Boom, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
34) If GDP is ________ potential output, adjustment to the long-run equilibrium requires that output falls and prices ________. A) above; rise B) above; fall C) below; rise D) below; fall Answer: A Diff: 2 Topic: Returning to Full Employment from a Boom Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 35) If GDP is ________ potential output, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up. A) above; increasing B) above; decreasing C) below; increasing D) below; decreasing Answer: A Diff: 2 Topic: Returning to Full Employment from a Boom Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 36) If the unemployment rate is ________ the natural rate, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up. A) less than; increasing B) less than; decreasing C) greater than; increasing D) greater than; decreasing Answer: A Diff: 2 Topic: Returning to Full Employment from a Boom Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
37) How long do economists think it takes the U.S. economy to move from the short run to the long run? A) two years B) three years C) four years D) None of the above; economists disagree on the answer. Answer: D Diff: 1 Topic: Economic Policy and the Speed of Adjustment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 38) If the economy was operating below full employment, it could return to full employment A) by itself, through falling wages and prices. B) through increases in government spending or tax cuts. C) through open market purchases. D) all of the above. Answer: D Diff: 2 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 39) If the economy was operating above full employment, it could return to full employment A) by itself, through rising wages and prices. B) through decreases in government spending or tax increases. C) through open market sales. D) all of the above. Answer: D Diff: 2 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
40) Keynes expressed doubts that that the economy would A) ever return to full-employment. B) ever move away from full-employment. C) recover from a major recession without active policy. D) recover from the effects of higher prices. Answer: C Diff: 1 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 41) The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of A) increasing government spending to increase aggregate demand. B) increasing the money supply to increase aggregate demand. C) taking no action and allowing the economy to adjust naturally. D) decreasing government spending to increase aggregate demand. Answer: C Diff: 1 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 42) The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs rapidly, the government of Economia is likely to pursue a policy of A) decreasing government spending to decrease aggregate demand. B) decreasing the money supply to decrease aggregate demand. C) decreasing government spending to increase aggregate demand. D) taking no action and allowing the economy to adjust naturally. Answer: D Diff: 1 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
43) The GDP for the nation of Economia is currently below potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is likely to pursue a policy of A) increasing government spending to increase aggregate demand. B) decreasing the money supply to increase aggregate demand. C) taking no action and allowing the economy to adjust naturally. D) decreasing government spending to increase aggregate demand. Answer: A Diff: 2 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 44) The GDP for the nation of Economia is currently above potential output. If the adjustment to the long-run equilibrium occurs slowly, the government of Economia is most likely to pursue a policy of A) increasing government spending to decrease aggregate demand. B) decreasing the money supply to decrease aggregate demand. C) taking no action and allowing the economy to adjust naturally. D) decreasing government spending to increase aggregate demand. Answer: B Diff: 2 Topic: Economic Policy and the Speed of Adjustment Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 45) When an economy is experiencing a "liquidity trap," the adjustment process that brings the economy back to full employment A) has too large of an effect. B) changes wages, but prices remain unchanged. C) changes prices but not wages. D) no longer works. Answer: D Diff: 1 Topic: Liquidity Traps or Zero Lower Bound Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
46) Which of the following is another term for the "liquidity trap"? A) zero lower bound B) money neutrality C) fiscal ineffectiveness D) zero upper bound. Answer: A Diff: 1 Topic: Liquidity Traps or Zero Lower Bound Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 47) When the economy has reached the "zero lower bound," which of the following is TRUE? A) Nominal interest rates have reached zero and can no longer fall. B) Real interest rates have reached zero and can no longer fall. C) Money supply has reached zero and can no longer fall. D) Nominal GDP has reached zero and can no longer fall. Answer: A Diff: 1 Topic: Liquidity Traps or Zero Lower Bound Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation Recall the Application about the theory of secular stagnation to answer the following question(s). 48) As described in the Application, the theory of secular stagnation states that if there is not enough aggregate ________, the natural adjustment process will not work because interest rates will not ________ far enough. A) demand; rise B) demand; fall C) supply; rise D) supply; fall Answer: B Diff: 2 Topic: Application 1, Secular Stagnation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
49) Recall the Application. What is the only remedy for secular stagnation? A) an increase in government spending B) a decrease in government spending C) an increase in taxes D) a decrease in taxes Answer: A Diff: 2 Topic: Application 1, Secular Stagnation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 50) Recall the Application. Who recently resurrected the theory of secular stagnation? A) Janet Yellen B) Ben Bernanke C) Lawrence Summers D) Robert Rubin Answer: C Diff: 1 Topic: Application 1, Secular Stagnation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 51) Recall the Application. Critics of the theory of secular stagnation argue that A) the economy has grown consistently since the last recession. B) the unemployment rate in 2015 was at or close to the natural rate. C) spending on infrastructure is not necessary for the economy to operate at full employment. D) all of the above. Answer: D Diff: 2 Topic: Application 1, Secular Stagnation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
52) Suppose a politician stimulates the economy before an election to improve their reelection chances. This is known as A) an election cycle. B) a political business cycle. C) lobbying. D) campaigning. Answer: B Diff: 1 Topic: Political Business Cycles Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 53) A politician who utilizes the political business cycle uses ________ in order to ________. A) expansionary fiscal and monetary policies; improve chances of reelection B) contractionary fiscal and monetary policies; improve chances of reelection C) expansionary fiscal and monetary policies; improve chances of getting a law passed D) contractionary fiscal and monetary policies; improve chances of getting a law passed Answer: A Diff: 1 Topic: Political Business Cycles Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 54) The classic political business cycle would have a politician following A) expansionary policies before an election, and contractionary policies after the election. B) contractionary policies before an election, and expansionary policies after the election. C) expansionary policies before and after an election. D) contractionary policies before and after an election. Answer: A Diff: 1 Topic: Political Business Cycles Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election. 55) This Application addresses the idea that politicians use monetary or fiscal policy to stimulate the economy before an election to improve their reelection prospects. This concept is known as a(n) A) circular flow model. B) political business cycle. C) liquidity trap. D) automatic stabilization policy. Answer: B Diff: 1 Topic: Application 2, Elections, Political Parties, and Voter Expectations Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 56) If Republicans are primarily concerned with controlling inflation and Democrats are primarily concerned with controlling unemployment, then Republicans would tend to focus on ________ economic policies and Democrats would tend to focus on ________ economic policies. A) expansionary; expansionary B) contractionary; contractionary C) expansionary; contractionary D) contractionary; expansionary Answer: D Diff: 1 Topic: Application 2, Elections, Political Parties, and Voter Expectations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
57) Republicans have historically been primarily concerned with fighting inflation. Assuming this is TRUE, then after a Republican electoral victory, the public could anticipate which of the following economic actions to fight inflation? A) an increase in taxes and an increase in government spending B) open market purchases and a decrease in taxes C) open market sales and a decrease in government spending D) a decrease in the discount rate and an increase in reserve requirements Answer: C Diff: 2 Topic: Application 2, Elections, Political Parties, and Voter Expectations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 58) Historically, Democrats have been known to be primarily concerned with fighting unemployment. Assuming this is TRUE, then after a Democratic electoral victory, the public could anticipate which of the following economic actions to fight unemployment? A) an increase in taxes and an increase in government spending B) open market purchases and a decrease in taxes C) open market sales and a decrease in government spending D) a decrease in the discount rate and an increase in reserve requirements Answer: B Diff: 2 Topic: Application 2, Elections, Political Parties, and Voter Expectations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 59) According to the Application, President Trump's concern toward the economy is A) inconsistent with other Republican presidents as his policy is less concerned with inflation than growth. B) consistent with other Republican presidents who were more concerned with inflation than growth. C) consistent with other Democrat presidents who were more concerned with inflation than growth. D) consistent with the policies of previous presidents, Democrat or Republican. Answer: A Diff: 2 Topic: Application 2, Elections, Political Parties, and Voter Expectations Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
60) The Keynesian aggregate supply curve moves up if output is below its potential. Answer: FALSE Diff: 1 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 61) If GDP is higher than potential output, wages and prices will rise. Answer: TRUE Diff: 1 Topic: Returning to Full Employment from a Boom Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 62) Active economic policies are more likely to destabilize the economy if the adjustment process is quick enough. Answer: TRUE Diff: 1 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 63) A liquidity trap refers to a situation when interest rates are so high, they cannot legally go any higher. Answer: FALSE Diff: 1 Topic: Liquidity Traps or Zero Lower Bound Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 64) Politicians sometimes have the incentive to take advantage of the differences between the short-run and long-run effects of economic policies to improve their chances of being reelected. Answer: TRUE Diff: 1 Topic: Political Business Cycles Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
65) How might economic policy be used to fight a recession? What would happen to prices in this case? Answer: Suppose that the economy is below full employment. Rather than letting the economy naturally return to full employment, with prices gradually falling and output rising as the economy moves along the aggregate demand curve, policymakers could stimulate the economy by increasing spending or cutting taxes, thereby shifting aggregate demand to the right and hastening the speed to full employment. However, prices will be higher in the long-run equilibrium. Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 66) Describe the adjustment process of returning an economy to full employment when output is below full employment levels. Answer: When output is below full employment, the price level falls. This reduces the demand for money and interest rates. Lower interest rates mean that the price of investment is lower, so investment increases. This stimulated investment spending shifts demand in the economy up along the 45-degree line until output reaches full employment. Diff: 2 Topic: Returning to Full Employment from a Recession Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 67) Suppose that the economy is above the full employment level of output. Describe the adjustment process of returning this economy to full employment. Answer: Being above full employment will lead to upward pressure on wages and prices. The short-run aggregate supply curve continues to shift up, as prices increase and output falls along the aggregate demand curve, until the economy reaches its long-run equilibrium where the aggregate demand curve intersects the long-run aggregate supply curve at the full employment level of output. Diff: 2 Topic: Returning to Full Employment from a Boom Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
68) How do economists' beliefs about the speed of the adjustment process affect their recommendations about policy? Answer: Economists who believe that the economy adjusts rapidly generally oppose using monetary or fiscal policy to try to stabilize the economy. The reason is that if the economy is adjusting on its own the introduction of a policy-induced effect could make the situation worse instead of better. If the adjustment process is slower there is more of a need for the use of policy. Diff: 2 Topic: Economic Policy and the Speed of Adjustment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 69) What kind of policies can be used to reduce aggregate demand? Answer: contractionary monetary policy or contractionary fiscal policy Diff: 1 Topic: Economic Policy and the Speed of Adjustment Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 70) What is a liquidity trap, and what happens if it occurs? Answer: A liquidity trap is a situation where interest rates are so low, they can no longer fall. If a liquidity trap occurs, the adjustment process by which a recessionary economy recovers without active policy no longer works. The adjustment process calls for increased investment based on falling interest rates. If interest rates can no longer fall, investment will not increase. Diff: 2 Topic: Liquidity Traps or Zero Lower Bound Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation 71) Explain the political business cycle. Answer: The political business cycle refers to a politician's using economic policy in the short run to improve his or her prospects for reelection. It is possible because policy has different effects in the short run and in the long run. It is possible for a politician to use a short-run stimulus to improve economic conditions in time for the election. Diff: 2 Topic: Political Business Cycles Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation
15.3 The Economics Behind the Adjustment Process 1) An increase in the price level causes an increase in money demand because A) people need less money to purchase the same level of goods and services. B) people have unlimited wants. C) people need more money to purchase the same level of goods and services. D) changes in the price level have no effect on money demand. Answer: C Diff: 1 Topic: The Economics Behind the Adjustment Process Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
Figure 15.3 2) Refer to Figure 15.3 If this economy is initially in a recession, the price level will start to change to bring the economy back to full employment, which is reflected by the movement from A) p1 to p0. B) a to b. C) d to c. D) f to e. Answer: B Diff: 2 Topic: Understanding the Economics of the Adjustment Process, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
3) Refer to Figure 15.3 If this economy is initially in a recession, the change in price level which would bring the economy back to full employment would lead to a change in money demand, which is reflected by the movement from A) f to e. B) r1 to r0. C) AS1 to AS0. D) Md0 to Md1. Answer: D Diff: 2 Topic: Understanding the Economics of the Adjustment Process, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 4) Refer to Figure 15.3 If this economy is initially in a recession, the change in price level which would bring the economy back to full employment would also change the money demand. The change in money demand will change interest rates, which is reflected by the movement from A) yF to y0. B) r0 to r1. C) AS1 to AS0. D) I1 to I0. Answer: B Diff: 2 Topic: Understanding the Economics of the Adjustment Process, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) Refer to Figure 15.3 If this economy is initially in a recession, the change in price level which would bring the economy back to full employment would also change the money demand and interest rates. The change in interest rates will change investment spending, which is reflected by the movement from A) e to f. B) I1 to I0. C) r1 to r0. D) P1 to P0. Answer: A Diff: 2 Topic: Understanding the Economics of the Adjustment Process, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
6) Refer to Figure 15.3 If this economy is initially at full employment, a recession would be reflected by movements to point ________ in graph (A), point ________ in graph (B), and point ________ in graph (C). A) a; d; f B) b; d; f C) a; c; e D) b; c; f Answer: C Diff: 2 Topic: Understanding the Economics of the Adjustment Process, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 7) Refer to Figure 15.3 If this economy is initially in a recession, its movement back to full employment would be complete when it reaches point ________ in graph (A), point ________ in graph (B), and point ________ in graph (C). A) b; c; e B) a; d; f C) a; c; e D) b; d; f Answer: D Diff: 2 Topic: Understanding the Economics of the Adjustment Process, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
Figure 15.4 8) Refer to Figure 15.4. Suppose that the economy is originally in equilibrium at point a. In the short run, as the supply of money increases, the economy moves to point A) a. B) b. C) c. D) d. Answer: C Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) Refer to Figure 15.4. Suppose that the economy is originally in equilibrium at point a. In the short run, as the supply of money decreases, the economy moves to point A) a. B) b. C) c. D) e. Answer: D Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
10) Refer to Figure 15.4. Suppose that the economy is originally in equilibrium at point a. In the long run, as the supply of money increases, the economy moves to point A) a. B) b. C) c. D) d. Answer: B Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) Refer to Figure 15.4. Suppose that the economy is originally in equilibrium at point a. In the long run, as the supply of money decreases, the economy moves to point A) a. B) b. C) c. D) d. Answer: D Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
Figure 15.5 12) Refer to Figure 15.5. An increase in the price level, ceteris paribus, is represented by movement from point ________ to point ________. A) b; c B) c; d C) d; b D) a; c Answer: C Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 13) Refer to Figure 15.5. A decrease in the price level, ceteris paribus, is represented by movement from point ________ to point ________. A) d; a B) d; c C) d; b D) a; c Answer: D Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
14) Refer to Figure 15.5. If GDP is below potential output, the effect on the money market is represented by movement from point ________ to point ________. A) c; a B) b; d C) d; c D) b; a Answer: B Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) Refer to Figure 15.5. If GDP exceeds potential output, the effect on the money market is represented by movement from point ________ to point ________. A) b; d B) c; a C) a; d D) b; c Answer: B Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 16) Refer to Figure 15.5. If the unemployment rate is below the natural rate, the effect on the money market is represented by movement from point ________ to point ________. A) d; b B) a; c C) a; d D) b; c Answer: A Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
17) Refer to Figure 15.5. If the unemployment rate is above the natural rate, the effect on the money market is represented by movement from point ________ to point ________. A) c; a B) b; d C) d; a D) b; a Answer: B Diff: 2 Topic: The Long-Run Neutrality of Money, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) Suppose that GDP is ________ potential output. We would expect prices to rise, money demand to rise, interest rates to rise, and total demand to ________. A) above; fall B) above; rise C) below; fall D) below; rise Answer: A Diff: 2 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 19) Suppose that GDP is ________ potential output. We would expect prices to fall, money demand to fall, interest rates to fall, and total demand to ________. A) above; rise B) above; fall C) below; rise D) below; fall Answer: C Diff: 2 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
20) Suppose that the unemployment rate is ________ the natural rate. We would expect prices to rise, money demand to rise, interest rates to rise, and total demand to ________. A) above; rise B) above; fall C) below; rise D) below; fall Answer: D Diff: 3 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 21) Suppose that the unemployment rate is ________ the natural rate. We would expect prices to fall, money demand to fall, interest rates to fall, and total demand to ________. A) above; rise B) above; fall C) below; rise D) below; fall Answer: A Diff: 3 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 22) The Federal Reserve can use monetary policy to A) change output in the long run, but not the short run. B) change output in the short run, but not the long run. C) change output in both the short run and the long run. D) Monetary policy has no effect on output. Answer: B Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
23) In ________, monetary policy can change the level of output. A) the long run only B) both the short run and the long run C) neither the short run nor the long run D) the short run only Answer: D Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 24) A decrease in the money supply causes A) a long-run decrease in the level of output. B) both a long-run and short-run decrease in the level of output. C) a short-run decrease in the level of output. D) no changes in the level of output. Answer: C Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 25) A decrease in the money supply causes A) a decrease in the level of output in the short run, but no change in the level of output in the long run. B) a decrease in the level of output in the short run and in the long run. C) no change in the level of output in the short run and in the long run. D) no change in the level of output in the short run, but a decrease in the level of output in the long run. Answer: A Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
26) An increase in the money supply causes A) an increase in the level of output in the short run, but no change in the level of output in the long run. B) an increase in the level of output in the short run and in the long run. C) no change in the level of output in the short run and in the long run. D) no change in the level of output in the short run, but an increase in the level of output in the long run. Answer: A Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27) In the long run, an increase in the money supply A) decreases real interest rates, increases investment, and decreases output. B) decreases real interest rates, but has no effect on investment or output. C) increases output, but has no effect on real interest rates or output. D) has no effect on real interest rates, investment or output. Answer: D Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 28) In the long run, a decrease in the money supply A) has no effect on real interest rates, investment, or output. B) increases real interest rates, decreases investment, and decreases output. C) increases real interest rates, increases investment, and decreases output. D) decreases real interest rates, decreases investment, and decreases output. Answer: A Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
29) In the long run, increases in the money supply have no effect on the level of output because prices and wages will A) rise as GDP exceeds potential output, causing real interest rates to rise and output to fall to its original level. B) fall as GDP exceeds potential output, causing real interest rates to rise and output to fall to its original level. C) rise as GDP exceeds potential output, causing real interest rates to fall and output to fall to its original level. D) fall as GDP exceeds potential output, causing real interest rates to fall and output to fall to its original level. Answer: A Diff: 2 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 30) In the short run, increases in the money supply increase the level of output because A) prices and wages are sticky. B) prices and wages are flexible. C) interest rates are sticky. D) demand is fixed. Answer: A Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 31) Crowding out refers to A) an increase of investment caused by an increase in government spending. B) a decrease in investment caused by an increase in government spending. C) a decrease in investment caused by a decrease in government spending. D) an increase of investment caused by a decrease in government spending. Answer: B Diff: 1 Topic: Crowding Out in the Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
32) Investment is "crowded out" by an increase in government spending when A) an increase in government spending causes output and prices to rise, which in turn causes interest rates to rise. B) an increase in government spending causes output and prices to fall, which in turn causes interest rates to rise. C) an increase in government spending causes output and prices to rise, which in turn causes interest rates to fall. D) an increase in government spending causes output and prices to fall, which in turn causes interest rates to fall. Answer: A Diff: 1 Topic: Crowding Out in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 33) If increases in defense spending by the government "crowd out" private investment spending, this will lead to A) higher levels of real income and wages in the future than if there were no crowding out. B) effects on real income and wages that are unpredictable in the future. C) lower levels of real income and wages in the future than if there were no crowding out. D) higher levels of real income and lower levels of wages in the future than if there were no crowding out. Answer: C Diff: 2 Topic: Crowding Out in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 34) If increases in government spending on infrastructure projects "crowd out" private investment spending, this will lead to A) higher levels of real income and wages in the future than if there were no crowding out. B) effects on real income and wages that are unpredictable in the future. C) lower levels of real income and wages in the future than if there were no crowding out. D) higher levels of real income and lower levels of wages in the future than if there were no crowding out. Answer: C Diff: 2 Topic: Crowding Out in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates,
aggregate demand, real GDP and inflation 35) "Crowding in" refers to A) an increase of investment caused by an increase in government spending. B) a decrease in investment caused by an increase in government spending. C) an increase in investment caused by a decrease in government spending. D) a decrease in investment caused by a decrease in government spending. Answer: C Diff: 1 Topic: Crowding Out in the Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 36) Crowding in leads to A) higher levels of real income and wages in the future. B) no effects on real income and wages. C) lower levels of real income and wages in the future. D) lower prices. Answer: A Diff: 1 Topic: Crowding Out in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation Recall the Application about the possibility of increases in health-care expenditures crowding out consumption or investment spending to answer the following question(s). In 1950, health-care expenditures in the United States were 5.2 percent of GDP; by 2000, this share had risen to 15.4 percent. Driving these increases were several factors: increasing relative prices of health care compared to other goods, a larger population of the elderly, and increased longevity. Since 1950, the average life span has increased by 1.7 years per decade. 37) According to the Application, if increases in health-care expenditures crowd out investment, living standards would A) rise in the long run. B) fall in the long run. C) fall in the short run, but rise again in the long run. D) rise in the short run, and fall back to their original level in the long run. Answer: B Diff: 1 Topic: Application 3, Increasing Health-Care Expenditures and Crowding Out Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
