question

The fundamental problem of economics is:

answer

The scarcity of resources relative to human wants

question

A consequence of the economic problem of scarcity is that:

answer

Choices have to be made about how resources are used.

question

Opportunity cost may be defined as the:

answer

Goods or services that are forgone in order to obtain something else.

question

At which point is society employing some of its available technology but not all of it? (See Figure 1.1.)

answer

C (point inside the curve)

question

At which point is society producing the most output possible with the available resources and technology? (See Figure 1.1.)

answer

B (point on the curve)

question

According to the law of increasing opportunity costs:

answer

Greater production of one good requires increasingly larger sacrifices of other goods.

question

A point on a nation's production-possibilities curve represents:

answer

The full employment of resources to achieve a particular combination of goods and services.

question

Investment goods, as defined by economists, include:

answer

factories

question

If all nations specialize in their area of comparative advantage and then trade, total world output will:

answer

increase

question

The investment in human capital through education and training can result in:

answer

greater productivity

question

The goal of the consumer in a market economy is to use his/her limited income to buy:

answer

The set of goods and services that maximizes their utility.

question

he goal of the business firms in a market economy is to maximize:

answer

profits

question

Ceteris paribus, if the price of a digital camera rises, then we can expect:

answer

A decrease in the quantity demanded of digital cameras

question

Ceteris paribus, which of the following would you expect to have no effect on the demand for automobiles?

answer

An increase in the price of automobiles

question

If bagels and donuts are substitutes, then a decrease in the price of donuts will result in:

answer

A decrease in the demand for bagels.

question

Ceteris paribus, which of the following is most likely to cause a decrease in the supply of skateboards?

answer

An increase in the cost of materials used to produce skateboards

question

Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then:

answer

The supply curve for monkey wrenches will shift to the left.

question

If there is a shortage at a given price, then:

answer

That price is less than the equilibrium price.

question

As a result of a shortage:

answer

Producers increase output and raise the price.

question

An increase in the supply of gasoline, ceteris paribus, will cause equilibrium price:

answer

To fall and quantity to rise.

question

Suppose a hurricane hits Florida causing widespread damage to houses and businesses. The governor of Florida places a price ceiling on all building materials to keep the prices reasonable. Which of the following is the most likely result?

answer

Shortages of building materials and a slower recovery from the storm

question

The equilibrium price and quantity in Figure 3.2 are, respectively:

answer

$9 and 30 units.

question

If the actual market price were fixed at $15 per unit in Figure 3.2:

answer

There would be a surplus of 40 units.

question

Market failure leads to:

answer

Public goods being under-produced.

question

When market failure occurs, the role of government is to:

answer

Push market outcomes closer to the ideal.

question

A public good:

answer

Experiences the free-rider dilemma.

question

The government's role in limiting smoking in many buildings is justified by considerations of:

answer

externalities

question

Social demand is equal to:

answer

Market demand plus or minus externalities.

question

A natural monopoly is:

answer

An industry in which one firm can achieve economies of scale over the entire range of market supply.

question

National-income accounts assist:

answer

Economic policy makers in formulating policies and evaluating performance.

question

Suppose you volunteer to help clean up your neighborhood and the only payment you receive is the sense of goodwill that develops with your neighbors. Your efforts cause the GDP of the economy to:

answer

remain unchanged

question

If real GDP falls from one period to another and the price level stays the same we can conclude that:

answer

Nominal GDP decreased.

question

inflation is:

answer

An increase in the average level of prices of goods and services.

question

National income is a measure of:

answer

The income earned by the factors of production in producing GDP.

question

Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should be:

answer

A decrease in the demand for airline tickets.

question

Assume a series of forest fires reduces the supply of lumber which is an input in the production of wooden bats. Baseballs and wooden bats are complements. If the price of wooden bats increases, we can expect the:

answer

Demand for baseballs to decrease.

question

Which of the following is not held constant along a given supply curve for a good?

answer

Price

question

If the quantity demanded of a good is greater than the quantity supplied of the good at the current price, then:

answer

Price will increase until it reaches the equilibrium price.

question

A rightward shift of the market demand curve for MP3 players, ceteris paribus, causes equilibrium:

answer

Price to increase and quantity to increase.

question

National-income accounting is defined as the:

answer

Measurement of aggregate economic activity.

question

A furniture factory produces dining room sets. The lumber they purchase from the lumberyard is a/an:

answer

Intermediate good.