38) According to the Application, increases in health-care expenditures will have to crowd out some other component of GDP. The preferred outcome stated in the Application is that increased spending on health-care would come at the expense of A) investment spending. B) spending on consumer durables or larger houses. C) spending on non-durables such as food and clothing. D) spending on services such as higher education. Answer: B Diff: 1 Topic: Application 3, Increasing Health-Care Expenditures and Crowding Out Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 39) According to the Application, economists Charles I. Jones and Robert E. Hall suggest that normal economic growth will cause health-care expenditures to be approximately what percent of GDP by the mid-century? A) 18 B) 30 C) 62 D) 78 Answer: B Diff: 2 Topic: Application 3, Increasing Health-Care Expenditures and Crowding Out Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 40) If output is below full employment, we expect wages and prices to fall, money demand to decrease, and interest rates to fall. Answer: TRUE Diff: 2 Topic: The Economics Behind the Adjustment Process Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
41) A decrease in the money supply will decrease interest rates in the long run. Answer: FALSE Diff: 1 Topic: The Economics Behind the Adjustment Process Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 42) Money demand increases as the price level decreases in the economy. Answer: FALSE Diff: 1 Topic: The Economics Behind the Adjustment Process Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 43) Interest rates increase as the price level decreases in the economy. Answer: FALSE Diff: 1 Topic: The Economics Behind the Adjustment Process Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 44) Long-run money neutrality means that an increase in the money supply has no effect on real interest rates, investment, or output in the long run. Answer: TRUE Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 45) The "long-run neutrality of money" is when the increase of the supply of money has no effect on real interest rates, investment or output. Answer: TRUE Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 46) In the short run, money is neutral. Answer: FALSE
Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 47) In the short run, money is not neutral. In the long run, money is neutral. Answer: TRUE Diff: 1 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 48) If the economy is operating below full employment, falling wages and prices will increase money demand and raise interest rates. Answer: FALSE Diff: 1 Topic: Crowding Out in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 49) If the economy is operating above full employment, falling wages and prices will stimulate investment and increase output. Answer: FALSE Diff: 1 Topic: Crowding Out in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 50) The term "crowding out" refers to increases in government spending which affect private investment spending. Answer: TRUE Diff: 1 Topic: Crowding Out in the Long Run Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 51) How can changes in wages and prices restore an economy to full employment? Answer: Changes in wages and prices change the demand for money. The change in money demand changes interest rates, and the change in interest rates affects aggregate
demand for goods and services, which ultimately changes GDP, eventually resulting in equilibrium at a state of full employment. Diff: 2 Topic: The Economics Behind the Adjustment Process Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
Figure 15.3 52) Refer to Figure 15.3 and explain what happens in each graph when an economy is moving from a recession (point a) back to full employment. Answer: If the economy is in a recession at point a, wages and prices will start to fall (P0 to P1). Short-run aggregate supply will shift down, increasing output from y0 to yF and moving the economy from point a to point b in panel (A). In panel (B), the fall in price level will decrease the demand for holding money, shifting the money demand curve down and moving the economy from point c to point d. This will cause interest rates to fall from r0 to r1. When interest rates fall from r0 to r1, investment spending will increase from I0 to I1, moving the economy from point e to point f in panel (C). Diff: 3 Topic: Understanding the Economics of the Adjustment Process, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
53) Explain why money is neutral in the long run. Answer: Starting at full employment, an increase in the supply of money will initially reduce interest rates and raise investment spending. Hence, output will increase above full employment. But as wages and prices increase as a consequence of being above full employment, the demand for money increases as well, restoring interest rates to their earlier level and output returns to full employment. Changes in the money supply therefore do not affect investment, interest rates, or output in the long run. Diff: 3 Topic: The Long-Run Neutrality of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 54) Explain the "crowding out" criticism of Keynesian policies of increasing government spending to stimulate the economy. Answer: Starting at full employment, an increase in government spending shifts up the total demand line and raises output above full employment. As wages and prices increase, the demand for money increases, raising interest rates and hence reducing investment. The economy returns to full employment but with a higher level of interest rates and prices and a lower level of investment spending than before. Diff: 2 Topic: Crowding Out in the Long Run Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15.4 Classical Economics in Historical Perspective 1) Which of the following individuals is NOT considered a classical economist? A) John Maynard Keynes B) Adam Smith C) John Stuart Mill D) Jean-Baptiste Say Answer: A Diff: 1 Topic: Classical Economics in Historical Perspective Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories
2) Which of the following individuals is considered the earliest classical economist? A) David Ricardo B) Adam Smith C) John Stuart Mill D) Jean-Baptiste Say Answer: B Diff: 1 Topic: Classical Economics in Historical Perspective Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 3) The term "classical economist" was first used by ________ to differentiate his work from the work of earlier economists. A) David Ricardo B) John Maynard Keynes C) John Stuart Mill D) Jean-Baptiste Say Answer: B Diff: 1 Topic: Classical Economics in Historical Perspective Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 4) The doctrine that states that "supply creates its own demand" is called ________ law. A) Keynes's B) Smith's C) Say's D) Malthus's Answer: C Diff: 1 Topic: Say's Law Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories
5) Say's Law is a doctrine which states A) wages and prices rise together. B) unemployment and prices self-adjust. C) investment and prices increase together. D) supply creates its own demand. Answer: D Diff: 1 Topic: Say's Law Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 6) According to believers of Say's Law, if production was $10 billion and people start saving $1 billion of their income and spend only $9 billion, then the economy A) will experience a decrease in the demand for goods and services from $10 billion to $9 billion. B) will experience no change in the demand for goods and services because investments will increase. C) will experience an increase in the demand for goods and services from $10 billion to $11 billion. D) will experience a decrease in the supply of goods and services from $10 billion of $9 billion. Answer: B Diff: 1 Topic: Classical Economics in Historical Perspective Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 7) According Keynes, if production was $10 billion and people start saving $1 billion of their income and spend only $9 billion, then the economy A) will experience a decrease in the demand for goods and services from $10 billion to $9 billion. and $ 1 billion in products will be unsold. B) will experience no change in the demand for goods and services because investments will increase. All $10 billion of the products will be sold. C) will experience an increase in the demand for goods and services from $10 billion to $11 billion. A total of $11 billion of products will be sold. D) will experience a decrease in the supply of goods and services from $10 billion of $9 billion. All goods will be sold. Answer: A Diff: 1 Topic: Classical Economics in Historical Perspective Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories
8) The Keynesian view that demand could fall short of production is more likely to hold TRUE if A) wages and prices are fully flexible. B) prices, but not wages, are fully flexible. C) wages and prices are not fully flexible. D) wages, but not prices, are fully flexible. Answer: C Diff: 1 Topic: Keynesian and Classical Debates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 9) A necessary condition for the classical model to work is that A) wages and prices are fully flexible. B) prices, but not wages, are fully flexible. C) wages and prices are not fully flexible. D) wages, but not prices, are fully flexible. Answer: A Diff: 1 Topic: Keynesian and Classical Debates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 10) Classical economics refers to a body of work initially developed by John Maynard Keynes. Answer: FALSE Diff: 1 Topic: Classical Economics in Historical Perspective Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 11) Classical economics is often associated with Say's law, the doctrine that "supply creates its own demand." Answer: TRUE Diff: 1 Topic: Say's Law Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories
12) In order for the classical economic model to work, prices and wages must be fully flexible. Answer: TRUE Diff: 1 Topic: Keynesian and Classical Debates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 13) Explain Say's law from a classical economic perspective. Answer: Say's law, "supply creates its own demand", is used to explain the classical idea that the value of GDP will equal the demand for goods and services. For example, if GDP is $100 billion, then production is $100 billion and $100 billion in income is generated. The classical economists believed that the $100 billion of production also created $100 billion in demand for current goods and services, so no surplus or shortage would ever exist. Diff: 2 Topic: Say's Law Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories 14) Explain why the flexibility of wages and prices tend to favor the Keynesian economic view in the short run and the classical economic view in the long run. Answer: In the short run, wages and prices are not fully flexible, which could cause demand to fall short of production and the economy not achieving full employment, as was argued by Keynes. In the long run, wages and prices are fully flexible, so the economy will return to full employment on its own, which reflects the classical perspective. Diff: 2 Topic: Keynesian and Classical Debates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 16 The Dynamics of Inflation and Unemployment 16.1 Money Growth, Inflation, and Interest Rates 1) The United States had serious difficulties fighting inflation in A) the 1970s. B) the 1980s. C) both the 1970s and the 1980s. D) every decade since World War II. Answer: C Diff: 1 Topic: The Dynamics of Inflation and Unemployment Skill: Fact
AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) Compared to other countries, inflation in the United States has been A) generally less severe. B) generally more severe. C) always worse. D) about the same. Answer: A Diff: 1 Topic: The Dynamics of Inflation and Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) Suppose workers receive a 5 percent increase in wages and prices are rising by 5 percent. Workers will experience A) an increase in nominal wages and a decrease in real wages. B) an increase in nominal wages and an increase in real wages. C) an increase in nominal wages but real wages are unchanged. D) a decrease in nominal wages and a decrease in real wages. Answer: C Diff: 1 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
4) All else equal, if workers confuse real and nominal magnitudes, they are experiencing A) expectations of inflation. B) money illusion. C) monetary confusion. D) fiscal policy. Answer: B Diff: 1 Topic: Inflation in a Steady State Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) Suppose the inflation rate is 3 percent this year. If nominal wages increase by 5 percent, real wages will A) decrease by 2 percent. B) increase by 2 percent. C) increase by 5 percent. D) decrease by 3 percent. Answer: B Diff: 1 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) Suppose the inflation rate is 6 percent this year. If nominal wages increase by 6 percent, real wages will A) increase by 6 percent. B) increase by 9 percent. C) decrease by 12 percent. D) not change. Answer: D Diff: 1 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
7) Suppose the inflation rate is 2 percent this year. If nominal wages increase by 5 percent, real wages will A) decrease by 5 percent. B) increase by 2 percent. C) increase by 7 percent. D) increase by 3 percent. Answer: D Diff: 1 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) If nominal wages increase by 4 percent while real wages remain constant, the inflation rate must be A) -2 percent. B) 0 percent. C) 2 percent. D) 4 percent. Answer: D Diff: 2 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) If nominal wages increase by 5 percent while real wages increase by 1 percent, the inflation rate must be A) 1 percent. B) 4 percent. C) 5 percent. D) 6 percent. Answer: B Diff: 2 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
10) If nominal wages increase by 6 percent while real wages increase by 4 percent, the inflation rate must be A) 2 percent. B) 4 percent. C) 6 percent. D) 10 percent. Answer: A Diff: 2 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) Which of the following is an example of an expectation of inflation? A) Producers expect their prices on average to be higher next year. B) Producers expect the prices they pay for raw materials to be higher next year. C) Workers expect that the prices they pay for goods and services will be higher next year. D) all of the above Answer: D Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 12) The real rate of interest is defined as the A) expected inflation rate minus the nominal interest rate. B) expected inflation rate plus the nominal interest rate. C) nominal interest rate minus the expected inflation rate. D) nominal inflation rate plus the expected inflation rate. Answer: C Diff: 1 Topic: Inflation in a Steady State Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
13) When the expected rate of inflation is added to the real interest rate, the result is called the A) preferred rate. B) nominal interest rate. C) adjustment rate. D) differential rate. Answer: B Diff: 1 Topic: Inflation in a Steady State Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) Suppose you have $100 to invest for a year and the nominal interest rate is 7 percent. If the inflation rate during the year is 4 percent, at the end of the year your real gain from the investment is approximately A) $3. B) $4. C) $7. D) $11. Answer: A Diff: 1 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) Suppose you have $100 to invest for a year and the nominal interest rate is 7 percent. If the inflation rate during the year is 4 percent, at the end of the year your nominal gain from the investment is A) $3. B) $4. C) $7. D) $11. Answer: C Diff: 1 Topic: Inflation in a Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
16) In the long run, decreases in the money supply will A) decrease real interest rates. B) increase real interest rates. C) may increase or decrease real interest rates. D) have no effect on real interest rates. Answer: D Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 17) In the long run, decreases in the growth rate of the money supply will ________ nominal rates of interest and ________ real rates of interest. A) decrease; increase B) decrease; decrease C) increase; increase D) decrease; not affect Answer: D Diff: 3 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) In the long run, increases in the growth rate of the money supply will ________ nominal rates of interest and ________ real rates of interest. A) increase; decrease B) decrease; decrease C) increase; not affect D) decrease; not affect Answer: C Diff: 3 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
19) In the short run, increases in the money supply growth rate will A) decrease real interest rates. B) increase real interest rates. C) may increase or decrease real interest rates. D) have no effect on real interest rates. Answer: A Diff: 1 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 20) In the short run, decreases in the money supply growth rate will A) decrease real interest rates. B) increase real interest rates. C) may increase or decrease real interest rates. D) have no effect on real interest rates. Answer: B Diff: 1 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 21) In the short run, decreases in the growth rate of the money supply will ________ nominal rates of interest and ________ real rates of interest. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase Answer: D Diff: 3 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
22) In the short run, increases in the growth rate of the money supply will ________ nominal rates of interest and ________ real rates of interest. A) decrease; increase B) increase; decrease C) decrease; decrease D) increase; increase Answer: C Diff: 3 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 23) Suppose the public expects a 4 percent inflation rate, while the Federal Reserve unexpectedly allows the money growth rate to be 5 percent. In the short run, we expect that A) real interest rates will remain constant. B) real interest rates may increase or decrease. C) real interest rates will decrease. D) real interest rates will increase. Answer: C Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 24) Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. Suddenly the Federal Reserve unexpectedly allows the money growth rate to be 5 percent. In the short run, we expect that A) real interest rates will remain constant. B) real interest rates may increase or decrease. C) real interest rates will decrease. D) real interest rates will increase. Answer: D Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
25) Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. The Federal Reserve decides to keep the money growth rate at 7 percent. In the short run, we expect that A) real interest rates will remain constant. B) real interest rates may increase or decrease. C) real interest rates will decrease. D) real interest rates will increase. Answer: A Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 26) Suppose the public expects a 4 percent inflation rate, while the Federal Reserve unexpectedly allows the money growth rate to be 5 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase Answer: D Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 27) Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. Suddenly the Federal Reserve unexpectedly allows the money growth rate to be 4 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________. A) decrease; decrease B) increase; decrease C) decrease; increase D) increase; increase Answer: A Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
28) Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. The Federal Reserve decides to keep the money growth rate to be 7 percent. In the short run, we expect that investment spending by firms will ________ and consumer durable spending will ________. A) increase; decrease B) decrease; increase C) increase; increase D) None of the above; there will be no change in the level of investment spending by firms and consumer durable spending by households. Answer: D Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 29) Suppose the economy has been at full employment for the past two years with a 4 percent inflation rate, and both the money supply and money demand were growing at 4 percent a year. If the Federal Reserve unexpectedly increases the rate of money growth to 6 percent, the following sequence of events occurs A) real interest rates fall, investment spending increases, GDP increases, unemployment falls, and prices rise. B) real interest rates fall, investment spending decreases, GDP increases, unemployment falls, and prices rise. C) real interest rates rise, investment spending decreases, GDP decreases, unemployment increases, and prices fall. D) real interest rates rise, investment spending increases, GDP decreases, unemployment increases, and prices fall. Answer: A Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
30) Suppose the economy has been at full employment for the past two years with a 7 percent inflation rate, and both the money supply and money demand were growing at 7 percent a year. If the Federal Reserve unexpectedly decreases the rate of money growth to 3 percent, the following sequence of events occurs A) real interest rates fall, investment spending decreases, GDP increases, unemployment falls, and prices rise. B) real interest rates rise, investment spending decreases, GDP decreases, unemployment increases, and prices fall. C) real interest rates fall, investment spending increases, GDP increases, unemployment falls, and prices rise. D) real interest rates rise, investment spending increases, GDP decreases, unemployment increases, and prices fall. Answer: B Diff: 2 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 31) A tight-money policy in the short run typically leads to A) slower money growth. B) higher interest rates. C) lower output. D) all of the above. Answer: D Diff: 1 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 32) In the long-run, reduced money growth results in ________ while having no effect on the level of output. A) lower inflation and lower unemployment B) lower interest rates and lower inflation C) lower interest rates and less purchasing of durable goods D) higher interest rates and no change in inflation Answer: B Diff: 1 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 33) An economy can, in principle, produce at full employment with any inflation rate. Answer: TRUE
Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 34) When the public expects inflation, real and nominal rates of interest will be the same. Answer: FALSE Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 35) The real interest rate is the nominal interest rate plus the expected inflation rate. Answer: FALSE Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 36) In the long run, the real rate of interest does not depend on monetary policy but the nominal rate of interest does. Answer: TRUE Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 37) All else equal, nominal wages would not likely increase if there is no inflation. Answer: TRUE Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
38) When people expect inflation, they assume that prices are going to increase at a certain rate and factor this into their decision making. Answer: TRUE Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 39) When the public expects inflation, real and nominal interest rates will differ because inflation needs to be accounted for in calculating the real return from lending and borrowing. Answer: TRUE Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 40) All else equal, expectations of higher inflation will affect the amount of money people are holding because they will need more cash to pay for goods and services. Answer: TRUE Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 41) By making more or less money available, the Federal Reserve can alter both the nominal and real interest rates in the long run. Answer: FALSE Diff: 1 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
42) If the growth rate of money changes, there will be short-run effects on real interest rates. Answer: TRUE Diff: 1 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 43) If the growth rate of money changes, there will be no long-run effects on real interest rates. Answer: TRUE Diff: 1 Topic: How Changes in the Growth Rate of Money Affect the Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 44) Define "money illusion" and explain its cause. Answer: Money illusion is a confusion of real and nominal values. Suppose an economy is in a steady state of constant inflation, say 5 percent a year. Because of the inflation rate, the nominal wages of workers are also rising at 5 percent a year. Because prices are rising at the same rate as nominal wages, real wages remain constant. Some workers may believe that without inflation, they would experience real-wage increases, since their nominal wages are rising at the same rate as inflation. These workers are suffering from money illusion, the confusion of real and nominal values. The only reason their wages are rising by 5 percent a year is the 5 percent inflation. If there was no inflation, their nominal wages would not increase at all. Diff: 2 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 45) Explain why real and nominal rates of interest will differ when the public expects inflation. Answer: When the public expects inflation, real and nominal interest rates will differ to account for inflation when calculating the real return from lending and borrowing. The nominal interest rate is equal to the real interest rate plus the rate of expected inflation. Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
46) Explain why money demand will be affected when the public expects inflation. Answer: Money demand refers to the amount of money people want to hold. If the public expects inflation, they know prices will increase so they will want to hold more money to be able to pay the higher prices. Diff: 1 Topic: Inflation in a Steady State Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 16.2 Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation 1) According to the expectations Phillips curve, unemployment varies with A) unanticipated inflation. B) anticipated inflation. C) actual inflation. D) real inflation. Answer: A Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 2) Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate increases relative to the expected rate, the unemployment rate A) decreases. B) increases. C) may increase or decrease. D) does not change. Answer: A Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
3) Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate decreases relative to the expected rate, the unemployment rate A) decreases. B) increases. C) may increase or decrease. D) does not change. Answer: B Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 4) Assume that last year's inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate remains constant relative to the expected rate, the unemployment rate A) decreases. B) increases. C) may increase or decrease. D) does not change. Answer: D Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 5) If the rate of unemployment is equal to the natural rate, the rate of inflation will A) fall by 1 percent per year B) rise by 1/2 percent per year. C) fall by 1/2 percent per year. D) not change. Answer: D Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
6) The difference between the Phillips curve and the expectations Phillips curve is that the A) expectations Phillips curve takes into account expectations of inflation. B) Phillips curve takes into account expectations of inflation. C) Phillips curve is flatter. D) Phillips curve is steeper. Answer: A Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 7) A decrease in the inflation rate is likely to be associated with A) an increase in the unemployment rate. B) decreased unemployment benefits. C) a decreased in the unemployment rate. D) less unemployment benefits being paid. Answer: A Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 8) If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will cause A) anticipated inflation to exceed actual inflation. B) actual inflation to exceed anticipated inflation. C) anticipated inflation to equal actual inflation. D) nominal inflation to exceed real inflation. Answer: B Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
9) If the inflation rate unexpectedly increases, it is likely that workers will not fully anticipate some of this sudden increase. This will tend to cause nominal wages to ________ and the belief that real wages have ________. A) increase; increased B) increase; decreased C) decrease; increased D) decrease; decreased Answer: A Diff: 2 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 10) Increases in unanticipated inflation will impact employment levels and would therefore tend to cause A) unemployment to rise above the natural rate. B) the natural rate of unemployment to rise. C) unemployment to fall below the natural rate. D) the natural rate of unemployment to fall. Answer: C Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 11) Increases in unanticipated inflation will impact employment levels, but once workers recognize higher inflation rates, they will incorporate them into their expectations of inflation. This will tend to cause A) unemployment to fall below the natural rate. B) unemployment to return to its natural rate. C) the natural rate of unemployment to rise. D) the natural rate of unemployment to fall. Answer: B Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) According to the rational expectations theory A) the public makes consistent errors when forming expectations.
B) only central bankers form expectations rationally. C) the public, on average, anticipates the future correctly. D) the public only uses a portion of the available information when forming expectations. Answer: C Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 13) According to the rational expectations theory, can individuals make incorrect predictions about inflation in the future? A) Yes, in specific instances. However, on average, their expectations are correct. B) Never. C) Yes, they consistently think inflation is lower than it usually is. D) Yes, they always think inflation is higher than it usually is. Answer: A Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 14) The most prominent proponent of the theory of rational expectations is A) Robert Lucas, Jr. B) Edmund Phelps C) John Keynes D) Milton Friedman Answer: A Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
15) Which of the following economists believe that the public uses simple rules of thumb to predict inflation in the future? A) Herbert Simon B) Edmund Phelps C) Robert Lucas, Jr. D) Milton Friedman Answer: A Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 16) Assuming last year's inflation rate as your best guess for the inflation rate this year is using ________ to predict inflation. A) a rule of thumb B) the Phillips Curve C) rational expectations D) a crystal ball Answer: A Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 17) If the public forms their expectations rationally, a credible central bank will A) tend to encourage wage increases. B) tend to deter wage increases. C) have no influence over wages. D) ignore the public's beliefs. Answer: B Diff: 2 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
18) Suppose workers negotiate for a 5 percent nominal wage increase and expect a 1 percent inflation rate. If the actual inflation rate is 6 percent, then workers A) and firms are both better off. B) are better off and firms are worse off. C) are worse off and firms are better off. D) and firms are both worse off. Answer: C Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 19) Suppose workers negotiate for a 5 percent nominal wage increase and expect a 8 percent inflation rate. If the actual inflation rate is 4 percent, then workers A) and firms are both better off. B) are better off and firms are worse off. C) are worse off and firms are better off. D) and firms are both worse off. Answer: B Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 20) As the result of unanticipated inflation, workers are better off while firms are worse off if the actual inflation rate A) is equal to the expected inflation rate. B) exceeds the expected inflation rate. C) is less than the expected inflation rate. D) Neither firms nor workers are better off as the result of unanticipated inflation. Answer: C Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
21) As the result of unanticipated inflation, firms are better off while workers are worse off if the actual inflation rate A) is equal to the expected inflation rate. B) exceeds the expected inflation rate. C) is less than the expected inflation rate. D) Neither firms nor workers are better off as the result of unanticipated inflation. Answer: B Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 22) As the result of unanticipated inflation, borrowers are better off while lenders are worse off if the actual inflation rate A) exceeds the expected inflation rate. B) is equal to the expected inflation rate. C) is less than the expected inflation rate. D) Neither borrowers nor lenders are better off as the result of unanticipated inflation. Answer: A Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 23) As the result of unanticipated inflation, lenders are better off while borrowers are worse off if the actual inflation rate A) is equal to the expected inflation rate. B) exceeds the expected inflation rate. C) is less than the expected inflation rate. D) Neither borrowers nor lenders are better off as the result of unanticipated inflation. Answer: C Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
24) Suppose that the expected inflation rate is 3 percent and the actual inflation rate is 6 percent. Then borrowers A) and lenders are both better off. B) are better off and lenders are worse off. C) are worse off and lenders are better off. D) and lenders are both worse off. Answer: B Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 25) Suppose that the expected inflation rate is 4 percent and the actual inflation rate is 1 percent. Then borrowers A) and lenders are both better off. B) are better off and lenders are worse off. C) are worse off and lenders are better off. D) and lenders are both worse off. Answer: C Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 26) Suppose that the expected inflation rate is 8 percent and the actual inflation rate is 8 percent. Then borrowers A) and lenders are both worse off. B) and lenders are both better off. C) are better off and lenders are worse off. D) none of the above. Answer: D Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
27) During the Carter administration, inflation increased from 6.5 percent to 9.4 percent because A) unemployment increased above the natural rate. B) the economy experienced an oil price shock. C) The United States was involved in a major war. D) the Fed suspended the dollar's convertibility into gold. Answer: B Diff: 1 Topic: U.S. Inflation and Unemployment in the 1980s Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 28) In order to reduce the high inflation of the late 1970s, Paul Volcker A) increased the growth of the money supply, thereby decreasing interest rates. B) decreased the growth of the money supply, thereby decreasing interest rates. C) decreased the growth of the money supply, thereby increasing interest rates. D) increased the growth of the money supply, thereby increasing interest rates. Answer: C Diff: 1 Topic: U.S. Inflation and Unemployment in the 1980s Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 29) During the early 1980s, one effect of the Federal Reserve's fight against inflation was A) historically low interest rates. B) falling unemployment rates. C) the largest peace-time economic expansion. D) high unemployment rates. Answer: D Diff: 1 Topic: U.S. Inflation and Unemployment in the 1980s Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
30) Which of the following would likely lead to an increase in the natural rate of unemployment? A) an increase in the number of teenagers in the workforce B) an increase in the length of time during which people can receive unemployment benefits C) a prolonged recession D) all of the above Answer: D Diff: 1 Topic: Shifts in the Natural Rate of Unemployment in the 1990s Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 31) Which of the following would likely lead to a decrease in the natural rate of unemployment? A) an increase in the number of teenagers in the workforce B) a decrease in the length of time during which people can receive unemployment benefits C) a prolonged recession D) all of the above Answer: B Diff: 1 Topic: Shifts in the Natural Rate of Unemployment in the 1990s Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Recall the Application about how to estimate the shifts in the natural rate of unemployment to answer the following question(s). 32) Recall the Application. Under normal circumstances, the higher the unemployment rate, the ________ job vacancies there will be. Over time, this would tend to ________ the natural rate of unemployment. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease Answer: C Diff: 2 Topic: Application 1, Shifts in the Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
33) Recall the Application. If the labor market becomes more efficient in matching jobs with individuals, there will be ________ job vacancies and the natural rate of unemployment will ________. A) more; rise B) more; decline C) fewer; rise D) fewer; decline Answer: D Diff: 1 Topic: Application 1, Shifts in the Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 34) Recall the Application. If the natural rate of unemployment has been underestimated and is actually higher than is commonly perceived, reducing the unemployment rate to the perceived natural rate will tend to A) increase anticipated inflation. B) decrease anticipated inflation C) increase unanticipated inflation. D) decrease unanticipated inflation. Answer: C Diff: 1 Topic: Application 1, Shifts in the Natural Rate of Unemployment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 35) Recall the Application. The natural rate of unemployment in the United States was approximately 5 percent in the mid 1960s, ________ in the late 1970s and early 1980s, and ________ in the late 1980s until the year 2000. A) peaked; declined B) rose; continued to rise C) fell; rose again D) remained at 5 percent; began to rise Answer: A Diff: 1 Topic: Application 1, Shifts in the Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
36) Recall the Application. The natural rate of unemployment is currently (as of 2018) somewhere between A) 4 and 5 percent. B) 3 and 4 percent. C) 5 and 6 percent. D) 6 and 7 percent. Answer: A Diff: 1 Topic: Application 1, Shifts in the Natural Rate of Unemployment Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 37) According to the expectations Phillips curve, the unemployment rate and the inflation rate are inversely related. Answer: TRUE Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 38) If the natural rate of unemployment was 5 percent and inflation was 3 percent, the inflation rate will rise if the unemployment rate for the next two years rose to 8 percent. Answer: FALSE Diff: 1 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 39) According to the theory of rational expectations, people do not make mistakes when they form their expectations. Answer: FALSE Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
40) Rational expectations of inflation means that when decisions are made regarding inflation, people use information rather than making assumptions that inflation will rise or decline in the future. Answer: TRUE Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 41) When decisions are made regarding inflation using the rule-of-thumb, decision makers assume that inflation next year will be the same as the current year. Answer: TRUE Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 42) The natural rate of unemployment does not change over time. Answer: FALSE Diff: 1 Topic: Shifts in the Natural Rate of Unemployment in the 1990s Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 43) Describe briefly the relationship between unanticipated inflation and unemployment. Answer: The relationship is described by the expectations Phillips curve. There does appear to be a relationship between the level of unemployment and the change in the unexpected rate of inflation. Specifically, if an economy experiences an increase in unanticipated inflation, unemployment will tend to fall. Diff: 2 Topic: Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
44) Explain the rational expectations theory of inflation. Answer: The rational expectations theory of inflation analyzes how the public uses all the information available to them to be able to accurately predict future inflation. According to this theory, on average, the public anticipates the future correctly, so their expectations are rational. Diff: 1 Topic: Are the Public's Expectations About Inflation Rational? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 45) What factors can shift the natural rate of unemployment? Answer: Economists have identified three basic factors that can shift the natural rate of unemployment: demographics, institutional changes and the state of the economy. Diff: 1 Topic: Shifts in the Natural Rate of Unemployment in the 1990s Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 16.3 How the Credibility of a Nation's Central Bank Affects Inflation 1) Suppose that union leaders negotiate a significant increase in nominal wages. If the Federal Reserve holds the growth in the money supply constant, in the short run the aggregate supply curve will shift A) up, unemployment will increase, and prices will rise. B) down, unemployment will increase, and prices will rise. C) down, unemployment will decrease, and prices will rise. D) up, unemployment will decrease, and prices will rise. Answer: A Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
2) Suppose that union leaders negotiate a significant increase in nominal wages. If the Federal Reserve holds the growth in the money supply constant, in the long run, unemployment A) remains constant while prices increase. B) remains constant will prices decrease. C) and prices both remain constant. D) decreases while prices increase. Answer: C Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 3) If union leaders believe that the Federal Reserve is a credible inflation fighter, they believe that an increase in nominal wages will A) increase prices but have no effect on the unemployment rate. B) increase prices and decrease the unemployment rate. C) decrease prices but have no effect on the unemployment rate. D) lead to a recession with rising unemployment rates and rising prices. Answer: D Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 4) When monetary authorities are deemed as "conservative" they are more likely to implement policies that A) decrease inflation. B) increase unemployment. C) decrease unemployment. D) strengthen the value of their currency. Answer: A Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
5) Monetary policymakers tend to be conservative because A) they are old and boring. B) their actions influence the public's expectations. C) their actions have no effect on the public's expectations. D) they do not want to increase the federal budget deficit. Answer: B Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 6) Countries with more independent central banks tend to have A) higher inflation rates. B) lower inflation rates. C) lower rates of unemployment. D) higher rates of GDP growth. Answer: B Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 7) What would happen to prices if, for example, all trade unions negotiated long-term higher nominal pay and regular across-the-board increases for workers? A) Prices would remain unchanged. B) Prices would likely increase. C) Prices are not affected by nominal salary increases. D) Prices would likely decrease. Answer: B Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
8) When determining monetary policies, central banks tend to take what kind of approach? A) liberal economic policies B) conservative economic policies C) focused on increasing investments. D) focus only on preventing recessions Answer: B Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 9) When making economic policies or taking actions to fight inflation, a central bank will likely find ________ an acceptable part of the solution. A) lower interest rates B) increasing unemployment C) expansionary policies D) contractionary polices Answer: B Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 10) Which of the following countries have the highest index (or most independent) of central bank independence? A) Germany B) Turkey C) France D) Tanzania Answer: A Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
11) Which of the following countries have the lowest inflation rate? A) Germany B) Turkey C) France D) Tanzania Answer: A Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
12) Use Figure 16.1 to answer the question below. Suppose the economy is currently at point c. If labor unions ask for higher wages and the Fed is conservative, then the economy will find itself at point ________ in the short run. A) a B) b C) c D) none of the above. Answer: A Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects inflation, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
13) Use Figure 16.1 to answer the question below. Suppose the economy is currently at point c. If labor unions ask for higher wages and the Fed aims to keep unemployment low, then the economy will find itself at point ________ in the short run. A) a B) b C) c D) none of the above. Answer: B Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects inflation, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) Use Figure 16.1 to answer the question below. Suppose the economy is currently at point c. If labor unions strongly believe that the Fed is conservative, then where will the economy end up? A) The unions will hesitate to ask for a raise, and the economy will stay at point c. B) The unions will ask for a raise, and the Fed will increase AD. The economy will be at point b. C) The unions will ask for a raise, and the Fed will not increase AD. The economy will be at point a. D) None of the above are correct. Answer: A Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects inflation, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) Use Figure 16.1 to answer the question below. Suppose the economy is currently at point c. If labor unions do not believe that the Fed is conservative and are correct. Where will the economy end up? A) The unions will hesitate to ask for a raise, and the economy will stay at point c. B) The unions will ask for a raise, and the Fed will increase AD. The economy will be at point b. C) The unions will ask for a raise, and the Fed will not increase AD. The economy will be at point a. D) None of the above are correct. Answer: B Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects inflation, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
16) Use Figure 16.1 to answer the question below. Suppose the economy is currently at point c. If labor unions mistakenly believe that the Fed is not conservative. Where will the economy end up? A) The unions will hesitate to ask for a raise, and the economy will stay at point c. B) The unions will ask for a raise, and the Fed will increase AD. The economy will be at point b. C) The unions will ask for a raise, and the Fed will not increase AD. The economy will be at point a. D) None of the above are correct. Answer: C Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects inflation, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation Recall the Application about how the Fed looks at the natural rate of interest to answer the following question(s). 17) According to this Application, the natural rate of interest is defined as the ________ interest rate consistent with full employment after ________ demand and supply shocks have subsided. A) real; permanent B) real; temporary C) nominal; permanent D) nominal; temporary Answer: B Diff: 1 Topic: Application 2, Estimating the Natural Real Interest Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 18) According to this Application, which of the following can shift the natural rate of interest? A) changes in fiscal policy B) productivity C) savings decisions of households D) all of the above Answer: D Diff: 1 Topic: Application 2, Estimating the Natural Real Interest Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
19) In this Application, economist John Williams recently estimated that the natural rate of interest has fallen to about A) 4%. B) 2%. C) 1%. D) 0%. Answer: D Diff: 1 Topic: Application 2, Estimating the Natural Real Interest Rate Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 20) According to the Application, is the movement in the natural rate of interest in the U.S. similar or different to other major economies such as the EU, Canada and the U.K.? A) The U.S. and other major regions are similarly experiencing a decline in the natural rate of interest. B) The U.S. and other major regions are similarly experiencing a rise in the natural rate of interest. C) The U.S. natural rate of interest is declining while other major regions are experiencing a rise in the natural rate of interest. D) The U.S. natural rate of interest is rising while other major regions are experiencing a decline in the natural rate of interest. Answer: A Diff: 1 Topic: Application 2, Estimating the Natural Real Interest Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) The heads of central banks tend to be conservative, preferring to risk increasing unemployment instead of risking an increase in inflation. Answer: TRUE Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
22) If a central bank is credible in its desire to fight inflation, it can deter the private sector from taking aggressive actions that drive up prices. Answer: TRUE Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 23) Why are the heads of central banks typically very conservative and constantly warning about the dangers of inflation? Answer: These monetary policymakers can influence expectations of inflation, which in turn influence actual behavior, provided that they are credible in their statements. Diff: 1 Topic: How the Credibility of a Nation's Central Bank Affects Inflation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
24) Using Figure 16.1, describe the two choices the Fed has with respect to changing the money supply if unions negotiate higher industry wages for its members, and as a result, higher rates of inflation emerge. Assume before the wage increase, the economy is at point c. Answer: If workers' nominal wages increase, the aggregate supply curve will shift from AS0 to AS1. If the Fed keeps aggregate demand constant at AD0 by not changing the money supply, a recession will occur at point a, and the economy will eventually return to full employment at point c. If the Fed increases the money supply, aggregate demand will shift up to AD1, the economy will remain at full employment at point b, but will have a higher price level. Diff: 2 Topic: How the Credibility of a Nation's Central Bank Affects inflation, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
16.4 Inflation and the Velocity of Money 1) The rate at which the money supply turns over in economic transactions in a given year to purchase nominal GDP is known as A) money demand. B) the money multiplier. C) the velocity of money. D) the discount rate. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 2) Velocity of money = A) (nominal GDP) × (money supply). B) (nominal GDP) / (money supply). C) (nominal GDP) / (money demand). D) (nominal GDP) + (money demand). Answer: B Diff: 1 Topic: Inflation and the Velocity of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 3) If nominal GDP is $12 trillion and the money supply is $8 trillion, then the velocity of money is A) 0.667. B) 1.5. C) 4. D) 8. Answer: B Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
4) If nominal GDP is $16 trillion and the money supply is $4 trillion, then the velocity of money is A) 0.25. B) 4. C) 12. D) 20. Answer: B Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 5) If the velocity of money is 6 and the money supply is $4 trillion, then nominal GDP is A) $24 trillion. B) $2 trillion. C) $1.5 trillion. D) $0.667 trillion. Answer: A Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6) If the velocity of money is 4 and the money supply is $16 trillion, then nominal GDP is A) $64 trillion. B) $12 trillion. C) $4 trillion. D) $0.25 trillion. Answer: A Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
7) If the velocity of money is 2 and nominal GDP is $10 trillion, then the money supply is A) $0.2 trillion. B) $5 trillion. C) $8 trillion. D) $12 trillion. Answer: B Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 8) If the velocity of money is 4 and nominal GDP is $24 trillion, then the money supply is A) $28 trillion. B) $20 trillion. C) $6 trillion. D) $0.167 trillion. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) If the velocity of money is high, then A) interest rates fall. B) people hold onto money for a long period of time. C) people hold onto money for a short period of time. D) interest rates rise. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
10) If, on average, the velocity of money is low A) interest rates fall. B) people hold onto money for a long period of time. C) people hold onto money for a short period of time. D) interest rates rise. Answer: B Diff: 1 Topic: Inflation and the Velocity of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 11) The quantity equation A) determines foreign exchange rates. B) describes the amount of required reserves held in banks. C) links money, velocity, prices, and real output. D) links money supply and interest rates. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) The quantity equation is expressed as A) MV = Py. B) MP = Vy. C) M/V = P/y. D) M + V = P + y. Answer: A Diff: 1 Topic: Inflation and the Velocity of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
13) The growth version of the quantity equation A) determines foreign exchange rates. B) links the growth rates of money, velocity, prices and real output. C) links money, velocity, prices, and real output. D) determines the growth of the money supply. Answer: B Diff: 1 Topic: Inflation and the Velocity of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 14) In the growth version of the quantity equation, which of the following is usually assumed to be zero? A) the growth rate of velocity B) the growth rate of the money supply C) the growth rate of prices D) the growth rate of real output Answer: A Diff: 1 Topic: Inflation and the Velocity of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 15) Using the growth version of the quantity equation, can inflation be negative? A) Yes, the growth rate of the money supply plus the growth rate of the velocity has to be less than the growth rate of output. B) Yes, the growth rate of the money supply has to be negative, C) Yes, the growth rate of the money supply plus the growth rate of the velocity has to be greater than the growth rate of output. D) Never. No country ever experienced a deflation. Answer: A Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
16) Using the growth version of the quantity equation, what must be TRUE for inflation to be positive? A) The growth rate of the money supply plus the growth rate of the velocity has to be less than the growth rate of output. B) The growth rate of the money supply has to be negative, C) The growth rate of the money supply plus the growth rate of the velocity has to be greater than the growth rate of output. D) The growth rate of velocity must be greater than zero. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 17) Suppose that for a given year money growth is 12 percent, real GDP growth is 4 percent, and velocity is constant. According to the growth version of the quantity equation, the inflation rate would be A) 0.67 percent. B) 3 percent. C) 8 percent. D) 16 percent. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 18) Suppose that for a given year money growth is 10 percent, real GDP growth is 8 percent, and velocity is constant. According to the growth version of the quantity equation, the inflation rate would be A) -2 percent. B) 1.25 percent. C) 2 percent. D) 18 percent. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
19) Suppose that for a given year money growth is 12 percent, real GDP growth is 3 percent, and velocity growth is 2 percent. According to the growth version of the quantity equation, the inflation rate would be A) -3 percent. B) 9 percent. C) 11 percent. D) 12 percent. Answer: C Diff: 1 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 20) Suppose that for a given year money growth is 5 percent, real GDP growth is 2 percent, and the inflation rate is 5 percent. According to the growth version of the quantity equation, velocity growth would be A) 0 percent. B) 2 percent. C) 8 percent. D) 12.5 percent. Answer: B Diff: 2 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) Suppose that for a given year money growth is 3 percent, real GDP growth is 1 percent, and the inflation rate is 2 percent. According to the growth version of the quantity equation, velocity growth would be A) 0 percent. B) 2 percent. C) 3 percent. D) 4 percent. Answer: A Diff: 2 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
22) Suppose that for a given year money growth is 11 percent, real GDP growth is 6 percent, and the inflation rate is 3 percent. According to the growth version of the quantity equation, velocity growth would be A) -2 percent. B) 0.6 percent. C) 1.67 percent. D) 5 percent. Answer: A Diff: 2 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 23) The velocity of money is equal to nominal GDP divided by the money supply. Answer: TRUE Diff: 1 Topic: Inflation and the Velocity of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 24) According to the data, the velocity of M2 in the U.S. in the last 50 years has been constant. Answer: FALSE Diff: 1 Topic: Inflation and the Velocity of Money Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 25) If the growth of the money supply is 8 percent per year, velocity decreases by 5 percent, and there is no growth in real GDP, the inflation rate is 3 percent. Answer: TRUE Diff: 2 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
26) The velocity of money refers to the rate of its turnover, or changing hands, in the economy. Answer: TRUE Diff: 1 Topic: Inflation and the Velocity of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 27) If nominal GDP is $24 trillion and the money supply is $8 trillion, what is the velocity of money in the economy? Answer: The velocity of money is the ratio of nominal GDP to the money supply. In this example, the velocity of money is 3. Diff: 1 Topic: Inflation and the Velocity of Money Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 28) If the growth rate of money is 7 percent, the growth rate of prices is 4 percent, and velocity is NOT changing, what is the growth rate of output in an economy? Answer: Apply the growth version of the quantity equation 7 + 0 = 4 + X, so output is growing at a rate of 3 percent per year. Diff: 2 Topic: Inflation and the Velocity of Money Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 29) What is meant by the term "velocity of money," and how is the velocity of money calculated? Answer: The velocity of money refers to the rate at which money changes hands in economic transactions during a given year, so an economy can reach its level of GDP. The velocity of money is calculated as nominal GDP divided by the money supply. Diff: 1 Topic: Inflation and the Velocity of Money Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
16.5 Hyperinflation 1) An inflation rate greater than 50 percent per month is known as A) disinflation. B) stagflation. C) deflation. D) hyperinflation. Answer: D Diff: 1 Topic: Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 2) During hyperinflations, the real value of money A) rises rapidly. B) falls rapidly. C) falls slowly. D) does not change. Answer: B Diff: 1 Topic: Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 3) During hyperinflations, the velocity of money generally increases because A) money is no longer a good store of value, so people spend it slowly. B) money is a better store of value, so people spend it immediately. C) economic agents have irrational expectations. D) money is no longer a good store of value, so people spend it immediately. Answer: D Diff: 1 Topic: Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
4) During hyperinflations, prices are A) not changing. B) decreasing rapidly. C) changing slowly and predictably. D) changing fast and unpredictably. Answer: D Diff: 1 Topic: Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 5) Based on the quantity theory of money, hyperinflations are most likely caused by a rapid A) increase in the growth of the money supply. B) decrease in the price level. C) increase in real GDP. D) decrease in the money supply. Answer: A Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 6) The revenue raised from printing money is called A) seignorage. B) deficit. C) bonds. D) hyperinflation. Answer: A Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
7) Suppose that the government has a $100 million deficit. How can the government finance the deficit? A) through new borrowing from the public and new money created. B) through new borrowing from the public only. C) through the printing of new money only. D) through the sale of government buildings and historical artifacts only. Answer: A Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 8) Nations that are unable to borrow money to pay for budget deficits often resort to A) printing new money to cover the deficit. B) purchasing bonds issued by other nations. C) lowering taxes. D) destroying money already in circulation. Answer: A Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 9) A nation that cannot borrow money but creates a large budget deficit is likely to experience A) hyperinflation. B) disinflation. C) deflation. D) stagflation. Answer: A Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
10) To stop hyperinflations, a nation must A) increase the budget deficit. B) decrease taxes. C) increase spending. D) eliminate the budget deficit. Answer: D Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 11) Monetarists A) believe that fiscal policy is the most important aspect of the economy. B) believe that output is determined by technology shocks. C) emphasize the role of money in the economy. D) suggest that the government determine all production decisions. Answer: C Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 12) Economists who emphasize the role of the supply of money in determining nominal income and inflation in the economy are known as A) Keynesians. B) classical economists. C) monetarists. D) rational expectation economists. Answer: C Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
13) The most famous monetarist was A) John Maynard Keynes B) Robert Lucas, Jr. C) Milton Friedman D) Edmund Phelps. Answer: C Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 14) Today, most economists agree with the monetarists that in the long run, inflation is caused by A) growth in the money supply. B) people's expectations. C) government borrowing. D) high taxes. Answer: A Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 15) The gap between government spending and its revenues is called A) the trade imbalance. B) the deficit. C) the lag time. D) seignorage. Answer: B Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
16) In addition to raising taxes, another way a budget deficit can be reduced or eliminated is by A) trying to increasing employment. B) quickly reducing government spending. C) increasing exports. D) reducing foreign trade. Answer: B Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 17) When a government has a budget deficit and has reduced its spending, what other step can be taken to generate more revenue, besides issuing government bonds? A) reduce unemployment B) raise interest rates C) increasing exports D) raise taxes Answer: D Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Recall the Application about the study by Thomas J. Sargent of hyperinflations after World War I in Germany, Austria, Hungary, and Poland, and how those hyperinflations ended, to answer the following question(s). 18) According to this Application, Sargent found that in each of the four cases studied, hyperinflation ended A) when the governments were overthrown and the central banks were dissolved. B) with the creation of a central bank and change in the way that governments were financed. C) when the central banks were given less independence and the governments required the central banks to stop printing money. D) by increases in government spending to stimulate the economy and boost the private sector. Answer: B Diff: 1 Topic: Application 3, The Ends of Hyperinflations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
19) According to this Application, Sargent concluded that hyperinflations were ultimately caused by fiscal policy that was financed by A) money creation and not taxes. B) taxes and not money creation. C) both money creation and taxes. D) sources other than money creation and taxes. Answer: A Diff: 1 Topic: Application 3, The Ends of Hyperinflations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 20) According to this Application, Sargent found that in each of the four cases studied, hyperinflation ended A) when governments stopped relying on their central banks to finance their debt and instead sold their debt to private parties. B) when governments stopped relying on private parties to finance their debt and instead sold their debt to their central banks. C) when central banks stopped issuing money and instead relied on increased tax revenues to finance government debt. D) when governments implemented austerity programs which banned the issuance of any new government bonds. Answer: A Diff: 1 Topic: Application 3, The Ends of Hyperinflations Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 21) The definition of a hyperinflation is having an inflation rate of 50 percent a year (or more). Answer: FALSE Diff: 1 Topic: Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation
22) Rapid inflation results when governments print money to finance large portions of their budget deficits. Answer: TRUE Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 23) Seignorage refers to the revenue raised through money creation. Answer: TRUE Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 24) Define hyperinflation and explain what causes it. Answer: Economists define hyperinflation as inflation rates over 50 percent per month. It is caused by money growth. Hyperinflations always occur in countries that have large deficits but cannot borrow and are forced to print new money. Diff: 1 Topic: Hyperinflation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 25) What happens to the real value of money in an economy experiencing hyperinflation? Answer: The value decreases dramatically. Diff: 1 Topic: Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 26) What must a government do to end hyperinflation in its economy? Answer: To eliminate hyperinflation, governments must eliminate budget deficits. Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation 27) Name two ways or methods a government can employ to eliminate budget deficits.