question

Real GDP is more accurate than nominal GDP in making comparisons of output over time because:

answer

Nominal GDP can increase simply because of price increases over time.

question

A nation's production possibilities curve should, ceteris paribus, shift:

answer

Outward if net investment is positive.

question

To measure an economy's output adjusted for changes in the price level, one would use:

answer

Real GDP.

question

Any imperfection in the market mechanism that prevents optimal outcomes is known as:

answer

Market failure.

question

The macro consequence of unemployment is:

answer

Lost output for the economy.

question

To be officially counted as unemployed, one must be:

answer

Actively seeking employment and currently not working.

question

What is the unemployment rate in 2006 in Table 6.1?

answer

17.5 percent

question

Discouraged workers:

answer

Do not actively seek employment, although they desire to be employed.

question

When there is a mismatch between the skills required for a job and the skills of job seekers, the unemployment that results is an example of:

answer

structural unemployment

question

During an economic downturn, consumers spend considerably less on goods and services. This results in layoffs, and the laid off workers are classified as:

answer

Cyclically unemployed.

question

Inflation is:

answer

An increase in the average level of prices of goods and services.

question

Which of the following measures changes in the average price of consumer goods and services?

answer

CPI

question

The inflation rate is the:

answer

Annual percentage rate increase in the average price level.

question

If the CPI increases from 250 to 275 for one year, the rate of inflation for that year is:

answer

10 percent.

question

The price index that refers to all goods and services produced is the:

answer

GDP deflator.

question

Based on Table 7.1, the rate of inflation between 2002 and 2004 using the GDP deflator is:

answer

5.7 percent

question

Alternating periods of economic growth and contraction in real GDP define:

answer

The business cycle.

question

According to classical economists, market-driven economies:

answer

Are typically self-adjusting.

question

Which of the following is characteristic of a downturn in the business cycle?

answer

Lower real output

question

Real GDP is better than nominal GDP for measuring growth because real GDP has been adjusted for changes in:

answer

The price level.

question

Which of the following is illustrated by the aggregate demand curve?

answer

How total quantity of output demanded varies with the average price level

question

Macro equilibrium always occurs when:

answer

Aggregate demand equals aggregate supply at the average price level of the economy.

question

Which of the following is a potential problem at macro equilibrium?

answer

It is inconsistent with the macroeconomic goals

question

Ceteris paribus, the price level will decrease if the aggregate:

answer

Demand curve shifts to the left.

question

According to Keynesian theory, the correct fiscal policy to stimulate the economy would be to:

answer

increase government expenditures to increase aggregate demand.

question

According to Keynes, unemployment resulted from:

answer

Insufficient spending on the part of consumers, business, and government.

question

In Figure 8.5, according to Keynesians, if equilibrium real output is Q1 and full employment real output is Q2, an appropriate fiscal policy lever would be to:

answer

Increase AD by increasing government spending.

question

In Figure 8.5, if equilibrium real output is Q1 and full employment real output is Q2, an appropriate monetarist policy lever would be to increase:

answer

AD by reducing interest rates.

question

The components of aggregate demand are:

answer

Consumption, government spending, net exports, and investment.

question

If disposable income increases from $9,000 billion to $11,000 billion, and consumption increases from $9,500 billion to $11,000 billion, the MPC must be:

answer

0.75. The MPC is equal to the change in consumption spending divided by the change in disposable income. (1500/2000 = .75)

question

Suppose the consumption function is C = $200 + 0.85YD. If disposable income is $400, consumption is:

answer

$540. The level of consumption is equal to autonomous consumption plus the disposable income multiplied by the MPC; .85×400 + 200 = 540.

question

Which of the following is true when an economy produces at full employment, but consumers, government, businesses, and the foreign sector do not buy all the output?

answer

There is a recessionary gap

question

According to Keynes, cyclical unemployment is caused by too:

answer

Little aggregate demand

question

The economy will not reach and maintain its goals of full employment and price stability if aggregate demand is too:

answer

Great, too small or unstable

question

Using Figure 9.6, if full employment occurs at QC then aggregate demand is:

answer

Too small causing cyclical unemployment.

question

Using Figure 9.6, if full employment occurs at QB then aggregate demand is:

answer

just right

question

An addition of spending to the circular flow of income is:

answer

an injection

question

If an economy is at full employment and investment spending decreases while all other levels of spending remaining constant then the price level:

answer

Decreases and output decreases.