Answer: To eliminate budget deficits, a government can increase taxes, cut spending, or both. Diff: 1 Topic: How Budget Deficits Lead to Hyperinflation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 17 Macroeconomic Policy Debates 17.1 Should We Balance the Federal Budget? 1) A deficit is defined as A) the excess of total expenditures over total revenues. B) the excess of total revenues over total expenditures. C) government spending plus transfer payments. D) the sum of all past borrowing by the government. Answer: A Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) A surplus is defined as A) the excess of total expenditures over total revenues. B) the excess of total revenues over total expenditures. C) government spending plus transfer payments. D) the sum of all past borrowing by the government. Answer: B Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 3) Governments run a balanced budget when A) their debt is interest-free. B) transfer payments equal zero. C) revenues exceed spending. D) revenues equal spending. Answer: D Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
4) Government expenditures are defined as A) the excess of total expenditures over total revenues. B) the excess of total revenues over total expenditures. C) government spending on goods and services plus transfer payments. D) the sum of all past borrowing by the government. Answer: C Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) Transfer payments include A) Social Security. B) dividends. C) consumption taxes. D) open market sales. Answer: A Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 6) The government debt is defined as A) the excess of total expenditures over total revenues. B) the excess of total revenues over total expenditures. C) government spending on goods and services plus transfer payments. D) the sum of all past deficits and surpluses. Answer: D Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 7) The sum of all budget deficits and surpluses is known as the A) fiscal year. B) budget balance. C) government expenditure. D) government debt. Answer: D Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) If a government had a debt of $300 billion and then ran deficits of $200 billion each
year for the next three years, by the end of the third year its total debt would be A) -$300. B) $300 billion. C) $600 billion. D) $900 billion. Answer: D Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 9) If government spending is $900 billion while government revenue is $600 billion, the government is said to have a A) $300 billion budget surplus. B) $300 billion budget deficit. C) $1,500 billion budget deficit. D) $600 billion budget deficit. Answer: B Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 10) If government spending is $650 billion while government revenue is $950 billion, the government is said to have a A) $300 billion budget deficit. B) $1,600 billion budget balance. C) $300 billion budget surplus. D) $950 billion budget deficit. Answer: C Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
11) If government spending is $6.2 trillion while government revenue is $6.2 trillion, the government is said to have a A) budget deficit. B) budget surplus. C) balanced budget. D) balanced debt. Answer: C Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 12) Suppose the government's initial debt is $425 billion. If for the next three years the government runs deficits of $150, $125, and $200 billion, the government's total debt at the end of the three years will be A) -$50 billion. B) $50 billion. C) $475 billion. D) $900 billion. Answer: D Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 13) Suppose the government's initial debt is $400 billion. If for the next three years the government runs deficits of $150, $125, and $200 billion, the government's additional debt at the end of the three years will be A) -$50 billion. B) $50 billion. C) $475 billion. D) $900 billion. Answer: C Diff: 2 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
14) Suppose the government's initial debt is $350 billion and that during the next two years the government runs deficits of $90 and $40 billion. If during the third year the government has a $70 billion surplus, the government's total debt at the end of the three years will be A) $60 billion. B) $200 billion. C) $410 billion. D) $550 billion. Answer: C Diff: 2 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 15) Suppose the government's initial debt is $350 billion and that during the next two years the government runs deficits of $90 and $40 billion. If during the third year the government has a $70 billion surplus, the government's additional debt at the end of the three years will be A) $60 billion. B) $200 billion. C) $410 billion. D) $550 billion. Answer: A Diff: 2 Topic: Should We Balance the Federal Budget? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 16) What would happen to a government's total debt if it ran a budget deficit? A) Spending would decrease. B) Spending would increase. C) Total debt would increase. D) Total debt would decrease. Answer: C Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
17) In the 1980s and most of the 1990s, the federal government A) was balanced. B) ran small deficits. C) ran large deficits. D) ran small surpluses. Answer: C Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 18) In the year ________, for the first time in 30 years, the federal government ran a surplus. A) 1980 B) 1985 C) 1990 D) 1998 Answer: D Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 19) The standard way to measure the effects of debt in an economy is to look at the stock of debt relative to A) total government spending. B) federal tax revenue. C) GDP. D) the total budget. Answer: C Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
20) In the United States, the debt burden tends to rise during ________ and fall during ________. A) peacetime; wartime B) wartime; peacetime C) peacetime; wartime, but only if the war lasts several years. D) wartime, but only if the war is of short duration; peacetime Answer: B Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 21) The debt burden in the United States was highest during A) World War I. B) World War II. C) the 1960s. D) the 1980s. Answer: B Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 22) If there was a federal budget surplus it would make it possible to A) reduce the national debt. B) increase spending on priorities. C) decrease taxes in order to improve the equity and efficiency of the tax system. D) any of the above. Answer: D Diff: 1 Topic: The Budget in Recent Decades Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
23) During recessions, unemployment ________ while the budget deficit as a percentage of GDP ________. A) decreases; decreases B) increases; increases C) increases; decreases D) decreases; increases Answer: B Diff: 1 Topic: The Budget in Recent Decades Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) After experiencing its first budget surplus in 30 years in 1998, for how many consecutive years following that did the budget remain in a surplus state? A) 1 B) 2 C) 3 D) 4 Answer: C Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 25) As a result of the large surpluses following the Clinton Administration, what did President George W. Bush do in 2001, which reduced the surplus? A) increased government spending B) made substantial cuts in taxes C) raised the interest rate to reduce spending D) lowered the interest rate to stimulate spending Answer: B Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
26) To measure the effect of debt in an economy, economists use a standard measure which involves the ________ relative to the GDP. A) stock market activity B) outstanding government bonds C) stock of debt D) capital stock of equipment Answer: C Diff: 1 Topic: The Budget in Recent Decades Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) President Obama's stimulus package in 2009 included A) tax increases and decreases in government spending. B) new tax cuts and increases in government spending. C) increases in government spending but no change in taxes. D) new tax cuts but no change in government spending. Answer: B Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 28) The federal government ran a budget deficit of approximately ________ in fiscal year 2011. A) $250 billion B) $800 billion C) $1.3 trillion D) $14 trillion Answer: C Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
29) The federal government ran a budget deficit of approximately ________ in fiscal year 2014. A) $ 483 billion B) $1.3 billion C) $167 billion D) $1.3 trillion Answer: A Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 30) Between 2011 and 2014, the federal government budget deficit ________ because ________. A) decreased; the economy improved B) increased; the economy improved C) decreased; the economy worsened D) increased; the economy worsened Answer: A Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 31) During 2008 and 2009, the debt to GDP ratio in the United States A) fell to its lowest level since World War I. B) is the highest it has been since the founding of the country. C) rose to its highest level since World War II. D) remained relatively unchanged, as it has since the mid 1970s. Answer: C Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) Which of the following contributed to higher deficits in 2017 and 2018? A) President Trump sign a law that lowered the taxes on capital gains. B) Congress approved larger budgets for the 2017 and 2018 fiscal year. C) The unemployment rate has been below 5 percent in both years. D) A and B are correct. Answer: D Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
33) The U.S. debt to GDP ratio in 2017 was A) less than 20 percent. B) 42.4 percent. C) 76.7 percent. D) greater than 85 percent. Answer: C Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 34) During the financial crisis of 2008, the Fed A) attempted to stabilize the economy by selling over $1 trillion in securities. B) engaged in massive purchases of securities, adding over $1 trillion to its balance sheet. C) stopped its purchase of mortgage-backed securities to reduce its balance sheet. D) was careful to balance its purchase and sale of securities so as not to drastically change its balance sheet. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 35) Automatic stabilizers were clearly in evidence during the recession of 2007-2009 as A) tax revenues increased. B) tax revenues decreased. C) transfer payments decreased. D) tax revenues and transfer payments both decreased. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
36) If a government runs a deficit it can cover the gap by A) increasing transfer payments. B) printing money. C) purchasing bonds. D) lowering the discount rate. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 37) The government deficit is equal to A) new borrowing from the public minus new money created. B) new borrowing from the public plus new money created. C) new money created minus new borrowing from the public. D) new borrowing from the public divided by new money created. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 38) The government borrows money to cover budget deficits by A) purchasing bonds. B) petitioning the International Monetary Fund. C) filling out a loan application at Citibank. D) selling bonds. Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
39) If the Federal Reserve purchases newly issued government bonds, the government is said to be A) borrowing from the public. B) fiscalizing the deficit. C) monetizing the deficit. D) borrowing from itself. Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 40) Suppose the government has a $900 billion budget deficit. If the government borrows $560 billion to finance this deficit and finances the rest by printing money, the amount of new money created will be A) $340 billion. B) $560 billion. C) $900 billion. D) $1,460 billion. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 41) Suppose the government has a $1.2 trillion budget deficit. If the government borrows $1.2 trillion to finance this deficit and finances the rest by printing money, the amount of new money created will be A) $0. B) $600 billion. C) $1.2 trillion. D) $2.4 trillion. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
42) Suppose the government has a $440 billion budget deficit. If the government borrows $330 billion to finance this deficit and finances the rest by printing money, the amount of new money created will be A) $90 billion. B) $110 billion. C) $440 billion. D) $770 billion. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 43) Suppose the government has a $375 billion budget deficit. If the government creates $225 billion of new money to finance this deficit and finances the rest by borrowing, the amount borrowed from the public will be A) $150 billion. B) $225 billion. C) $375 billion. D) $600 billion. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 44) Suppose the government has a $180 billion budget deficit. If the government creates $95 billion of new money to finance this deficit and finances the rest by borrowing, the amount borrowed from the public will be A) $85 billion. B) $95 billion. C) $180 billion. D) $275 billion. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
45) Budget deficits inevitably lead to inflation in A) nations that can easily borrow from the public. B) nations that are unable to borrow from the public. C) budget deficits have no effect on inflation. D) small nations. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 46) Excessive creation of new money to finance a government budget deficit can lead to A) disinflation. B) deflation. C) stagflation. D) hyperinflation. Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 47) Which of the following countries endured massive inflation because their central banks monetized their deficits? A) Zimbabwe in 2008-2009 B) Russia in the 1990s C) Bolivia and Argentina in the 1980s D) All of the above are correct. Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
48) The term "monetizing the deficit" refers to the act of the A) Treasury issuing new debt to finance deficits. B) central bank selling newly issued bonds. C) banks in an economy buying newly issued government bonds. D) central bank purchasing newly issued government bonds. Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 49) Monetizing the budget deficit A) leads to increases in the money supply. B) creates a full-employment deficit that exceeds the actual deficit. C) occurs when the Treasury sells bonds to businesses. D) helps stabilize the economy. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 50) If the Federal Reserve purchases newly issued government debt A) the effect is the same as borrowing from the public. B) existing money is destroyed. C) new money is created. D) the money supply decreases. Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 51) If the Federal Reserve purchases newly issued government debt A) the effect is the same as borrowing from the public. B) the effect is as if the Treasury had printed money to cover the deficit. C) existing money is destroyed. D) the money supply decreases. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 52) Prior to the recession which began in late 2007, the Federal Reserve purchased
________ of the government budget deficit. A) none B) a small portion C) about 50 percent D) all Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 53) The burdens of the national debt generally fall on A) past generations. B) the present generation. C) future generations. D) all of the above. Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 54) Which of the following illustrates a burden of the national debt? A) A large debt decreases the amount of capital, thereby decreasing future incomes. B) Future generations will have to pay lower taxes to finance the national debt. C) The current generation receives a higher level of government services. D) The current generation pays a higher level of taxes. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
55) Government debt ________ the amount of savings available to firms and thus ________ the amount of capital in the economy. A) increases; increases B) decreases; increases C) increases; decreases D) decreases; decreases Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 56) Government debt "crowds out" private investment because A) the government can order the public to buy bonds. B) the government and private firms compete in the same market for savings. C) private firms stop borrowing money when the government enters the market. D) the government's increased demand for loans decreases interest rates. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 57) Suppose the public increases the level of savings in anticipation of higher future taxes to service the national debt. This is an example of A) Reaganomics. B) Smithsonian equivalence. C) Ricardian equivalence. D) Monetary equivalence. Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
58) Ricardian equivalence is the proposition that A) government expenditure should only be financed by issuing new debt. B) it does not matter whether government expenditure is financed by taxes or debt. C) it does not matter whether government expenditure is financed by creating new money or issuing debt. D) government expenditure should only be financed by taxes. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 59) Financing government expenditure through deficits rather than through taxes will lead to higher spending if A) people are more aware of taxes than they are of deficits. B) people are more aware of deficits than they are of taxes. C) it results in crowding out. D) it results in crowding in. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 60) Automatic stabilizers are changes in ________ that occur automatically as economic activity changes. A) taxes and transfer payments B) unemployment C) inflation D) the money supply Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
61) Automatic stabilizers dampen economic fluctuations during recessions because ________ decrease while ________ increase. A) unemployment rates; inflation rates B) tax payments; tax revenues C) tax revenues; tax payments D) tax payments; transfer payments Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 62) Suppose the actual budget deficit remains unchanged when the economy falls into a recession. This is an indication that A) monetary policy was not used during the recession. B) fiscal policy was not used during the recession. C) monetary policy was used during the recession. D) fiscal policy was used during the recession. Answer: B Diff: 2 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 63) Suppose the actual budget deficit increases when the economy falls into a recession. This is an indication that A) monetary policy was not used during the recession. B) fiscal policy was not used during the recession. C) monetary policy was used during the recession. D) fiscal policy was used during the recession. Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
64) The policy of running deficits and only gradually increasing taxes later to service the debt is referred to as A) crowding out. B) tax-smoothing. C) generational accounting. D) Ricardian equivalence. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 65) A constitutional balanced budget amendment would A) require that federal expenditures equal revenues (excluding borrowing). B) divide the federal budget into a capital budget and an operating budget. C) require a majority vote of Congress to authorize spending increases. D) require that the federal government maintain a balanced operating budget only. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 66) Arguments for the balanced budget amendment include all of the following EXCEPT A) a balanced budget amendment would exert fiscal discipline on the federal government. B) a balanced budget amendment would increase capital formation. C) a balanced budget amendment would limit Congress from using fiscal policy during a recession. D) a balanced budget amendment would reduce the taxation burden on future generations. Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
67) Arguments against the balanced budget amendment include all of the following EXCEPT A) a balanced budget amendment would limit Congress from using fiscal policy during a recession. B) a balanced budget amendment would reduce the taxation burden on future generations. C) a balanced budget amendment would turn control of the federal budget over to the Judicial Branch. D) a balanced budget amendment would induce Congress to issue more mandates to states to increase spending. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 68) Arguments against the balanced budget amendment include which of the following? A) A balanced budget amendment would exert fiscal discipline on the federal government. B) A balanced budget amendment would increase capital formation. C) A balanced budget amendment would reduce the taxation burden on future generations. D) A balanced budget amendment would limit Congress' ability to use fiscal policy during a recession. Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 69) Taking some types of spending "off budget" means A) not counting that spending as part of the official budget. B) borrowing to finance it instead of using tax revenue. C) eliminating that spending. D) financing the spending by special one-time taxes. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
70) What does the U.S. Treasury issue to finance the deficit? A) tax increase notices B) government bonds C) new regulations on spending D) directives to lower unemployment Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 71) What government agency has the option to purchase government bonds issued by the U.S. Treasury? A) the IRS B) the Federal Reserve C) the Commerce Department D) the Congressional Budget Office Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 72) When the government prints more money to finance debt, it is actually creating a situation that could result in A) inflation. B) devaluing of the dollar in markets. C) lowering foreign spending. D) increasing domestic spending. Answer: A Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
73) If the private sector is NOT willing to purchase government bonds being issued to finance a deficit, and the government's only option is to print more money, then this will likely cause A) a weak stock market. B) deflation. C) inflation. D) a run on borrowing. Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 74) A large government debt can reduce the amount of ________ in an economy and reduce future income and real wages for citizens. A) employment B) capital C) government spending D) social benefit programs Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 75) Who pays the interest on government debt for the money it borrows today? A) the Federal Reserve B) the Congressional Budget Office C) future generations of taxpayers D) The government does not pay interest on money it borrows. Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
76) In 2014, approximately 47 percent of the U.S. public debt was held by A) private companies. B) foreigners. C) investment firms. D) individuals. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 77) Even though a high portion of the public debt is held by older and wealthy individuals or institutions, the debt is paid for by increased taxes on A) only those holding the actual debt. B) all taxpayers. C) those who invest in the stock market. D) purchasers of gasoline and luxury items. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 78) When the deficit increases under the concept of Ricardian Equivalence, what happens to savings in the private sector? A) nothing B) savings decrease C) savings increase D) savers hedge on purchases Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
79) When a government must operate on a balanced budget, it means that there is no ________ or ________. A) borrowing; printing of money B) unemployment; special taxes C) surplus; deficit D) bonds being issued; purchased Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 80) When a government chooses to have a zero deficit with regard to revenues and spending, it is operating with what kind of budget? A) a conservative budget B) a slow economy budget C) a taxpayer-based budget D) a balanced budget Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 81) To help pull an economy out of a recession and put additional income in the hands of the public, a government can force its expenditures to ________ its revenues and create a ________. A) reduce; deficit B) exceed; deficit C) stimulate; depression D) exceed; special taxes Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
82) Income and revenue from taxes have a specific relationship during recessions. What is it? A) incomes rise, tax revenue decreases B) incomes rise, tax revenue increases C) incomes fall, tax revenue increases D) incomes fall, tax revenue decreases Answer: D Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 83) In bringing an economy out of a recession, a government will often resort to ________ fiscal policies, which often results in budget deficits. A) innovative B) contractionary C) expansionary D) conservative Answer: C Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 84) What is one specific economic situation that a balanced budget amendment would create? A) It would forbid budget surpluses. B) It would prevent deficits during peacetime. C) It would prevent a recession. D) It would curtail inflation. Answer: B Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
Recall the Application about why the U.S. federal government took over the debt of the state governments in the late 1700s to answer the following question(s). 85) According to this Application, in exchange for the federal government absolving their debts, the states were willing to give up their ability to raise revenue from collecting A) import tariffs. B) income taxes. C) property taxes. D) all of the above. Answer: A Diff: 1 Topic: Application 1, Creating the U.S. Federal Fiscal System Through Debt Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 86) According to this Application, when the states got into fiscal difficulties in the 1840s through overly ambitious infrastructure projects, the federal government A) again bailed out all the states. B) only bailed out the states which comprised the original 13 colonies. C) bailed out only the northern states, but not the southern states. D) did not bail out any of the states. Answer: D Diff: 1 Topic: Application 1, Creating the U.S. Federal Fiscal System Through Debt Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 87) According to this Application, the federal government's assuming the debts of the state governments that had been incurred during the Revolutionary War was seen as a way to A) force states to be dependant on the federal government. B) strengthen the federal government. C) prevent rapid inflation. D) balance the federal budget. Answer: B Diff: 1 Topic: Application 1, Creating the U.S. Federal Fiscal System Through Debt Policy Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
88) The government debt is the difference between the current level of total expenditures and revenues. Answer: FALSE Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 89) Purchases of goods and services are included in GDP, but transfer payments are not included. Answer: TRUE Diff: 1 Topic: Should We Balance the Federal Budget? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 90) Since 1998, the U.S. federal government has continuously run a budget surplus. Answer: FALSE Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 91) Based in part on the budget surplus, in 2001 President Bush and Congress passed a permanent tax cut. Answer: FALSE Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 92) The standard way to measure the effect of debt in an economy is the stock of debt relative to the GDP. Answer: TRUE Diff: 1 Topic: The Budget in Recent Decades Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
93) President Obama's 2009 stimulus package greatly increased the budget deficit. Answer: TRUE Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 94) The federal government ran a budget deficit of approximately $1.3 trillion in 2011. Answer: TRUE Diff: 1 Topic: The Budget in Recent Decades Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 95) The only way governments can finance a deficit is by printing new money. Answer: FALSE Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 96) The purchase by the central bank of newly created government debt is called "monetizing the deficit." Answer: TRUE Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 97) A large government debt increases the amount of capital in the economy and thereby increases future incomes and real wages. Answer: FALSE Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
98) Interest payments on the national debt are not a problem because we owe all of it to ourselves. Answer: FALSE Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 99) "Ricardian equivalence" is the proposition that it does not matter whether government expenditure is financed by taxes or by issuing debt. Answer: TRUE Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 100) Over short time periods, deficits can help the economy cope with shocks. Answer: TRUE Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 101) An economy's capital stock is increased when individuals and institutions use savings to increase capital investment in stocks and bonds. Answer: TRUE Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 102) Ricardian equivalence requires that saving by the private sector decreases when the deficit increases. Answer: FALSE Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
103) Using sharp increases or decreases in taxes rather than deficits is a better way to prevent distortions in an economy. Answer: FALSE Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 104) The federal government has a Constitutional requirement to operate a balanced budget each fiscal year. Answer: FALSE Diff: 1 Topic: Five Debates About Deficits Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 105) What method is used as the standard way to measure the effect of debt in an economy? Answer: the stock of debt relative to the GDP Diff: 1 Topic: The Budget in Recent Decades Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 106) Do deficits lead to inflation? Answer: Governments can finance a deficit either by issuing bonds or creating new money. Some countries do not have to "monetize the deficit," but if creating money is the only option then those deficits will inevitably cause inflation. Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 107) In what ways is the government debt a burden on future generations? Answer: There are two different burdens. First, a large debt can reduce the amount of capital in the economy and thereby reduce future incomes and real wages. Second, a large national debt will mean future generations will have to pay higher taxes to finance the interest on the debt. Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
108) Critically evaluate the statement, "Budget deficits can only be bad for a country." Answer: The statement is not correct. One time when running a budget deficit can be good for a country involves the case of automatic stabilizers. When the economy goes into recession, tax revenue falls and social insurance payments go up, softening the recession but also increasing the deficit. Those who believe in Ricardian Equivalence might also argue that budget deficits do not matter. Diff: 2 Topic: Five Debates About Deficits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 109) Proponents of a balanced budget amendment to the Constitution argue that it will finally exert discipline on the federal government and so prevent large peacetime deficits. What do the critics argue? Answer: Critics of a balanced budget amendment point to several problems; first, it may make it harder to stabilize the economy; second, the Constitution may not be the correct vehicle for dealing with the problem; third, Congress could devise special ways to get around the restrictions; and finally, Congress can also find nonbudgetary ways to get around the restrictions. Diff: 2 Topic: Five Debates About Deficits Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 110) Explain what is meant by the term "monetizing the deficit." Answer: Monetizing the deficit occurs when a country's central bank acquires newly created government debt by purchasing newly issued government bonds. Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 111) Explain the proposition known as Ricardian equivalence. Answer: The theory of Ricardian equivalence is based on the premise that it does not matter whether government expenditures are financed by taxes or by issuing debt. Diff: 1 Topic: Five Debates About Deficits Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
112) Those who favor smaller government tend to do what in order to make it more difficult for politicians to increase government spending? List at least two methods. Answer: cut taxes, reduce surpluses, increase deficits Diff: 1 Topic: Five Debates About Deficits Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17.2 Should the Fed Target Both Inflation and Employment? 1) By the first years of the 21st century, the rate of inflation in the United States had fallen to between ________ percent. A) 1 and 2 B) 4 and 5 C) 5 and 6 D) 8 and 10 Answer: A Diff: 1 Topic: Should the Fed Target Both Inflation and Employment? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 2) Complete price stability would be the result of A) inflation. B) deflation. C) hyperinflation. D) an inflation rate of zero. Answer: D Diff: 1 Topic: Two Debates About Targeting Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
3) Many economists believe that our price indexes ________ the true inflation rate. A) understate B) overstate C) perfectly measure D) minimize Answer: B Diff: 1 Topic: Two Debates About Targeting Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 4) All of the following are benefits of the Fed having only the single goal of price stability EXCEPT A) the Fed would be more credible. B) the Fed would be free from political pressures. C) the fed would not be distracted and led astray by other concerns. D) there would be greater reliance on fiscal policy for economic stabilization. Answer: D Diff: 1 Topic: Two Debates About Targeting Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 5) Some economists object to having the Fed concentrate solely on price stability because it would A) free the Fed from political pressure. B) lessen its credibility. C) make stabilizing the economy more difficult. D) privatize the Federal Reserve. Answer: C Diff: 1 Topic: Two Debates About Targeting Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
6) If the Fed decided to target price levels and inflation was lower than its target for a period of time, the Fed would be required to A) temporarily raise inflation above its target to reach its price level target. B) temporarily lower its inflation target to match its price level target. C) permanently lower its price level target to align it with the inflation rate. D) permanently raise inflation above its target to reach and maintain its price level target. Answer: A Diff: 1 Topic: Two Debates About Targeting Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation Recall the Application about whether the Federal Reserve should change the target inflation rate to answer the following question(s). 7) According to the Application, the Federal Reserve currently targets an inflation rate of A) 2 percent. B) 3 percent. C) 0 percent. D) one percent. Answer: A Diff: 1 Topic: Application 2, Do we need to change our inflation targets? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 8) According to the Application, the Reserve Bank of Australia has a target inflation rate of A) two to three percent. B) three to four percent. C) zero to one percent. D) one to two percent. Answer: A Diff: 1 Topic: Application 2, Do we need to change our inflation targets? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
9) According to the Application, what is the reason that the Fed does NOT target a zero inflation rate? A) Many believed that price indices did not capture technological progress. B) Many believed that a zero inflation rate created unemployment. C) Many believed that targeting zero inflation is impossible. D) Many believed that the U.S. government makes a profit selling bonds if the inflation rate was greater than zero. Answer: A Diff: 1 Topic: Application 2, Do we need to change our inflation targets? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 10) According to the Application, what is the benefit for having a higher inflation target? A) The Fed has more room to lower interest rates in case of a recession. B) The Fed has more room to raise interest rates when the economy is experiencing rapid growth. C) The Fed has less ability to conduct open market operations. D) A higher inflation rate makes U.S. bonds more attractive to domestic and foreign investors. Answer: A Diff: 1 Topic: Application 2, Do we need to change our inflation targets? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 11) According to the Application, what is the danger of having a new target inflation rate that is higher than two percent? A) Some economists believe that once the target is raised, the Fed could lose control of inflation expectations. B) A higher inflation target could introduce other inflation distortions in the economy. C) The U.S. government makes a smaller profit selling bonds if the inflation rate was greater than two percent. D) Both A and B are correct. Answer: D Diff: 1 Topic: Application 2, Do we need to change our inflation targets? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
12) In the United States, the Federal Reserve pursues an inflation targeting policy of keeping inflation below 2 percent. Answer: FALSE Diff: 1 Topic: Should the Fed Target Both Inflation and Employment? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 13) Having the single goal of price stability would make the Fed more subject to political pressure. Answer: FALSE Diff: 1 Topic: Two Debates About Targeting Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 14) Active fiscal policy is the main tool used by the Fed for economic stabilization. Answer: FALSE Diff: 1 Topic: Two Debates About Targeting Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 15) A policy where the Federal Reserve focuses only on inflation is called monetarizing inflation. Answer: FALSE Diff: 1 Topic: Two Debates About Targeting Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation
16) Should the Fed only have the single goal of price stability? Why or why not? Answer: Having only a single goal has advantages because the Fed would not be distracted by other concerns, it would have enhanced credibility, and it would help to keep the Fed free of political pressures. However it would also mean not being able to use monetary policy to stabilize the economy in the same way as it is used at present. It should be noted, however, that some economists would think that even that last point is an advantage. Diff: 1 Topic: Two Debates About Targeting Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation 17.3 Should We Tax Consumption Rather than Income? 1) The U.S. saving rate is A) higher than that of most major countries. B) low. C) rapidly increasing. D) negative. Answer: B Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 2) Among the factors that have a negative impact on savings in the United States is the A) tax system. B) structure of our welfare programs. C) fact that colleges give less in financial aid to students whose families have savings. D) all of the above. Answer: D Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
3) Suppose that a person in the United States earns $5,000 and faces an income tax rate of 25 percent. If that person saves $2,000 and invests it at 12 percent then he or she will pay A) more in taxes than if there had been no saving. B) less in taxes because of the saving. C) tax only on the income spent. D) tax only on the amount saved. Answer: A Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 4) An example of a consumption tax is A) a sales tax. B) the Social Security tax. C) an income tax. D) transfer payments. Answer: A Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 5) In the United States there are some methods to save which reduce taxes on savings. These include A) commodity purchases. B) stock purchases. C) retirement plans like 401Ks and 403Bs. D) money market accounts. Answer: C Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
6) In its basic form, an IRA simply does what to taxes? A) eliminates them B) passes the taxes on to the rich C) defers their payment to a later time D) reduces the tax payments when you save Answer: C Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 7) A capital gains tax is a tax A) on the profits investors earn when they sell stocks, bonds, real estate or other assets. B) on firms who purchase factories and machinery. C) on workers incomes. D) on consumer's purchases on cars and other durable goods. Answer: A Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 8) Which of the following is an example of a capital gain? A) an investor bought a building in 2016 for $5 million and selling it for $8 million one year later. B) a physician earns income off of her investment human capital C) a farmer sells corn for $30,000 grown from seeds that were worth $300. D) John buys a car at auction for $22,000. He believes the car is worth 40,000. Answer: A Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
9) A flat tax which does allow deductions for investment spending is a type of A) luxury tax. B) consumption tax. C) investment tax. D) excise tax. Answer: B Diff: 2 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 10) The "________ tax" designed by Robert Hall and Alvin Rabushka feature a single low tax rate for both individuals and businesses. A) flat B) progressive C) regressive D) value added Answer: A Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 11) A flat tax that does allow for deductions for investments generally has the same effect as allowing a deduction for savings. This type of a flat tax is a A) consumption tax. B) capital gains tax. C) regressive tax. D) value added tax. Answer: A Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
12) A flat tax which does NOT allow for deductions or credits is essentially a tax on A) income. B) consumption. C) government expenditures. D) education. Answer: A Diff: 2 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 13) Suppose the federal government implemented a flat tax to replace the income tax, and the flat tax saved taxpayers a total of $5 billion. A tax change such as this could be viewed as an example of the federal government implementing A) expansionary monetary policy. B) contractionary monetary policy. C) expansionary fiscal policy. D) contractionary fiscal policy. Answer: C Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 14) Capital gains are a type of income earned from A) interest on savings accounts. B) the sale of assets. C) employment in a factory. D) all of the above. Answer: B Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
15) Capital gains are the profit earned from the sale of A) stocks. B) bonds. C) real estate. D) all of the above. Answer: D Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 16) A consumption tax system is likely to benefit A) higher income individuals. B) lower income individuals. C) an individual who, regardless of income, is a large consumer. D) corporations. Answer: A Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 17) Capital gains are taxed at a different rate than income and this reduces revenues the government receives. All else equal, what would happen if capital gains taxes were eliminated? A) The government would not be able to spend money on any programs. B) Everyone would have to pay less in taxes. C) The deficit would increase because of lack of revenues. D) They would have to be replaced by a consumption tax. Answer: C Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
Recall the Application that questions if the United States can or should adopt a VAT to answer the following question(s). 18) According to the Application, the VAT is an acronym for A) value added tax B) virtually avoidable tax C) very annoying tax D) very amazing transaction Answer: A Diff: 1 Topic: Application 3, Is a VAT in Our Future? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 19) According to the Application, one difference between a value-added tax and an income tax is the value-added tax A) is difficult to collect. B) is not a consumption tax. C) does not penalize individuals who save. D) is a progressive tax. Answer: C Diff: 1 Topic: Application 3, Is a VAT in Our Future? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 20) According to this Application, ________ developed countries and ________ developing countries have a value-added tax. A) virtually all; many B) very few; most C) most; very few D) very few; very few Answer: A Diff: 1 Topic: Application 3, Is a VAT in Our Future? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
21) According to this Application, some conservatives worry that a value-added tax ________ and some liberals worry that a value-added tax ________. A) will result in consumers not realizing all the taxes they pay; is regressive B) will discourage consumers from saving; will decrease federal tax revenue C) is progressive; will reduce investment. D) will penalize high-income individuals; will decrease per-capita GDP Answer: A Diff: 1 Topic: Application 3, Is a VAT in Our Future? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 22) The United States is a country with a high saving rate. Answer: FALSE Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 23) Typical consumption taxes create an incentive to save. Answer: TRUE Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 24) Corporate income is taxed twice. Answer: TRUE Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 25) Capital gains are the profits earned by investors from the sale of stocks, bonds, real estate, or other assets. Answer: TRUE Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
26) What are consumption taxes, and what is an example of a consumption tax? Answer: Consumption taxes are taxes based on the consumption of individuals as opposed to an individual's income. Examples include sales taxes, value-added taxes, and luxury taxes. Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 27) Robert Hall and Alvin Rabushka designed a "flat tax" that allowed for businesses to deduct investment spending. What was their intent in designing this tax? Answer: A typical flat tax that does not allow for deductions on investment spending is essentially a consumption tax. By designing a flat tax that allows businesses to deduct wage payments and investment expenditures before they calculate their tax payments, Hall and Rabushka designed a flat tax that was essentially a consumption tax. Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 28) What kind of investment instrument is an IRA, and when is the income earned from an IRA taxed? Answer: An IRA is a savings account which allows savers to defer tax payments. The income earned from an IRA is taxed only when the money is withdrawn from the account. Diff: 1 Topic: Should We Tax Consumption Rather than Income? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 29) Will consumption taxes lead to more savings? Why or why not? Answer: Consumption taxes have the effect of increasing the return from savings. This has both a substitution and an income effect; the substitution effect is positive, in that the higher returns from savings will cause people to save more. The income effect is negative because the higher returns make people feel better off and so they spend more instead of saving. Determining whether savings increases or decreases when tax rates are cut ultimately must be settled by careful research. Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy
30) Give an example of income in the United States that is taxed twice. Answer: Corporate income is taxed once when it is earned and then again when it is distributed to shareholders as dividends and they have to claim it on their personal income taxes. Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 31) Define capital gains. Answer: Capital gains are profits investors earn when they sell stocks, bonds, real estate or other assets. Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy 32) By NOT taxing capital gains separately from ordinary income, what would happen to the government's stream of revenue? Answer: It would be greatly reduced. Diff: 1 Topic: Two Debates About Consumption Taxation Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 18 International Trade and Public Policy 18.1 Benefits from Specialization and Trade 1) The opportunity cost of something is A) a measure of the scarcity of the good. B) what you sacrifice to get the good. C) the price you pay for the good. D) what you are willing to pay for the good. Answer: B Diff: 1 Topic: Benefits from Specialization and Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 2) The production possibilities curve represents the set of all A) feasible combinations of goods that the economy can produce given that a nation's resources are fully employed.
B) factors of production that can be used to manufacture goods and services. C) combinations of goods and services that can be used in the production of other goods and services. D) nonlinear forms of production in the economy. Answer: A Diff: 1 Topic: Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 3) If the tradeoff between the two goods is constant, the production possibilities curve is A) a negatively-sloped straight line. B) a positively-sloped straight line. C) a negatively-sloped curve which is bowed outward. D) a negatively-sloped curve which is bowed inward. Answer: A Diff: 1 Topic: Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
4) The slope of the production possibilities curve is A) positive. B) positive and increasing. C) positive and decreasing. D) the opportunity cost of one good in terms of the other. Answer: D Diff: 1 Topic: Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 5) Suppose the nation of Arcadia produces only two goods, teapots and surfboards. If Arcadia produces only teapots, it can make 80 per day. If Arcadia produces only surfboards, it can make 30 per day. What is the opportunity cost of 1 teapot in Arcadia? A) 3/8 of a surfboard B) 8/3 surfboards C) 30 surfboards D) 80 surfboards Answer: A Diff: 2 Topic: Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 6) Suppose the nation of Arcadia produces only two goods, teapots and surfboards. If Arcadia produces only teapots, it can make 40 per day. If Arcadia produces only surfboards, it can make 60 per day. What is the opportunity cost of 1 teapot in Arcadia? A) 2/3 of a surfboard B) 1.5 surfboards C) 40 surfboards D) 60 surfboards Answer: B Diff: 2 Topic: Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
7) For a nation to have ________ in producing a good it must have a lower opportunity cost of producing that good than the other country. A) a comparative advantage B) an absolute advantage C) an autarky advantage D) both a comparative advantage and an absolute advantage Answer: A Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 8) The relative amounts of the goods that will be exchanged for each other in trade refers to the nations' A) absolute advantages. B) terms of trade. C) production possibilities. D) autarky status. Answer: B Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 9) If Italy can produce grapes at a lower opportunity cost than any other nation, Italy is said to have a(n) ________ in the production of grapes. A) autarky B) absolute advantage C) comparative disadvantage D) comparative advantage Answer: D Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
Daily Output of Russia and Panama Russia Panama Gloves 40 240 Hats 120 180 Table 18.1 10) Refer to Table 18.1. The opportunity cost of a glove in Russia is A) 1/8 of a hat. B) 1/3 of a hat. C) 3 hats. D) 8 hats. Answer: C Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 11) Refer to Table 18.1. The opportunity cost of a hat in Russia is A) 1/3 of a glove. B) 1/2 of a glove. C) 2 gloves. D) 3 gloves. Answer: A Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 12) Refer to Table 18.1. The opportunity cost of a glove in Panama is A) 1/8 of a hat. B) 3/4 of a hat. C) 4/3 hats. D) 8 hats. Answer: B Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
13) Refer to Table 18.1. The opportunity cost of a hat in Panama is A) 1/2 of a glove. B) 3/4 of a glove. C) 4/3 gloves. D) 2 gloves. Answer: C Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 14) Refer to Table 18.1. Russia has a comparative advantage in A) hats. B) gloves. C) both hats and gloves. D) neither hats nor gloves. Answer: A Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 15) Refer to Table 18.1. Panama has a comparative advantage in A) hats. B) gloves. C) both hats and gloves. D) neither hats nor gloves. Answer: B Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
16) Refer to Table 18.1. After trade begins, ________ will specialize in the production of hats and ________ will specialize in the production of gloves. A) Russia; Panama B) Panama; Russia C) Panama; Panama D) Russia; Russia Answer: A Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 17) Refer to Table 18.1. Mutually beneficial terms of trade between Russia and Panama would be A) 1 hat for 2 gloves. B) 1 glove for 6 hats. C) 5 gloves for 3 hats. D) 1 hat for 1 glove. Answer: D Diff: 3 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
Figure 18.1 18) Refer to Figure 18.1. The opportunity cost of bicycles in Canada is A) 1/2 of a hang glider. B) 2/3 of a hang glider. C) 2 hang gliders. D) 4 hang gliders. Answer: A Diff: 1 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 19) Refer to Figure 18.1. The opportunity cost of hang gliders in Canada is A) 1/4 of a bicycle. B) 1/2 of a bicycle. C) 2 bicycles. D) 4 bicycles. Answer: C Diff: 1 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
20) Refer to Figure 18.1. The opportunity cost of bicycles in the United States is A) 1/3 of a hang glider. B) 1/2 of a hang glider. C) 3 hang gliders. D) 4 hang gliders. Answer: C Diff: 1 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 21) Refer to Figure 18.1. The opportunity cost of hang gliders in the United States is A) 1/4 of a bicycle. B) 1/3 of a bicycle. C) 3 bicycles. D) 4 bicycles. Answer: B Diff: 1 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 22) Refer to Figure 18.1. The United States has a comparative advantage in the production of A) bicycles. B) hang gliders. C) both bicycles and hang gliders. D) neither bicycles nor hang gliders. Answer: B Diff: 1 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
23) Refer to Figure 18.1. Canada has a comparative advantage in the production of A) bicycles. B) hang gliders. C) both bicycles and hang gliders. D) neither bicycles nor hang gliders. Answer: A Diff: 1 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 24) Refer to Figure 18.1. After trade begins, ________ will specialize in the production of bicycles and ________ will specialize in the production of hang gliders. A) the United States.; the United States B) the United States; Canada C) Canada; the United States D) Canada; Canada Answer: C Diff: 1 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 25) Refer to Figure 18.1. ________ has a comparative disadvantage in bicycles and ________ has a comparative disadvantage in hang gliders. A) The United States; the United States B) The United States; Canada C) Canada; the United States D) Canada; Canada Answer: B Diff: 2 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
26) Refer to Figure 18.1. Mutually beneficial terms of trade between the United States and Canada would be A) 1 bicycle for 8 hang gliders. B) 1 hang glider for 3 bicycles. C) 1 hang glider for 1/4 of a bicycle. D) 1 hang glider for 1/2 of a bicycle. Answer: D Diff: 3 Topic: Comparative Advantage and the Terms of Trade, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 27) Autarky refers to A) a situation in which nations trade goods and services. B) the location on a consumption possibilities curve. C) a situation in which there is no trade. D) the equilibrium a nation reaches after trade begins. Answer: C Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 28) The rate at which nations will exchange goods and services is known as the A) exchange rate. B) transfer rate. C) terms of trade. D) terms of exchange. Answer: C Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
29) Which of the following statements is FALSE? A) The production possibilities curve shows the combinations of goods that can be consumed by a nation before trade begins. B) The production possibilities curve shows the combinations of goods that can be consumed by a nation after trade and specialization begins. C) The production possibilities curve shows the combinations of goods that can be produced by a nation before trading begins. D) The production possibilities curve shows the combinations of goods that can be produced by a nation after trade and specialization begins. Answer: B Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 30) The consumption possibilities curve shows the combinations of goods that can be A) consumed by a nation before trade begins. B) consumed by a nation after trading begins. C) produced by a nation before trading begins. D) produced by a nation after trade begins. Answer: B Diff: 1 Topic: The Consumption Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 31) As a whole, nations are better off after trade and specialization because A) nations can consume along their consumption possibilities curve, which is outside of their production possibilities curve. B) nations can consume along their consumption possibilities curve, which is inside of their production possibilities curve. C) nations can consume along their production possibilities curve, which is outside of their consumption possibilities curve. D) nations experience an inward shift of their production possibilities curve. Answer: A Diff: 1 Topic: The Consumption Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
Figure 18.2 32) Refer to Figure 18.2. Macadamia has a comparative advantage in the production of A) fishing poles. B) spears. C) both spears and fishing poles. D) neither spears nor fishing poles. Answer: A Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 33) Refer to Figure 18.2. The opportunity cost of producing fishing poles in Macadamia is A) 3/4 of a spear. B) 5/6 of a spear. C) 6/5 spears. D) 4/3 spears. Answer: B Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
34) Refer to Figure 18.2. The opportunity cost of producing spears in Macadamia is A) 3/4 of a fishing pole. B) 5/6 of a fishing pole. C) 6/5 fishing poles. D) 4/3 fishing poles. Answer: C Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 35) Refer to Figure 18.2. In autarky, the maximum amount of fishing poles that Macadamia can produce is A) 40. B) 100. C) 120. D) 160. Answer: C Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 36) Refer to Figure 18.2. In autarky, the maximum amount of spears that Macadamia can produce is A) 40. B) 100. C) 120. D) 160. Answer: B Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
37) Refer to Figure 18.2. After trade and specialization begin, the maximum amount of fishing poles that Macadamia can consume is A) 40. B) 100. C) 120. D) 160. Answer: C Diff: 2 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 38) Refer to Figure 18.2. After trade and specialization begin, the maximum amount of spears that Macadamia can consume is A) 40. B) 100. C) 120. D) 160. Answer: D Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
Figure 18.3 39) Refer to Figure 18.3. Livonia has a comparative advantage in the production of A) pogo sticks. B) scooters. C) both scooters and pogo sticks. D) neither scooters nor pogo sticks. Answer: A Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 40) Refer to Figure 18.3. The opportunity cost of producing pogo sticks in Livonia is A) 2/3 of a scooter. B) 4/5 of a scooter. C) 6/5 scooters. D) 1.25 scooters. Answer: B Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
41) Refer to Figure 18.3. The opportunity cost of producing scooters in Livonia is A) 2/3 of a pogo stick. B) 6/5 of a pogo stick. C) 1.5 pogo sticks. D) 1.25 pogo sticks. Answer: D Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 42) Refer to Figure 18.3. In autarky, the maximum amount of pogo sticks that Livonia can produce is A) 120. B) 100. C) 80. D) 40. Answer: B Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 43) Refer to Figure 18.3. In autarky, the maximum amount of scooters that Livonia can produce is A) 120. B) 100. C) 80. D) 40. Answer: C Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
44) Refer to Figure 18.3. After trade and specialization begin, the maximum amount of pogo sticks that Livonia can consume is A) 120. B) 100. C) 80. D) 40. Answer: B Diff: 1 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 45) Refer to Figure 18.3. After trade and specialization begin, the maximum amount of scooters that Livonia can consume is A) 120. B) 100. C) 80. D) 40. Answer: A Diff: 2 Topic: The Consumption Possibilities Curve, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 46) Suppose there are only 2 nations, Atlantis and Pacifica, and only two goods, surfboards and kayaks. If Atlantis produces only surfboards, it can make 50 per day. If Atlantis produces only kayaks, it can make 75 per day. If Pacifica produces only surfboards, it can make 75 per day. If Pacifica produces only kayaks, it can make 75 per day. After trade begins, ________ will specialize in the production of surfboards and ________ will specialize in the production of kayaks. A) Atlantis; Atlantis B) Pacifica; Pacifica C) Atlantis; Pacifica D) Pacifica; Atlantis Answer: D Diff: 2 Topic: The Consumption Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