question

If an economy is at full employment and consumption spending decreases while all other levels of spending remaining constant then:

answer

Increased unemployment results.

question

The marginal propensity to consume is:

answer

The fraction of each additional dollar of disposable income spent on consumption.

question

Suppose an economy can be described by the consumption function C = 250 + 0.90YD and I = $300. What is the multiplier?

answer

10. The multiplier is equal to 1 ÷ (1 - MPC), and MPC is the slope variable.

question

If the MPC = 0.80, the cumulative decrease in total spending resulting from an initial $150 recessionary gap would be:

answer

$750. One can determine the total change in spending by taking the initial change in spending and multiplying it by the multiplier, where the multiplier is equal to 1 ÷ (1 - MPC).

question

If leakages are greater than injections, then equilibrium output will be:

answer

Less than full-employment output and a recessionary gap will occur.

question

Assume the equilibrium level of output is less than full employment. To achieve a full-employment equilibrium the aggregate demand curve must shift to the right by:

answer

An amount greater than the recessionary GDP gap because the spending increase raises the price level.

question

In the short run, if AD increases the unemployment rate will:

answer

Fall and the price level will rise.

question

When an economy is operating at "full employment," as economists usually define the term:

answer

The unemployment rate is between 4-6 percent.

question

To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.50, the government should increase spending by:

answer

$50 billion. The general formula for computing the desired stimulus (increase in government spending) is the AD shortfall divided by the multiplier, therefore $100 billion divided by 2 (1/(1 - .5) is equal to $50 billion.

question

Given a $500 billion AD shortfall and an MPC of 0.75, the desired fiscal stimulus would be:

answer

A $125 billion increase in government expenditures. The general formula for computing the desired stimulus (increase in government spending) is the AD shortfall divided by the multiplier, therefore $500 billion divided by 4 (1/(1 - .75)) is equal to $125 billion.

question

Assume the MPC is 0.80. If the government wants to eliminate an AD shortfall of $300 billion it should:

answer

Cut taxes by $75 billion. The general formula for computing the desired stimulus is the AD shortfall divided by the multiplier (300/5 = 60) and the formula to determine the tax cut necessary to close a GDP gap is the desired fiscal stimulus divided by the MPC (60/.8 = 75). Therefore the tax cut necessary to close a $300 AD shortfall (when the MPC is 0.80) is $75 billion.

question

f the government cuts taxes by $200 million and simultaneously decreases government spending by $200 million, then:

answer

People will spend only a part of their tax cut, so aggregate demand will eventually fall by $200 million.

question

Using Figure 11.1, which fiscal policy action would increase aggregate demand from AD1 to AD3?

answer

A decrease in taxes

question

Which of the following is an argument against balancing the federal budget?

answer

Doing so may prevent the government from pulling the economy out of recession.

question

The national debt is:

answer

The accumulation of annual deficit flows

question

Debt service:

answer

Refers to the annual interest payments on the debt.

question

The banking system can lend more than the sum of its excess reserves because:

answer

Banks are required to keep only a fraction of deposits on reserve.

question

When the reserve requirement changes, which of the following will change for an individual bank?

answer

Required reserves, excess reserves, lending capacity

question

A single bank with $10,000 of reserves and a reserve ratio of 25 percent could support total transactions account balances of at most:

answer

$40,000.

question

Suppose a bank has $1 million in deposits, a required reserve ratio of 25 percent, and total reserves of $600,000. Then it has excess reserves of:

answer

$350,000.

question

If the banking system has demand deposits of $100,000, total reserves equal to $15,000, and a required reserve ratio of 10 percent, then the banking system can increase the volume of loans by:

answer

$50,000.

question

The primary method for controlling the money supply in the United States is to limit the:

answer

Volume of loans the banking system can make.

question

The government uses ____________ to regulate the amount of money banks lend.

answer

Monetary policy

question

Which of the following is responsible for the Fed's daily activity in financial markets?

answer

The FOMC

question

A change in the reserve requirement causes a change in all of the following except:

answer

Pre-tax income.

question

Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?

answer

Federal funds market

question

When the Fed raises the discount rate all of the following result except:

answer

It expands the lending capacity of the banking system.

question

Which of the following is the tool used most frequently by the Fed?

answer

Open market operations

question

When the Fed buys bonds from the public, it:

answer

increases the flow of reserves to the banking system.

question

Using Figure 15.2, the equilibrium rate of interest is:

answer

6 percent

question

In Figure 15.2, if the money supply decreased from $200 billion to $100 billion, which of the following would be likely to occur?