47) Suppose there are only 2 nations, Atlantis and Pacifica, and only two goods, surfboards and kayaks. If Atlantis produces only surfboards, it can make 27 per day. If Atlantis produces only kayaks, it can make 18 per day. If Pacifica produces only surfboards, it can make 32 per day. If Pacifica produces only kayaks, it can make 24 per day. After trade begins, ________ will specialize in the production of surfboards and ________ will specialize in the production of kayaks. A) Atlantis; Atlantis B) Pacifica; Atlantis C) Atlantis; Pacifica D) No trade will occur. Answer: C Diff: 3 Topic: The Consumption Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 48) Which of the following statements is TRUE? A) Free trade will benefit all workers in a nation equally. B) As a result of specialization some workers will be displaced and harmed in the short run by free trade. C) Free trade leads to lower wages for all workers in both nations. D) Specialization will result in a decline in an industry and none of those workers will be able to find other jobs. Answer: B Diff: 1 Topic: How Free Trade Affects Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
49) Suppose Belgium produces only two goods, chocolate and lace. If Belgium has a comparative advantage in lace, a move toward free trade will A) benefit chocolate workers, harm lace workers in the short run, but benefit the nation as a whole. B) harm chocolate workers in the short run, benefit lace workers, but benefit the nation as a whole. C) harm chocolate workers in the short run, harm lace workers, but benefit the nation as a whole. D) benefit chocolate workers, harm lace workers in the short run, but harm the nation as a whole. Answer: B Diff: 1 Topic: How Free Trade Affects Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 50) Suppose Panama produces only two goods, bananas and hats. If Panama has a comparative advantage in bananas, a move toward free trade will A) harm hat workers, benefit banana workers, but benefit the nation as a whole. B) harm hat workers, harm banana workers, but benefit the nation as a whole. C) benefit hat workers, harm banana workers, but harm the nation as a whole. D) benefit hat workers, harm banana workers, but benefit the nation as a whole. Answer: A Diff: 1 Topic: How Free Trade Affects Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 51) A production possibilities curve shows the combinations of products which can be produced in an economy which is fully employing and efficiently using its productive resources. Answer: TRUE Diff: 1 Topic: Production Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
52) If the opportunity cost of 1 wristwatch is 4 wall clocks in Japan and 2 wall clocks in Germany, it makes sense for Germany to produce wristwatches. Answer: TRUE Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 53) If the opportunity cost of 1 wristwatch is 4 wall clocks in Japan and 2 wall clocks in Germany, it makes sense for Japan to produce wristwatches. Answer: FALSE Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 54) The opportunity cost of 1 wristwatch is 4 wall clocks in Japan and 2 wall clocks in Germany. If the nations split the difference between the willingness to pay and the willingness to accept, the terms of trade would be 3 wristwatches per wall clock. Answer: FALSE Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 55) The rate at which units of one product can be exchanged for units of another product is called the terms of trade. Answer: TRUE Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
56) The ability to produce a product at a lower resource cost than another nation can produce the same product is called comparative advantage. Answer: FALSE Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 57) To draw the consumption possibilities curve for a particular nation you need to know the output of the good for which the nation has a comparative advantage and the terms of trade. Answer: TRUE Diff: 1 Topic: The Consumption Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 58) A consumption possibilities curve shows the combinations of two goods that can be consumed when a nation specializes in producing a particular good and trades with another nation. Answer: TRUE Diff: 1 Topic: The Consumption Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 59) Free trade will affect a country's employment in different industries. Answer: TRUE Diff: 1 Topic: How Free Trade Affects Employment Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
60) Consider the following weekly production possibilities of gloves and hats in Panama and Russia:
Gloves Hats
Russia 20 80
Panama 180 90
What is each country's opportunity cost of producing gloves and hats? If the countries could, should they trade? Answer: Russia's opportunity cost of a glove is 4 hats, while Panama's opportunity cost of a glove is 1/2 of a hat. The opportunity costs of hats are the reciprocals of these. Even though Panama has an absolute advantage in the production of all goods, it will still make sense for Panama to specialize in glove production (because of its comparative advantage) and trade for hats, as Russia has the comparative advantage in hat production. Diff: 2 Topic: Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 61) Consider the following weekly production possibilities of gloves and hats in Panama and Russia:
Gloves Hats
Russia 20 80
Panama 180 90
What is the possible range of terms of trade between Panama and Russia? Answer: The price of 1 glove needs to fall between 1/2 of a hat and 4 hats. The price of 1 hat needs to fall between 1/4 of a glove and 2 gloves. Diff: 2 Topic: Production Possibilities Curve Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
62) Consider a nation that has a comparative advantage in the production of goods using unskilled labor. What types of workers will benefit from increased trade, and what types will lose? Answer: As a result of trade, the wage of unskilled labor will increase and the wage of skilled labor will decrease. Diff: 2 Topic: Comparative Advantage and the Terms of Trade Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 63) What is the difference between comparative advantage and absolute advantage? Answer: Comparative advantage refers to the ability of one person or nation to produce a product at a lower opportunity cost than another person or nation. Absolute advantage refers to the ability of one person or nation to produce a product at a lower resource cost than another person or nation. Diff: 1 Topic: Comparative Advantage and the Terms of Trade Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade 64) What is the difference between a production possibilities curve and a consumption possibilities curve? Answer: A production possibilities curve shows the possible combinations of two products that can be produced in an economy. A consumption possibilities curve shows the possible combinations of two products that can be consumed when a nation specializes and trades with another nation. Diff: 1 Topic: The Consumption Possibilities Curve Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade
18.2 Protectionist Policies 1) An import ban results in A) a decrease in the supply of the product. B) an increase in the product's price. C) a decrease in the quantity of the product bought and sold. D) all of the above. Answer: D Diff: 1 Topic: Import Bans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 2) An import quota A) limits the amount of a good that can be imported, thus decreasing prices. B) limits the amount of a good that can be imported, thus increasing prices. C) increases the amount of a good imported, thus decreasing prices. D) increases the amount of a good imported, thus increasing prices. Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) A(n) ________ is a trade policy by which a nation agrees to limit its exports of a good in order to avoid more restrictive trade policies. A) tariff B) voluntary export restraint (VER) C) import quota D) import ban Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
4) Exporting nations often agree to voluntary export restraints (VERs) in an attempt to A) employ more workers in the importing nation. B) avoid more restrictive trade policies. C) increase global welfare. D) decrease inflation. Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 5) Voluntary export restraints (VER) A) have the same effect as an import ban. B) are illegal under the international trading rules. C) violate the spirit of international trade agreements. D) all of the above. Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 6) Which of the following benefits from a quota or VER? A) consumers B) domestic producers C) the government D) all of the above Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
7) A(n) ________ is a tax on an imported good. A) tariff B) import quota C) voluntary export restraint (VER) D) export quota Answer: A Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 8) Import bans, import quotas, voluntary export restraints (VERs), and tariffs on goods all A) increase equilibrium quantities and prices. B) decrease equilibrium quantities and prices. C) increase equilibrium quantities, but decrease prices. D) decrease equilibrium quantities, but increase prices. Answer: D Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 9) Import bans, import quotas, voluntary export restraints (VERs), and tariffs on goods all A) increase imports and raise prices for consumers. B) reduce imports and prices for consumers. C) reduce imports and raise prices for consumers. D) increase imports and reduce prices for consumers. Answer: C Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
10) Which of the following situations will arise in the domestic market following the imposition of a tariff? A) imports decrease, domestic production increases, prices increase B) imports increase, domestic production increases, prices increase C) imports increase, domestic production decreases, prices decrease D) imports decrease, domestic production increases, prices decrease Answer: A Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) Which of the following situations will arise in the domestic market following the imposition of an import ban? A) imports increase, domestic production increases, prices increase B) imports increase, domestic production decreases, prices decrease C) imports decrease, domestic production increases, prices increase D) imports decrease, domestic production increases, prices decrease Answer: C Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 12) Which of the following situations will arise in the domestic market following the imposition of an import quota? A) imports increase, domestic production decreases, prices decrease B) imports decrease, domestic production increases, prices decrease C) imports decrease, domestic production decreases, prices increase D) imports decrease, domestic production increases, prices increase Answer: D Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
13) Which of the following situations will arise in the domestic market following the imposition of a voluntary export restraint? A) imports increase, domestic production increases, prices increase B) imports decrease, domestic production increases, prices increase C) imports increase, domestic production decreases, prices decrease D) imports decrease, domestic production increases, prices decrease Answer: B Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 14) Which of the following situations will arise in the domestic market following the removal of an import quota? A) imports increase, domestic production increases, prices increase B) imports increase, domestic production decreases, prices decrease C) imports decrease, domestic production increases, prices decrease D) imports decrease, domestic production decreases, prices increase Answer: B Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
15) Refer to Figure 18.4. With free trade, what is the equilibrium quantity of gloves in Duckland? A) 100 B) 80 C) 60 D) 40 Answer: A Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 16) Refer to Figure 18.4. With free trade, what is the equilibrium price of gloves in Duckland? A) $0 B) $8 C) $9 D) $11 Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
17) Refer to Figure 18.4. With an import ban, what is the equilibrium quantity of gloves in Duckland? A) 100 B) 80 C) 60 D) 40 Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18) Refer to Figure 18.4. With an import ban, what is the equilibrium price of gloves in Duckland? A) $0 B) $8 C) $9 D) $12 Answer: D Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 19) Refer to Figure 18.4. With free trade, how many gloves are produced domestically in Duckland? A) 100 B) 80 C) 60 D) 0 Answer: D Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
20) Refer to Figure 18.4. With an import ban, how many gloves are produced domestically in Duckland? A) 100 B) 80 C) 60 D) 0 Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 21) Refer to Figure 18.4. With a tariff or quota, what is the equilibrium quantity of gloves in Duckland? A) 100 B) 80 C) 60 D) 40 Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 22) Refer to Figure 18.4. With a tariff or quota, what is the equilibrium price of gloves in Duckland? A) $8 B) $9 C) $10 D) $11 Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
23) Refer to Figure 18.4. With a tariff, how much does the government collect for each glove imported into Duckland? A) $0 B) between $2 and $3 C) between $8 and $10 D) more than $10 Answer: B Diff: 1 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 24) Tariffs ________ prices for domestic consumers and import quotas ________ prices for domestic consumers. A) raise; lower B) lower; raise C) raise; also raise D) lower; also lower Answer: C Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 25) Importers collect additional revenues from a ________, and governments collect additional revenues from ________. A) tariff; voluntary export restraints B) quota; import bans C) quota; tariffs D) voluntary export restraint; quotas Answer: C Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
26) Which of the following tariffs resulted in worldwide retaliation against the United States during the Great Depression? A) the Pasta Tariff B) the Chicken tariff C) the Smoot-Hawley tariff D) the Tariff of Abominations Answer: C Diff: 1 Topic: Responses to Protectionist Policies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 27) In 1995, the United States threatened to impose 100 percent tariffs on ________ from ________ if it didn't loosen its protectionist policies. A) luxury cars; Japan B) auto parts; Japan C) brandies; France D) light trucks; Germany Answer: A Diff: 1 Topic: Responses to Protectionist Policies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
Recall the Application about the impact tariffs have on lower income households to answer the following question(s). Economists have found that tariffs in the United States fall most heavily on lower-income consumers. In the United States, tariffs are very high on textiles, apparel items and footwear, and within these categories the highest tariffs fall on the cheapest products. In general, to protect U.S. industries, tariffs are highest on labor-intensive goods. 28) According to this Application, tariffs in the United States are very high on textiles, apparel items and footwear. These tariffs disproportionately impact lower-income households because A) lower-income households tend to purchase more of these items than do higher-income households. B) these products represent a higher fraction of consumption of lower-income households than higher-income households. C) the tariffs are only applicable to lower-income households. D) higher-income households tend to purchase products produced in the United States, which are not subject to tariffs. Answer: B Diff: 1 Topic: Application 1, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 29) According to this Application, tariffs in the United States are very high on textiles, apparel items, and footwear, and within these categories tariffs are highest on the cheapest products. These tariffs disproportionately impact lower-income households because A) higher-income consumers tend to refuse to purchase products with tariffs. B) only lower-income consumers buy cheap, imported products. C) these cheaper products tend to be purchased by lower-income consumers. D) higher-income consumers can deduct the tariff from their income taxes. Answer: C Diff: 1 Topic: Application 1, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
30) If the tariffs on textiles, apparel items, and footwear mentioned in the Application were replaced by equivalent voluntary export restraints (VERs), low-income consumers would probably A) be better off. B) be worse off. C) be no better nor worse off. D) not be subject to the VERs. Answer: C Diff: 1 Topic: Application 1, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 31) If the tariffs on textiles, apparel items, and footwear mentioned in the Application were replaced by equivalent voluntary export restraints (VERs), who would benefit the most? A) low-income consumers B) high-income consumers C) the U.S. government D) the foreign manufacturer Answer: D Diff: 1 Topic: Application 1, The Impact of Tariffs on the Poor Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 32) A voluntary export restraint occurs when one country prevents a specific product from being imported from another country. Answer: FALSE Diff: 1 Topic: Import Bans Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
33) If a country bans the importation of a particular good, the market equilibrium is shown by the intersection of the foreign demand curve and the domestic supply curve. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 34) An import quota is the same as an import ban. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 35) The equilibrium price under an import quota is below the price that occurs with an import ban. Answer: TRUE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 36) The equilibrium price under an import quota is below the price that occurs with free trade. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 37) Voluntary export restraints are illegal under international trading rules. Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 38) From the perspective of consumers, a quota is preferred to a tariff.
Answer: FALSE Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 39) A restriction on imports is likely to reduce further restrictions on trade. Answer: FALSE Diff: 1 Topic: Responses to Protectionist Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 40) Import restrictions create an incentive to smuggle. Answer: TRUE Diff: 1 Topic: Responses to Protectionist Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 41) List four protectionist policies. Answer: Protectionist policies include import bans, import quotas, voluntary export restraints, and tariffs. Diff: 1 Topic: Protectionist Policies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 42) What is an import quota? Answer: An import quota is a government-imposed limit on the quantity of a good that can be imported. Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 43) What is a voluntary export restraint (VER)? Answer: A voluntary export restraint (VER) is a scheme under which an exporting country voluntarily limits its exports.
Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 44) What is a tariff? Answer: A tariff is a tax on an imported good. Diff: 1 Topic: Quotas and Voluntary Export Restraints Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 45) Would consumers benefit more from a tariff or a quota on imports? Answer: In both cases, the price of the good is higher than it would be under free trade. The difference lies in who collects the money. In the case of a quota, importers collect the money. In the case of a tariff, the government collects the money, which can then be used to reduce consumers' taxes or to finance public programs. So a tariff is more attractive from a consumer perspective. Diff: 2 Topic: Quotas and Voluntary Export Restraints Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
46) Using a graph, illustrate what the market effects of a quota, a tariff, or a complete ban on imports would be. Answer:
As shown in the graph, the demand for the product is the same in all cases; the question is what the supply curve would look like. In the case of the complete ban, the supply curve is the domestic supply curve. It shifts to the right if the tariff or quota is put in place, and shifts further to the right in the world without trade barriers. So free trade has the highest quantity and lowest price, an import ban has the lowest quantity and highest price, and the tariff or quota is somewhere in between the two cases. Diff: 2 Topic: Quotas and Voluntary Export Restraints, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18.3 What Are the Rationales for Protectionist Policies? 1) Which of the following is NOT a rationale for protectionist policies? A) Improve the welfare of domestic consumers. B) Protect domestic workers from foreign competition. C) Help domestic firms establish a world monopoly in a particular market. D) Protect an infant industry from foreign competitors. Answer: A Diff: 1 Topic: What are the Rationales for Protectionist Policies? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
2) A possible reason to impose a protectionist policy such as a tariff is to A) increase the welfare of domestic consumers. B) slow domestic production. C) aid other nations in developing their own industries. D) protect domestic workers from foreign competition. Answer: D Diff: 1 Topic: What are the Rationales for Protectionist Policies? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) A possible reason a nation might impose a protectionist policy such as a tariff is to A) increase the level of imports. B) protect an infant industry from foreign competitors. C) encourage specialization in the good in which the nation has a comparative advantage. D) slow domestic production. Answer: B Diff: 1 Topic: What are the Rationales for Protectionist Policies? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 4) A possible reason a nation might impose a protectionist policy such as a tariff is to A) help domestic firms establish a world monopoly in a particular market. B) increase the level of imports. C) encourage specialization in the good in which the nation has a comparative advantage. D) increase the welfare of domestic consumers. Answer: A Diff: 1 Topic: What are the Rationales for Protectionist Policies? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
5) According to the infant industry argument for trade protectionism A) trade barriers must be used to protect domestic workers. B) new industries need to be shielded from competition in the early stages of learning by doing. C) tariffs imposed to aid new industries should never be removed. D) new industries are capable of competing with established rivals. Answer: B Diff: 1 Topic: To Nurture Infant Industries Until They Mature Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 6) The argument that calls for the trade protection of only newly developing industries is known as the ________ argument. A) learning by doing B) predatory dumping C) infant industry D) developing nation Answer: C Diff: 1 Topic: To Nurture Infant Industries Until They Mature Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 7) Based on the experiences of many countries, do firms that receive infant industry protection evolve to compete against their more established international competitors? A) Rarely. B) Never, C) Always. D) Yes, but only in the 1950s and 1960s. Answer: A Diff: 1 Topic: What are the Rationales for Protectionist Policies? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
8) The case of Airbus, an airplane manufacturing consortium in Europe, which receives large subsidies from several European countries, best exemplifies which rationale for protectionist policies? A) shielding workers from foreign competition B) protecting infant industries C) prevention of dumping in local markets D) helping domestic firms establish monopolies in world markets Answer: D Diff: 1 Topic: To Help Domestic Firms Establish Monopolies in World Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 9) When would a government support through subsidies one of its domestic firms into becoming a worldwide monopoly in a market? A) when the industry has extremely large economies of scale B) when the world market will support only one firm C) when the world market has diseconomies of scale D) A and B are correct. Answer: D Diff: 1 Topic: To Help Domestic Firms Establish Monopolies in World Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 10) Which of the following firms is an example of a firm who received large subsidies because the government provided subsidies to help it become a worldwide monopoly in a market? A) Coca-cola B) Citibank C) Facebook D) Airbus Answer: D Diff: 1 Topic: To Help Domestic Firms Establish Monopolies in World Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
Recall the Application about the impact Chinese imports have on U.S. labor markets to answer the following question(s). 11) This Application addresses the idea that A) imports are only beneficial to a community if they are equally matched by exports from that community. B) imports ultimately have a positive impact on all communities. C) imports have an equal impact on all communities. D) imports have a bigger impact on some communities than on others. Answer: D Diff: 1 Topic: Application 2, Chinese Imports and Local Economies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 12) According to this Application, those communities that were more exposed to imports had larger increases in workers receiving A) food stamps. B) unemployment insurance. C) disability payments. D) all of the above Answer: D Diff: 1 Topic: Application 2, Chinese Imports and Local Economies Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 13) According to the Application, did Autor, Dorn and Hanson's study show that trade with China not beneficial to the United States? A) No, the study did not look into the additional opportunities of U.S. firms to export into China. B) Yes, communities exposed to imports from China had high unemployment rates. C) Yes, communities exposed to exports to China had high unemployment rates. D) Yes, communities exposed to imports from China had lower inflation rates. Answer: A Diff: 1 Topic: Application 2, Chinese Imports and Local Economies Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
14) If we eliminated our textile tariffs, the dislocated workers could easily switch to other jobs. Answer: FALSE Diff: 1 Topic: To Shield Workers from Foreign Competition Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 15) Acquiring knowledge and skills by participating in the production process is called "learning by doing." Answer: TRUE Diff: 1 Topic: To Nurture Infant Industries Until They Mature Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 16) Among the problems associated with subsidizing an industry in the hope of establishing a worldwide monopoly is that if two nations subsidize firms in the same industry, each could lose money. Answer: TRUE Diff: 1 Topic: To Help Domestic Firms Establish Monopolies in World Markets Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 17) Explain the concept of "learning by doing" with respect to infant industry protection. Answer: Learning by doing refers to the knowledge and skills that workers gain during production. These skills and knowledge increase productivity and lower costs. Infant industries, those which are at an early stage of development, can benefit from learning by doing by becoming more productive and cost efficient, and in doing so become more competitive in the world market. Diff: 2 Topic: To Nurture Infant Industries Until They Mature Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
18) What are the rationales for protectionist policies? Answer: The rationales for protectionist policies are to shield workers from foreign competition, to nurture infant industries, and to help domestic firms establish monopolies in world markets. Diff: 1 Topic: What are the Rationales for Protectionist Policies? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 19) Based on the experiences of many countries, do firms that receive infant industry protection evolve to compete against their more established international competitors? Answer: Rarely. Domestic industries rarely, if ever, become as efficient as their foreign competitors. Further, once the government provides protection to a domestic industry, it tends to be very difficult to remove that protection. Finally, even established firms complain of unfair competition and seek infant industry protection. Diff: 1 Topic: To Nurture Infant Industries Until They Mature Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 18.4 A Brief History of International Tariff and Trade Agreements 1) The average tariff rate of the United States is about ________ of the value of their imports. A) 1.6 percent B) 7.4 percent C) 59 percent D) 100 percent Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
2) The average tariff rate of the United States in the 1930s was about ________ of the value of their imports. A) 1.6 percent B) 7.4 percent C) 59 percent D) 100 percent Answer: C Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) Which of the following trade agreements, which took effect in 1994 and was implemented over a 15-year period, eliminates all tariffs and other trade barriers between its members? A) North American Free Trade Agreement B) World Trade Organization C) Asian Pacific Economic Cooperation D) General Agreement on Tariffs and Trade Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 4) Which of the following groups of countries were members of NAFTA? A) Japan, Canada, and Mexico B) the United States, Japan, and Mexico C) the United States, France, and Germany D) the United States, Canada, and Mexico Answer: D Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
5) Which of the following are NOT members of DR-CAFTA? A) Mexico B) the United States C) Honduras D) The Dominican Republic Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 6) If the United States has reason to believe that the trade policies of another country violates the GATT, then to which organization do they send their complaint to? A) the World Trade Organization (WTO) B) the International Monetary Fund (IMF) C) the United Nations (UN) D) the World Bank (WB) Answer: A Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 7) Which of the following trade agreements provides for the development of a single market among its members? A) North American Free Trade Agreement B) World Trade Organization C) European Union D) Asian Pacific Economic Cooperation Answer: C Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
8) The WTO and GATT promote trade by A) reducing tariffs. B) eliminating quotas. C) reducing agricultural subsidies. D) all of the above. Answer: D Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 9) Today, the average U.S. tariff is 1.6 percent of the value of imported goods, which is very low by historical standards. Answer: TRUE Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 10) The first major international trade agreement following World War II was the North American Free Trade Agreement (NAFTA). Answer: FALSE Diff: 1 Topic: A Brief History of International Tariff and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) What are GATT and the WTO? Answer: GATT is the General Agreement on Tariffs and Trade. It is an international agreement, established in 1947, that has lowered trade barriers among its more than 149 nation members. The WTO is the World Trade Organization, which was established in 1995 to enforce GATT and other international trade agreements, resolve trade disputes, and host trade negotiations. Diff: 2 Topic: A Brief History of International Tariff and Trade Agreements Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
18.5 Recent Policy Debates and Trade Agreements 1) Dumping occurs when a firm A) charges a higher price to a foreign market than either the price charged in its home market or the production costs. B) generates toxic waste when producing export goods and then dumps the waste in the ocean. C) stops selling to a foreign market due to excessive tariffs. D) charges a lower price to a foreign market than either the price charged in its home market or the production costs. Answer: D Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 2) Suppose Duracell, an American firm, produces car batteries and sells the batteries for $100 to retailers in the USA, but sells them 20% cheaper to Australia retailers. In this scenario, Duracell is guilty of A) dumping in Australia. B) imposing taxes. C) benevolence to Australians. D) fraud. Answer: A Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 3) When Korean firms sold VCRs in Korea at a higher price than they did in Europe, this illustrates dumping due to A) predatory pricing. B) avoidance of environmental laws. C) price discrimination. D) retaliatory trade practices. Answer: C Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
4) ________ occurs when a firm cuts prices below production costs in a deliberate attempt to drive competitors out of business. A) Voracious dumping B) Ravaging dumping C) Predatory dumping D) Deliberate dumping Answer: C Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 5) Suppose the nation of Alphonia was charged with dumping electric lawnmowers in the nation of Omegalon. The charge of dumping electric lawnmowers in the Omegalon market means that Alphonia was accused of A) selling faulty electric lawnmowers in Omegalon. B) selling electric lawnmowers below cost or below domestic prices. C) selling counterfeit-branded electric lawnmowers in Omegalon. D) discarding electric lawnmowers which would not sell in their home country. Answer: B Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 6) Suppose the nation of Alphonia was charged with dumping electric lawnmowers in the nation of Omegalon. The result of Omegalon imposing anti-dumping tariffs on electric lawnmowers manufactured in Alphonia would most likely be A) an increased market share for Alphonian-manufactured electric lawnmowers in Omegalon. B) higher selling prices on electric lawnmowers in Omegalon. C) lower selling prices on electric lawnmowers in Alphonia. D) increased exports of electric lawnmowers from Alphonia. Answer: B Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
7) Suppose the nation of Alphonia was charged with dumping electric lawnmowers in the nation of Omegalon. The two reasons a nation like Alphonia would dump products in another nation are A) price discrimination and import licensing. B) outsourcing and predatory pricing. C) price discrimination and predatory pricing. D) import licensing and outsourcing. Answer: C Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Recall the Application about how technological advances in another country may hurt the United States to answer the following question(s). 8) In this Application, how does China manage to gain access to the latest intellectual property of companies in the United States? A) by requiring American firms to have joint partnerships with Chinese companies if they want to do business in China B) through espionage C) through Google searches D) when American companies sell technology to the highest bidder Answer: A Diff: 1 Topic: Application 3, Should we care if another country adopts our latest technology? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
9) In this Application, how is the United States hurt when the Chinese gain access to U.S. technology? A) when China's access to technology causes the U.S. to lose comparative advantage in both high-tech and consumer goods B) when China's access to technology causes the U.S. to export high-tech goods and import consumer goods C) when China's access to technology causes the U.S. to import high-tech goods and export consumer goods D) when China's access to technology causes the U.S. high-tech goods to become cheaper Answer: A Diff: 1 Topic: Application 3, Should we care if another country adopts our latest technology? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 10) In this Application, how will the United States gain when China becomes more prosperous? A) American companies get a larger market for U.S. goods. B) We can borrow more money from them. C) They can share the costs of keeping world peace. D) We can access the new technology they develop. Answer: A Diff: 1 Topic: Application 3, Should we care if another country adopts our latest technology? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 11) A U.S. boycott against Mexican tuna caught in nets was A) upheld by the WTO on the grounds that the use of nets to catch tuna also kills dolphins. B) upheld by the WTO on the grounds that nations can impose any environmental standards on other nations. C) not upheld by the WTO on the grounds that U.S. ships could still use nets to catch tuna. D) not upheld by the WTO on the grounds that killing dolphins in tuna nets does not harm the United States directly. Answer: D Diff: 1 Topic: Do Trade Laws Inhibit Environmental Protection? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
12) Under current WTO rules, a country can adopt A) any environmental standard it chooses, even if it discriminates against foreign producers. B) any environmental standard it chooses as long as it does not discriminate against foreign producers. C) only WTO-approved environmental standards. D) only the same environmental standards as its immediate geographic neighbors. Answer: B Diff: 1 Topic: Do Trade Laws Inhibit Environmental Protection? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 13) Since 1973 in the United States, wages of skilled workers have A) risen more slowly than those of unskilled workers. B) fallen due to foreign trade. C) remained constant. D) risen faster than those of unskilled workers. Answer: D Diff: 1 Topic: Do Outsourcing and Trade Cause Income Inequality? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 14) The government can facilitate the transfer of unskilled workers to high-skilled jobs by A) increasing tariffs to help unskilled workers. B) increasing tariffs to speed the development of jobs requiring skilled labor. C) providing assistance for education and training for unskilled workers. D) laying off skilled workers to provide jobs for unskilled workers. Answer: C Diff: 1 Topic: Do Outsourcing and Trade Cause Income Inequality? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
Recall the Application about how worldwide trade has affected the U.S. auto industry to answer the following question(s). 15) According to this Application, over the past few years there has been a ________ increase in ________ of automobile parts from outside the United States and Canada. A) small; imports B) large; imports C) small; exports D) large; exports Answer: B Diff: 1 Topic: Application 4, How American are American Cars? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 16) According to this Application, what percentage of parts in the Ford Escape came from parts suppliers in the United States and Canada in 2015? A) 55% B) 100% C) 35% D) 70% Answer: A Diff: 1 Topic: Application 4, How American are American Cars? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 17) According to this Application, what percentage of parts in the Ford Focus came from parts suppliers in the United States and Canada in 2015? A) 40% B) 100% C) 35% D) 70% Answer: A Diff: 1 Topic: Application 4, How American are American Cars? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
18) According to this Application, why are car companies in the U.S. finding themselves using more foreign made auto parts? A) lower wages abroad B) foreign made parts are more durable C) shipping costs have risen D) American politicians force companies to do this in order to make our allies happy. Answer: A Diff: 1 Topic: Application 4, How American are American Cars? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 19) This Application illustrates A) that U.S. parts manufacturers are now facing increasing global pressures. B) the trade-offs inherent in a global economy. C) how U.S. domestic manufacturers of auto parts have been adversely affected in recent years. D) all of the above. Answer: D Diff: 1 Topic: Application 4, How American are American Cars? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 20) In the last few decades there has been little progress in lowering the barriers to international trade. Answer: FALSE Diff: 1 Topic: Recent Policy Debates and Trade Agreements Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 21) Dumping is sometimes legal under international trade agreements. Answer: FALSE Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
22) National policy always overrides free trade in matters of environmental concern. Answer: FALSE Diff: 1 Topic: Do Trade Laws Inhibit Environmental Protection? Skill: Fact AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 23) Trade theory suggests that increased trade leads to increased wage equality. Answer: FALSE Diff: 1 Topic: Do Outsourcing and Trade Cause Income Inequality? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 24) If a firm produces components of its goods and services in other countries, it is said to be outsourcing. Answer: TRUE Diff: 1 Topic: Do Outsourcing and Trade Cause Income Inequality? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 25) What is dumping and why would firms engage in it? Answer: Dumping is when the price charged in a foreign market is either lower than the price charged in the home market or lower than the production cost. Reasons for dumping include price discrimination and predatory pricing. Diff: 1 Topic: Are Foreign Producers Dumping Their Products? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention
26) What is the difference between price discrimination and predatory pricing? Answer: Price discrimination occurs when a firm divides consumers into two or more groups and charges each group a different price for the same product. Predatory pricing occurs when a firm decreases the price of a product to drive a rival out of business. Once the rival is gone, the firm increases the price of the product. Diff: 2 Topic: Are Foreign Producers Dumping Their Products? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 27) What is the current WTO policy regarding environmental standards and trade? Answer: Under current WTO rules, a country can adopt any environmental standard it chooses, as long as it does not discriminate against foreign producers by applying its environmental standards on other countries. Diff: 1 Topic: Do Trade Laws Inhibit Environmental Protection? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention 28) As per WTO rules, can the U.S. require cars from Germany to limit the amount of emissions that these cars release into the atmosphere? Answer: Yes, under current WTO rules, a country can adopt any environmental standard it chooses, as long as it does not discriminate against foreign producers by applying its environmental standards on other countries. In the case of cars, the U.S. can require foreign cars to have a limit on its emissions, provided that the rule applies to all cars, foreign and domestic. Diff: 1 Topic: Do Trade Laws Inhibit Environmental Protection? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention Macroeconomics, 10e (O'Sullivan/Sheffrin/Perez) Chapter 19 The World of International Finance 19.1 How Exchange Rates Are Determined 1) The rate at which one currency can be traded for another is called the A) terms of trade. B) transfer rate. C) exchange rate. D) coupon rate. Answer: C Diff: 1
Topic: What Are Exchange Rates? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 2) If the price of smoothies is $3.50 in the United States and the exchange rate is 110 yen per dollar, then what is the yen price of smoothies? A) 110 yen B) 240 yen C) 318 yen D) 385 yen Answer: D Diff: 1 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 3) If the price of watermelons is 5 pesos in Argentina and the exchange rate is 4 pesos per dollar, then what is the dollar price of watermelons? A) $0.75 B) $0.80 C) $1.25 D) $2.00 Answer: C Diff: 1 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
4) If the price of papayas is 12 baht in Thailand and the exchange rate is 30 baht per dollar, then what is the dollar price of papayas? A) $0.40 B) $2.50 C) $2.90 D) $26.00 Answer: A Diff: 1 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 5) If the yen to dollar exchange rate moves from 105 to 115 yen per dollar, then the dollar has ________ and the yen has ________. A) depreciated; depreciated B) depreciated; appreciated C) appreciated; depreciated D) appreciated; appreciated Answer: C Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 6) If the dollar to euro exchange rate moves from 1.1 to 0.9 dollars per euro, then the dollar has ________ and the euro has ________. A) depreciated; depreciated B) depreciated; appreciated C) appreciated; depreciated D) appreciated; appreciated Answer: C Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
7) An appreciation is A) a decrease in the value of currency. B) a decrease in the trade deficit. C) an increase in the trade surplus. D) an increase in the value of currency. Answer: D Diff: 1 Topic: What Are Exchange Rates? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 8) A depreciation is A) a decrease in the value of currency. B) a decrease in the trade deficit. C) an increase in the trade surplus. D) an increase in the value of currency. Answer: A Diff: 1 Topic: What Are Exchange Rates? Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 9) If the dollar depreciates against the British pound, U.S. goods sold in ________ would become less expensive and British goods sold in ________ would become more expensive. A) the United States; the United States B) the United States; Great Britain C) Great Britain; Great Britain D) Great Britain; the United States Answer: D Diff: 2 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
10) If the dollar depreciates against the yen, U.S. goods sold in ________ would become less expensive and Japanese goods sold in ________ would become more expensive. A) the United States; the United States B) the United States; Japan C) Japan; Japan D) Japan; the United States Answer: D Diff: 2 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 11) As the Indian rupee depreciates relative to the dollar, total spending on Indian goods and assets will increase. Therefore, in the foreign exchange market, the A) supply curve of dollars is upward sloping. B) demand curve for dollars is upward sloping. C) supply curve of euros is downward sloping. D) demand curve for euros is upward sloping. Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 12) As the dollar depreciates relative to the Russian ruble, U.S. goods become cheaper for Russians to purchase. Therefore, in the foreign exchange market, the A) supply curve of dollars is downward sloping. B) demand curve for dollars is downward sloping. C) supply curve of euros is downward sloping. D) demand curve for euros is upward sloping. Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
13) The exchange rate between currencies of different countries is controlled primarily by ________ in currency markets. A) diplomatic relations B) supply and demand C) tariff rates D) the outsourcing agreements Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 14) Spending on goods from a country will ________ as the value of its currency gets cheaper against the U.S. dollar. A) decrease B) increase C) reverse D) go to other countries Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
Figure 19.1 15) Referring to Figure 19.1, if the exchange rate is currently 11 pesos per dollar, then we expect the dollar to ________ and the peso to ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: C Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 16) Referring to Figure 19.1, if the exchange rate is currently 14 pesos per dollar, then we expect the dollar to ________ and the peso to ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
17) Referring to Figure 19.1, the dollar is likely to appreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 18) Referring to Figure 19.1, the dollar is likely to depreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: D Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 19) Referring to Figure 19.1, the peso is likely to appreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: D Diff: 2 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
20) Referring to Figure 19.1, the peso is likely to depreciate if the exchange rate is either ________ or ________ pesos to the dollar. A) 10; 11 B) 11; 12 C) 12; 13 D) 13; 14 Answer: A Diff: 2 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 21) Referring to Figure 19.1, U.S. goods will become more expensive in Mexico if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 13; 11 D) 14; 10 Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 22) Referring to Figure 19.1, U.S. goods will become cheaper in Mexico if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 11; 13 D) 10; 14 Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
23) Referring to Figure 19.1, Mexican goods will become more expensive in the United States if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 11; 13 D) 10; 13 Answer: A Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 24) Referring to Figure 19.1, Mexican goods will become cheaper in the United States if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 13; 11 D) 13; 10 Answer: B Diff: 1 Topic: How Demand and Supply Determine Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
Figure 19.2 25) Referring to Figure 19.2, a depreciation of the dollar is represented by a movement from point A) c to d. B) b to a. C) a to c. D) c to a. Answer: C Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 26) Referring to Figure 19.2, an appreciation of the dollar is represented by a movement from point A) a to d. B) c to d. C) a to c. D) b to c. Answer: B Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
27) Referring to Figure 19.2, the effect of an increase in U.S. interest rates is represented by a movement from point A) a to d. B) c to b. C) a to b. D) d to c. Answer: B Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 28) Referring to Figure 19.2, the effect of a decrease in U.S. prices is represented by a movement from point A) d to a. B) b to c. C) a to d. D) a to b. Answer: A Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 29) Referring to Figure 19.2, the effect of a decrease in U.S. interest rates is represented by a movement from point A) d to a. B) c to b. C) c to d. D) b to c. Answer: D Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
30) Referring to Figure 19.2, the effect of an increase in U.S. prices is represented by a movement from point A) c to b. B) b to a. C) d to a. D) a to d. Answer: D Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 31) Referring to Figure 19.2, the effect of an increase in Japanese interest rates is represented by a movement from point A) c to d. B) b to a. C) d to c. D) d to a. Answer: C Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 32) Referring to Figure 19.2, the effect of a decrease in Japanese prices is represented by a movement from point A) d to a. B) c to b. C) c to d. D) d to c. Answer: D Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
33) Referring to Figure 19.2, the effect of a decrease in Japanese interest rates is represented by a movement from point A) b to a. B) a to b. C) b to c. D) a to d. Answer: A Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 34) Referring to Figure 19.2, the effect of an increase in Japanese prices is represented by a movement from point A) d to c. B) c to d. C) a to b. D) a to d. Answer: B Diff: 1 Topic: Changes in Demand or Supply, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 35) A(n) ________ in U.S. interest rates will cause a decrease in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
36) A(n) ________ in U.S. interest rates will cause an increase in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: A Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 37) A(n) ________ in U.S. prices will cause a decrease in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: B Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 38) A(n) ________ in U.S. prices will cause an increase in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: C Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
39) An increase in Swiss interest rates will cause A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: C Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 40) A decrease in Swiss interest rates will cause A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: D Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
41) An increase in Swiss prices will cause A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: D Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 42) A decrease in Swiss prices will cause A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. C) an increase in the supply of U.S. dollars and a decrease in the exchange rate of Swiss francs per dollar. D) a decrease in the supply of U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. Answer: C Diff: 1 Topic: Changes in Demand or Supply Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 43) The exchange rate of currencies between countries affects the prices of the goods purchased and sold between them. Answer: TRUE Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
44) If the dollar appreciates against the peso it means that U.S. goods become more expensive in Mexico. Answer: TRUE Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 45) If the dollar depreciates against the euro it means that French-made goods become more expensive in the United States. Answer: TRUE Diff: 1 Topic: What Are Exchange Rates? Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 46) The exchange rate between currencies of different countries is controlled primarily by the supply and demand in currency markets. Answer: TRUE Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 47) If the exchange rate is 0.8 euro per dollar, one dollar is equal to 1.25 euros. Answer: FALSE Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
48) The dollar will depreciate against the euro when the European Central Bank raises interest rates. Answer: TRUE Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 49) The dollar will appreciate if interest rates fall in the United States. Answer: FALSE Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 50) Suppose that you are an Israeli citizen and had invested in a one-year U.S. bond that yielded 5 percent. The bond cost $5,000 and paid $5,250 at the end of the year. At the time you bought the bond, the exchange rate was 3.8 shekels/dollar. How many shekels did the bond cost? If the exchange rate fell to 3.5 shekels/dollar over this time period, what would the return on your investment be? Answer: The bond cost 19,000 shekels and would have returned 19,950 shekels at the end of the year had the exchange rate stayed constant. However, at the end of the year, your investment was worth 18,375 shekels, so your effective rate of return on the investment was -625 / 19,000 = -3.3 percent. Diff: 2 Topic: What Are Exchange Rates? Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 51) If the current exchange rate is 0.65 British pounds per dollar, what is the dollar price of one British pound? If the exchange rate changes to 0.70 British pounds per dollar, what is the new dollar value of one British pound? Answer: At 0.65 pounds per dollar, 1 dollar / 0.65 pounds = $1.54 per pound. At 0.70 pounds per dollar, 1 dollar / 0.70 pounds = $1.43 per pound. Diff: 1 Topic: How Demand and Supply Determine Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 52) What will happen to the exchange rate between the euro and the U.S. dollar if U.S. interest rates increase?
Answer: Higher U.S. interest rates will increase the demand for dollars, so all else equal the dollar will appreciate in value relative to the euro. Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 53) What will happen to the exchange rate between the British pound and the U.S. dollar if British prices increase? Answer: British price increases will decrease the supply of dollars, so all else equal the dollar will appreciate in value relative to the pound. British price increases will also decrease the demand for British pounds in the United States. Diff: 1 Topic: Changes in Demand or Supply Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 19.2 Real Exchange Rates and Purchasing Power Parity 1) The real exchange rate is the A) market exchange rate. B) market exchange rate adjusted for interest rates. C) exchange rate determined by the government. D) market exchange rate adjusted for prices. Answer: D Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
2) If the U.S. real exchange rate increases, U.S. exports will ________ and U.S. imports will ________. A) fall; fall B) fall; rise C) rise; fall D) rise; rise Answer: B Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 3) If the U.S. real exchange rate decreases, U.S. imports will ________ and U.S. exports will ________. A) fall; rise B) fall; fall C) rise; rise D) rise; fall Answer: A Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 4) If the yen to dollar exchange rate is 115, the U.S. price index is 140, and the Japanese price index is 165, what is the U.S. real exchange rate? A) 74.52 B) 97.58 C) 135.55 D) 200.87 Answer: B Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
5) If the U.S. real exchange rate is 125, the U.S. price index is 140, and the Japanese price index is 165, what is the yen to dollar exchange rate? A) 106.06 B) 125.65 C) 147.32 D) 184.80 Answer: C Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 6) A multilateral real exchange rate is the A) adjusted exchange rate. B) government exchange rate. C) index based on the average of the real exchange rates with all U.S. trading partners. D) index based on the average of the real exchange rates with all other countries in the world. Answer: C Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 7) According to the law of one price A) a company can only charge one price for a product, no matter which nation the product is sold in. B) the price of gold should differ between nations. C) interest rates across nations should be the same when adjusted for exchange rates. D) goods that are easily tradable across nations should sell for the same price expressed in a common currency. Answer: D Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
8) Suppose iPhones cost 180 euros and 240 dollars in Belgium and the United States, respectively, while binoculars cost 60 euros and 75 dollars in Belgium and the United States, respectively. If the exchange rate is 0.75 euros/dollar, the law of one price ________ for iPhones and ________ for binoculars. A) holds; holds B) does not hold; holds C) holds; does not hold D) does not hold; does not hold Answer: C Diff: 2 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 9) Suppose iPhones cost 180 euros and 240 dollars in Belgium and the United States, respectively, while binoculars cost 60 euros and 75 dollars in Belgium and the United States, respectively. If the exchange rate is 0.8 euros/dollar, the law of one price ________ for iPhones and ________ for binoculars. A) holds; holds B) does not hold; holds C) holds; does not hold D) does not hold; does not hold Answer: B Diff: 2 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 10) According to the theory of purchasing power parity, the exchange rate between two countries reflects A) differences in the overall price levels in the two countries. B) the unemployment rates in the two countries. C) the interest rates in the two countries. D) government spending in the two countries. Answer: A Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
11) Purchasing power parity does NOT provide accurate predictions of exchange rates because A) almost all goods and services are traded across nations. B) non-traded goods account for approximately 50 percent of the value of production in an economy. C) governments currently fix exchange rates. D) firms are unable to set prices differently across nations. Answer: B Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 12) Suppose the U.S. price level is 150, the German price level is 450, and the Swiss price level is 600. If exchange rates are 3 euros/dollar and 4 francs/dollar, then purchasing power parity ________ between Germany and the United States and ________ between Switzerland and the United States. A) holds; does not hold B) does not hold; holds C) holds; holds D) does not hold; does not hold Answer: C Diff: 3 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 13) A market exchange rate which has been adjusted for inflation is called a A) foreign market price index. B) real exchange rate. C) domestic exchange factor. D) nominal exchange rate. Answer: B Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
Recall the Application about the price of Big Macs in Norway and around the world to answer the following question(s). The following table is taken from the Application. For several years, The Economist has measured the prices of Big Macs throughout the world and compared the price differences to exchange rates.