answer

Aggregate demand would decrease

question

The effectiveness of monetary policy is influenced by:

answer

The time it takes for lower interest rates to make investment spending more profitable.

question

Long-term interest rates may not mirror short-term interest rates if:

answer

Lenders are reluctant to make loans.

question

Which of the following is a series of events that accurately describes the steps by which restrictive monetary policy is effective?

answer

Decrease in M1, increase in interest rate, decrease in I

question

A decrease in aggregate demand could be caused by:

answer

Contractionary monetary policy.

question

If the Federal Reserve raises the discount rate, we would expect the:

answer

AD curve to decrease.

question

If the Fed's objective is to stimulate the economy, which of the following gives the correct sequence of events?

answer

The money supply increases, interest rates decrease, investment increases, AD increases

question

In a graph showing investment demand, the effect of a higher discount rate could best be represented by, ceteris paribus:

answer

A movement up the investment demand curve.

question

Refer to Figure 16.4. If the economy is initially in equilibrium at P3 and Q1, the appropriate policy to move the economy to an equilibrium at P1 and Q2 would be to:

answer

Increase the investment in human capital.

question

Refer to Figure 16.4. If the economy is initially in equilibrium at P3 and Q1, which of the following policies would move the economy to equilibrium at P2 and Q3?

answer

A combination of monetary policy and supply-side policy

question

Supply-side economists favor tax incentives that:

answer

Encourage investment.

question

Which of the following is likely to occur because of a decrease in marginal tax rates?

answer

An increase in aggregate supply because of an increased incentive to work

question

Which of the following policies is a supply-side lever?

answer

Human capital investment

question

Stagflation refers to:

answer

The simultaneous occurrence of inflation and unemployment.

question

Supply-side policies are designed to achieve a:

answer

Lower inflation rate and a lower unemployment rate.

question

According to Figure 17.7, a shift in the long run aggregate supply from LRAS1 to LRAS2 would most likely result from:

answer

An increase in labor skills.

question

A movement from point C to point E in Figure 17.5 illustrates:

answer

An increase in the capacity to produce.

question

Tax credits for new investment are likely to:

answer

Increase physical capital investment.

question

Countries that have higher savings rates are likely to have:

answer

A higher investment rate as a percentage of GDP and a higher growth rate of real GDP.

question

Human capital is:

answer

The knowledge and skills possessed by the labor force.

question

Economic growth implies a:

answer

Rightward shift of the long-run aggregate supply curve

question

Which of the following must occur to achieve large and lasting increases in output?

answer

An increase in potential GDP

question

Which of the following is not true about macroeconomic models?

answer

They tend to agree with each other about how the economy works

question

Which of the following is true about stagflation?

answer

It can be corrected by policies that increase aggregate supply

question

If the United States raises tariffs on foreign goods it may achieve:

answer

Greater profitability of import-competing firms.

question

Protectionism achieves which of the following goals?

answer

Protection of infant industries

question

Producers of paper products are most likely to be in favor of:

answer

Protectionism in the paper product market but free trade in the lumber market.

question

Suppose the United States can produce 2,000 cars or 2,000 trucks. Japan can produce either 2,000 cars or 1,000 trucks. In terms of car production we can conclude that:

answer

Japan has a comparative advantage.

question

A country with a comparative advantage in producing computer chips:

answer

Has a lower opportunity cost of producing computer chips than its trading partners.

question

The expansion of world output as a result of trade is mainly due to the effects of:

answer

Specialization according to comparative advantage.

question

When a country has a lower opportunity cost in producing a good than any other country:

answer

Consumption possibilities will increase with specialization and trade.

question

Refer to Figure 20.3 for the dollar-Swiss franc foreign-exchange market. Which of the following is true?

answer

An increase in supply from S1 to S2 could be caused by an increase in the U.S. demand for Swiss chocolate.

question

Suppose the supply of dollars increased from S1 to S2 in Figure 20.3. As a result of this change:

answer

U.S. computer exports to Switzerland will be lower priced.

question

Ceteris paribus, if African countries experience a drought and purchase food from the United States, the currencies of the African countries should:

answer

Depreciate, and the dollar should appreciate.

question

Which of the following groups would be aided by a depreciation of the American dollar?

answer

American producers of goods for export.

question

The depreciation of a country's currency causes the price of imports to:

answer

Rise and the prices of exports to fall.

question

A depreciation of the Korean won against the U.