Country United States United Kingdom China Norway Mexico Japan
Price of a Big Mac in Local Currency 5.28 dollars 3.19 pounds 20.40 yuan 49 kroner 48.00 pesos 390 yen
Price of a Big Mac in Dollars 5.28 4.41 3.177 6.24 2.57 3.43
14) According to the table, the price of Big Macs converted to U.S. dollars varies widely around the world. This shows that Big Macs do NOT follow the A) law of demand. B) law of exchange rate parity. C) law of one price. D) law of opportunity cost. Answer: C Diff: 1 Topic: Application 1, Big Macs in Norway Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 15) According to the table, the price of Big Macs converted to U.S. dollars varies widely around the world. This shows that Big Mac pricing does NOT follow the theory of A) purchasing power parity. B) supply and demand. C) real versus nominal prices. D) Ricardian equivalence. Answer: A Diff: 1 Topic: Application 1, Big Macs in Norway Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
16) According to the table, when converted to U.S. dollars, Big Macs cost approximately ________ percent less in the United States than they do in Norway. A) 18 B) 42 C) 58 D) 126 Answer: A Diff: 2 Topic: Application 1, Big Macs in Norway Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 17) According to the table, the Big Mac would cost the same in Switzerland and the United States at an exchange rate of ________ Norwegian kroner for every one U.S. dollar. A) 7.85 B) 6.24 C) 9.28 D) 2.72 Answer: C Diff: 2 Topic: Application 1, Big Macs in Norway Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 18) The U.S. dollar will appreciate if inflation rises from 3 percent to 7 percent in the United States. Answer: FALSE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 19) The U.S. dollar will depreciate if the Canadian inflation rate falls from 5 percent to 3 percent. Answer: TRUE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
20) The key difference between the real exchange rate and the market exchange rate is that the market exchange rate controls for the level of prices. Answer: FALSE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 21) Holding everything else constant, the U.S. real exchange rate with Thailand will increase if the dollar depreciates. Answer: FALSE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 22) Holding everything else constant, the U.S. real exchange with Australia will increase if inflation is higher in the United States than in Australia. Answer: TRUE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 23) Holding everything else constant, the U.S. real exchange with India will increase if the rupee depreciates. Answer: TRUE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
24) Purchasing power parity suggests that the exchange rate between two currencies reflects differences in the overall price levels in the two countries. Answer: TRUE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 25) Accurate predictions for exchange rates can be determined by considering purchasing power parity. Answer: FALSE Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 26) Explain the theory of purchasing power parity. Answer: The theory of purchasing power parity suggests that market exchange rates simply reflect differences in the overall price levels between countries. Research has shown that it does not hold precisely, and it does not give accurate predictions for exchange rates. The reason for this is that many goods are not traded across countries. Diff: 2 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 27) What is the law of one price? Answer: The law of one price is the theory that goods which are easily tradeable across countries should sell at the same price when expressed in a common currency. Diff: 1 Topic: Real Exchange Rates and Purchasing Power Parity Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
19.3 The Current Account, the Financial Account, and the Capital Account 1) The U.S. current account equals A) U.S. exports + U.S. imports + net income from foreign investments + net transfers from abroad. B) U.S. imports - U.S. exports + net income from foreign investments + net transfers from abroad. C) U.S. exports - U.S. imports + net income from foreign investments + net transfers from abroad. D) U.S. exports - U.S. imports - net income from foreign investments + net transfers from abroad. Answer: C Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 2) The financial account is defined as A) the sum of net exports, net income received from investments abroad, and net transfers abroad. B) the sum of gross income received from investments abroad and as net transfers abroad. C) the value of the country's net sales of assets. D) net transfers abroad. Answer: C Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 3) When Mexican immigrants decide to move back to the Mexico and bring their belongings back to Mexico, the value of the belongings that they bring out of the U.S. is included in A) the U.S. capital account. B) Mexico's current account. C) the U.S. current account. D) Mexico's financial account. Answer: A Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
4) When Mexican immigrants decide to move back to the Mexico and bring their belongings back to Mexico, the value of the belongings that they bring out of the U.S. is included in A) Mexico's capital account. B) the U.S. current account. C) Mexico's current account. D) the U.S. financial account. Answer: A Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 5) Which of the following is included in the U.S. capital account? A) the sale of U.S. patents to China B) the sale of U.S. Treasury bonds to China C) the sale of U.S. made shoes to China D) the sale of U.S. real estate to China Answer: A Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 6) Which of the following is NOT included in the U.S. capital account? A) the sale of U.S. patents to China B) the value of goods brought back to China by a Chinese citizen who migrates from the U.S. back to China C) the sale of U.S. movie copyrights to China D) the sale of U.S. real estate to China Answer: D Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
7) In the first quarter of 2009, the United States trade deficit fell to its lowest level in a decade. This means that A) foreign countries imported more from the United States than they exported to the United States. B) the United States exported more to foreign countries than it imported from the rest of the world. C) the United States imported more from the rest of the world than it exported to the rest of the world. D) foreign countries exported more to the United States than they imported from the rest of the world. Answer: C Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 8) U.S. imports and exports both fell during the first quarter of 2009. The value of these imports and exports would be reflected in the United States A) current account. B) financial account. C) capital account. D) exchange rate account. Answer: A Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 9) Although it declined in the first quarter of 2009, the United States was still running a trade deficit, which means that the United States would have to A) devalue the dollar. B) increase the money supply. C) decrease the value of its financial account. D) sell some of its assets to foreigners. Answer: D Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
10) Any action that gives rise to a demand for foreign currency is a A) deficit item on the current, financial, or capital account. B) deficit item on the current account and a surplus item on the financial and capital accounts. C) surplus item on the current, financial, or capital account. D) surplus item on the current account and a deficit item on the capital and financial accounts. Answer: A Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 11) Any action that gives rise to a supply of foreign currency is a A) deficit item on the current, financial, or capital account. B) deficit item on the current account and a surplus item on the financial and capital accounts. C) surplus item on the current, financial, or capital account. D) surplus item on the current account and a deficit item on the financial and capital accounts. Answer: C Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 12) The purchase of a foreign asset by a U.S. resident is a A) deficit item on the current account. B) surplus item on the current account. C) deficit item on the financial account. D) surplus item on the financial account. Answer: C Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
13) The purchase of a U.S. asset by a foreign resident is a A) deficit item on the current account. B) surplus item on the current account. C) deficit item on the financial account. D) surplus item on the financial account. Answer: D Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 14) The net international investment position of the United States measures A) U.S. holdings of foreign assets. B) foreign holdings of U.S. assets. C) U.S. holdings of foreign assets plus foreign holdings of U.S. assets. D) U.S. holdings of foreign assets minus foreign holdings of U.S. assets. Answer: D Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 15) If, for the United States, exports are $450, imports are $320, net income from foreign investments is -$60, and net transfers from abroad is -$50, then the U.S. current account has a A) deficit of $110. B) surplus of $20. C) surplus of $130. D) deficit of $430. Answer: B Diff: 2 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
16) When the U.S. experiences a trade deficit with China, and the Chinese use the U.S. dollars to buy U.S. Treasury bonds, then China's A) holdings of sovereign investment funds increase. B) capital account increases. C) holdings of sovereign investment funds decrease. D) capital account decreases. Answer: A Diff: 2 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 17) The U.S. sovereign investment fund position measures the value A) of the foreign investments abroad made by the U.S. government. B) of the foreign investments in the U.S. made by the U.S. government. C) of the foreign investments in the U.S. by made by foreign government. D) of the foreign investments abroad made by foreign governments. Answer: A Diff: 2 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics Recall the Application about two major puzzles in international finance to answer the following question(s). 18) According to this Application, what is one of the major puzzles regarding international financial statistics? A) There appears to be more investment income paid than received each year. B) There appears to be less investment income paid than received each year. C) There appears to be the same amount of investment income paid and received each year. D) none of the above Answer: A Diff: 1 Topic: Application 2, Tax Havens and Global Imbalances Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
19) According to this Application, international statistics show that the developing countries are ________ and the developed countries are ________. A) debtors; debtors B) debtors; creditors C) creditors; debtors D) creditors; creditors Answer: C Diff: 2 Topic: Application 2, Tax Havens and Global Imbalances Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 20) According to this Application, an economist from the London School of Economics found that over ________ of all global wealth is held in tax havens where assets are ________. A) 4 percent; unrecorded B) 4 percent; recorded C) 8 percent; unrecorded D) 8 percent; recorded Answer: C Diff: 1 Topic: Application 2, Tax Havens and Global Imbalances Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 21) If the income from investments abroad and net transfer payments are negligible, the current account becomes equivalent to a country's net exports. Answer: TRUE Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 22) Since 1982, the United States has run a current account surplus every year. Answer: FALSE Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 23) In a balance of payments statement, the current account plus the financial account
must equal the capital account. Answer: FALSE Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 24) The net international investment position reflects the domestic holding of foreign assets minus foreign holdings of domestic assets. Answer: TRUE Diff: 1 Topic: Rules for Calculating the Current, Financial, and Capital Accounts Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 25) Distinguish the current account from the financial account. Answer: The current account is the sum of net exports, net income received from investments abroad, and net transfers from abroad. The financial account is the difference between foreign purchases of U.S. assets and U.S. purchases of foreign assets. Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 26) Why must the current account and the financial account sum to zero? (Assume the capital account is zero.) Answer: The current account and the financial account must sum to zero because any excess demand for foreign currency that arises from transactions in goods and services (the current account) must be met by an excess supply of foreign currency arising from asset transactions (the financial account). A current account deficit is offset by a financial account surplus and vice versa. Diff: 1 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
27) What is a balance of payments system, and what three types of international transactions are typically found in the balance of payments? Answer: A balance of payments is a system of accounts that measures transactions of goods, services, income, and financial assets between the households, businesses and government of one country and the residents of the rest of the world during a specific time period. The three types of international transactions typically found in a balance of payments are the current account, the financial account, and the capital account. Diff: 2 Topic: The Current Account, the Financial Account, and the Capital Account Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 19.4 Fixed and Flexible Exchange Rates 1) If a country's currency depreciates, the country will experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: C Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 2) If a country's currency appreciates, the country will experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: D Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
3) If the value of the U.S. dollar changes from 1.4 euros to 1.2 euros, we would expect that the United States would experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: C Diff: 2 Topic: Fixing the Exchange Rate Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 4) If the value of the U.S. dollar changes from 1.2 euros to 1.4 euros, we would expect that the United States would experience a ________ in exports and a ________ in imports. A) rise; rise B) fall; fall C) rise; fall D) fall; rise Answer: D Diff: 2 Topic: Fixing the Exchange Rate Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 5) The efforts of nations to influence exchange rates is known as A) open market operations. B) foreign exchange market intervention. C) rate discrimination. D) establishing terms of trade. Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
6) In the United States, the ________ has the official responsibility for foreign exchange intervention. A) State Department B) Treasury Department C) International Trade Commission D) Department of Commerce Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 7) If the U.S. government enters the foreign exchange market and purchases dollars to attain a specific exchange rate with the yen, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: C Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 8) If the U.S. government enters the foreign exchange market and sells dollars to attain a specific exchange rate with the yen, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
9) If the Japanese government enters the foreign exchange market and purchases yen to attain a specific exchange rate with the dollar, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: B Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 10) If the Japanese government enters the foreign exchange market and sells yen to attain a specific exchange rate with the dollar, the dollar will ________ and the yen will ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate Answer: C Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 11) A currency system in which governments try to keep the values of their currencies constant against another is called a ________ exchange rate system. A) fixed B) stable C) consistent D) flexible Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
12) A balance of payments deficit occurs if A) exports exceed imports. B) the supply of a nation's currency exceeds the demand for the currency at the current exchange rate. C) the demand for a nation's currency exceeds the supply of the currency at the current exchange rate. D) the supply of a nation's currency is equal to the demand for the currency at the current exchange rate. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 13) A balance of payments surplus occurs if A) exports exceed imports. B) the supply of a nation's currency exceeds the demand for the currency at the current exchange rate. C) the demand for a nation's currency exceeds the supply of the currency at the current exchange rate. D) the supply of a nation's currency is equal to the demand for the currency at the current exchange rate. Answer: C Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
14) Refer to Figure 19.3. At the exchange rate of 120 yen per dollar, the United States is experiencing a A) current account surplus. B) balance of payments deficit. C) capital account deficit. D) balance of payments surplus. Answer: B Diff: 2 Topic: Fixed versus Flexible Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 15) Refer to Figure 19.3. At the exchange rate of 90 yen per dollar, the United States is experiencing a A) current account deficit. B) balance of payments deficit. C) capital account surplus. D) balance of payments surplus. Answer: D Diff: 2 Topic: Fixed versus Flexible Exchange Rates, graphing Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
16) Suppose the United States is experiencing a balance of payments deficit. To prevent the exchange rate from depreciating, the U.S. Treasury must A) sell foreign currency and buy dollars. B) sell dollars and buy foreign currency. C) sell both dollars and foreign currency. D) buy both dollars and foreign currency. Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 17) Suppose the United States is experiencing a balance of payments surplus. To prevent the exchange rate from appreciating, the U.S. Treasury must A) sell foreign currency and buy dollars. B) sell dollars and buy foreign currency. C) sell both dollars and foreign currency. D) buy both dollars and foreign currency. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 18) In a fixed exchange rate system, a decrease in the exchange rate at which a currency is pegged is called a(n) A) appreciation. B) devaluation. C) revaluation. D) depreciation. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
19) In a fixed exchange rate system, an increase in the exchange rate at which a currency is pegged is called a(n) A) appreciation. B) devaluation. C) revaluation. D) depreciation. Answer: C Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 20) A country undertakes a devaluation in order to A) increase its net exports. B) decrease its net exports. C) raise the value at which its currency is pegged. D) move to a flexible exchange rate system. Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 21) A country that is experiencing a balance of payments surplus can correct this situation by A) revaluing its currency. B) devaluing. C) keeping its peg as long as possible. D) abandoning its currency in favor of the U.S. dollar or the euro. Answer: A Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
22) A country that is experiencing a balance of payments deficit can correct this situation by A) revaluing its currency. B) devaluing its currency. C) keeping its peg as long as possible. D) abandoning its currency in favor of the U.S. dollar or the euro. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 23) A country that is experiencing a balance of payments surplus and decides to keep its exchange rate at the current level will A) experience a trade deficit. B) gain foreign currency. C) buy more of its own currency. D) lose foreign currency. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 24) A country that is experiencing a balance of payments deficit and decides to keep its exchange rate at the current level will A) experience a trade surplus. B) gain foreign currency. C) sell more of its own currency. D) lose foreign currency. Answer: D Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
25) A country undertakes a revaluation in order to A) increase its net exports. B) decrease its net exports. C) lower the value at which its currency is pegged. D) move to a flexible exchange rate system. Answer: B Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 26) A currency system in which exchange rates are determined in free markets is called a A) fixed exchange rate system. B) gold standard. C) flexible exchange rate system. D) all of the above Answer: C Diff: 1 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 27) Under the Bretton Woods system A) all nations fixed the value of their currencies against the dollar. B) the United States was the only nation with a fixed exchange rate. C) the United States was the only nation with floating exchange rates. D) all nations allowed the value of their currencies to be determined by the free market. Answer: A Diff: 1 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
28) Under a fixed exchange rate system, if the inflation rate in the United States is 5 percent a year and the inflation rate in Australia is 0 percent a year, then the U.S. real exchange rate will A) remain constant. B) increase 5 percent a year. C) decrease 5 percent a year. D) possibly increase or decrease. Answer: B Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 29) Under a fixed exchange rate system, if the inflation rate in the United States is 0 percent a year and the inflation rate in Australia is 5 percent a year, then the U.S. real exchange rate will A) remain constant. B) increase 5 percent a year. C) decrease 5 percent a year. D) may increase or decrease. Answer: C Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Analytical AACSB: Analytical Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 30) Under a fixed exchange rate system, if the inflation rate of the United States exceeds the inflation rate of other nations, the A) dollar will depreciate. B) dollar will not change C) United States will develop a trade deficit. D) United States will develop a trade surplus. Answer: C Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
31) Under a fixed exchange rate system, if the inflation rate of the United States is less than the inflation rate of other nations, the A) dollar will not change. B) dollar will appreciate. C) United States will develop a trade deficit. D) United States will develop a trade surplus. Answer: D Diff: 2 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 32) Foreign exchange market intervention involves the purchase or sale of currencies by governments to influence the market exchange rate. Answer: TRUE Diff: 1 Topic: Fixing the Exchange Rate Skill: Definition AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 33) If the U.S. government wants to increase the price of the dollar relative to the euro, it could buy euros with dollars in the foreign exchange market. Answer: FALSE Diff: 1 Topic: Fixing the Exchange Rate Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 34) Under a flexible exchange rate system, exchange rates are determined by free markets. Answer: TRUE Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
35) An exchange rate system in which governments try to keep currency values from fluctuating against one another is a fixed exchange rate system. Answer: TRUE Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 36) A country facing a balance of payments deficit will change the pegged value of its currency; this is called a revaluation. Answer: FALSE Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 37) The Bretton Woods exchange rate system was replaced by a gold standard. Answer: FALSE Diff: 1 Topic: The U.S. Experience with Fixed and Flexible Exchange Rates Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
38) Suppose that the free market exchange rate for the dollar is 115 yen, but the U.S. and Japanese governments want it to be 120 yen/dollar. What can the governments do? Illustrate your answer with a graph. Answer:
As is shown in the graph, the initial demand and supply for the dollar intersect at an exchange rate of 115 yen/dollar. In order to raise the price of the dollar, the governments need to increase the demand for the dollar (shown in the graph as a shift in the demand curve). They would do this by selling yen for dollars until the exchange rate rises to the desired level of 120 yen/dollar. Diff: 2 Topic: Fixing the Exchange Rate, graphing Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 39) Explain what is meant by a devaluation of a currency. Under what circumstances would a country devalue its currency? Answer: In a fixed exchange rate system, a country faces a balance of payments deficit when the supply of its currency exceeds the demand at the fixed exchange rate. The country can lower the value at which the currency is pegged to increase its net exports; this is called a devaluation. Diff: 2 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
40) Explain what is meant by a revaluation of a currency. Under what circumstances would a country devalue its currency? Answer: In a fixed exchange rate system, a country faces a balance of payments surplus when the demand for its currency exceeds the supply at the fixed exchange rate. The country can increase the value at which the currency is pegged to reduce its net exports; this is called a revaluation. The opposite would be the case for a devaluation. Diff: 2 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 41) Distinguish between fixed and flexible exchange rate systems. Answer: A fixed exchange rate system is a system in which governments peg exchange rates to prevent their currencies from fluctuating. A flexible exchange rate system is a system in which exchange rates are determined by free markets. Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 42) Explain when a country would face a balance of payments deficit and when it would face a balance of payments surplus if it was operating under a fixed exchange rate system. Answer: Under a fixed exchange rate system, a country would face a balance of payments deficit when the supply of that country's currency exceeds the demand for the currency at the current exchange rate. The country would face a balance of payments surplus when the demand for its currency exceeds the supply of its currency at the current exchange rate. Diff: 1 Topic: Fixed versus Flexible Exchange Rates Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
19.5 Managing Financial Crises 1) Mexico pegged its exchange rate to the U.S. dollar in the 1980s A) to discourage foreign investment. B) in an attempt to abandon the peso and switch to U.S. dollars as currency. C) to signal to investors that Mexico was serious about controlling inflation. D) to maintain a similar unemployment rate to the United States. Answer: C Diff: 1 Topic: Managing Financial Crises Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 2) Why did Mexico peg its exchange rate against the U.S. dollar in the late 1980s? A) They wanted to encourage investment into Mexico. B) They wanted to make their goods cheaper to the U.S. C) They wanted to make their goods more expensive to the U.S. D) They wanted to encourage more Mexican investment into the U.S. Answer: A Diff: 1 Topic: Managing Financial Crises Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 3) When Mexico peg its exchange rate to encourage more investment into Mexico, were they successful? A) Yes, they were too successful and had so much foreign investment enter the country. B) Yes, there was an increase in investment, but the increase was minimal. C) No, the policy encouraged Mexican investment into the United States. D) No, the policy attracted no new investments into Mexico. Answer: A Diff: 1 Topic: Managing Financial Crises Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
4) What triggered the large pullout of funds by investors in Mexico in the 1990s? A) political turmoil B) a recession in the United States C) a recession in Mexico D) high interest rates in Brazil and Argentina Answer: A Diff: 1 Topic: Managing Financial Crises Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 5) In an attempt to maintain the peso exchange rate in 1994, the Mexican central bank A) purchased dollars and sold pesos. B) purchased both dollars and pesos. C) sold both dollars and pesos. D) sold dollars and purchased pesos. Answer: D Diff: 1 Topic: Managing Financial Crises Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 6) Which country did not experience a currency crisis in Asia in the 1990s? A) China B) South Korea C) Thailand D) Indonesia Answer: A Diff: 1 Topic: Managing Financial Crises Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
7) Some economists believe that the Asian crisis in 1997 A) was inevitable since most of the economies were experiencing slow economic growth. B) was made worse by the refusal of the IMF to take any actions. C) could have been avoided if stronger action had been taken by major countries and international agencies. D) was necessary to rid those economies of inflation. Answer: C Diff: 1 Topic: Managing Financial Crises Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 8) Which country experienced a currency collapse even though it took institutional steps to peg their currency to the U.S. dollar in the early 2000s? A) Argentina B) South Korea C) Thailand D) Indonesia Answer: A Diff: 1 Topic: Managing Financial Crises Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 9) Which of the following contributed to the currency collapse in Argentina in 2002? A) Argentina's strict adherence to fixed exchange rates. B) Argentina's government could not control its spending. C) the IMF's lack of support for Argentina during the crisis. D) A and B are both correct. Answer: D Diff: 1 Topic: Managing Financial Crises Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
10) Historically, the key role in assisting countries that ran into financial difficulties was played by A) Europe. B) Japan. C) the United Nations. D) the IMF. Answer: D Diff: 1 Topic: Managing Financial Crises Skill: Fact AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics Recall the Application about the problems for some countries in the euro bloc to answer the following question(s). 11) According to the Application, what was the main benefit for countries if they joined a currency bloc? A) Member countries would achieve economic stability and growth. B) Member countries would achieve the same growth as the most prosperous country in the bloc. C) Member countries would experience a currency appreciation. D) Member countries would defend each other during times of war. Answer: A Diff: 1 Topic: Application 3, Problems with the euro bloc Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 12) According to the Application, what was a disadvantage for countries if they joined a currency bloc? A) Member countries could not depreciate their currency in order to fight a recession. B) Member countries would have the same growth rate as the weakest economy in the bloc. C) Member countries would experience a large migration of workers from poorer countries. D) Member countries would experience a decline in wages. Answer: A Diff: 1 Topic: Application 3, Problems with the euro bloc Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics
13) According to the Application, why did a single currency area in Europe not experience the same success as the single currency area in the United States? A) The United States had a unified fiscal system while Europe did not. B) Europe had a unified fiscal system while the U.S. did not. C) The United States had smarter central bank governors. D) The United States had workers that earned higher wages. Answer: A Diff: 1 Topic: Application 3, Problems with the euro bloc Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics Recall the Application about the causes of the Argentinean financial crisis to answer the following question(s). 14) According to this Application, during the late 1980s, Argentina pegged its currency to the U.S. dollar. When the dollar appreciated sharply on world markets after 1995, this caused a large trade deficit in Argentina because A) Argentina could no longer afford to purchase as many imported products. B) Argentinean exports became relatively more expensive in global markets. C) Argentinean exports grew relative to the nation's imports. D) U.S. exports to Argentina declined. Answer: B Diff: 2 Topic: Application 4, The Argentine Financial Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 15) According to this Application, during the late 1980s, Argentina pegged its currency to the U.S. dollar. After 1995, the U.S. dollar appreciated sharply on world markets. Since the Argentinean peso was pegged to the U.S. dollar, the appreciation of the dollar essentially caused A) a severe revaluation of the peso relative to the dollar. B) the peso to also appreciate sharply on world markets. C) a sharp devaluation of the dollar relative to the peso. D) the peso to appreciate relative to the dollar, but depreciate on world markets. Answer: B Diff: 2 Topic: Application 4, The Argentine Financial Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 16) According to this Application, because Argentina pegged its currency to the U.S.
dollar, the appreciation of the dollar caused a large trade deficit in Argentina. This trade deficit meant that A) the supply of Argentinean pesos exceeded the demand for the pesos. B) the supply of Argentinean pesos exceeded the demand for U.S. dollars. C) the demand for Argentinean pesos exceeded the supply of the pesos. D) the demand for Argentinean pesos exceeded the supply of U.S. dollars. Answer: A Diff: 2 Topic: Application 4, The Argentine Financial Crisis Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics 17) Compare and contrast the financial crises in Mexico in 1994 and in Asia in 1997. Answer: In both cases large amounts of foreign investment poured into the countries. The Mexican crisis was precipitated by political events that caused concern among foreign investors and led them to pull funds out. Mexico was forced to devalue the peso, which exacerbated the crisis. In Asia, investors became pessimistic as some of their investments lost money and the withdrawal of funds devalued currencies throughout the region. Thus in both cases the large movements of global capital market funds were part of the story of the crisis. Diff: 2 Topic: Managing Financial Crises Skill: Conceptual AACSB: Reflective Thinking Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics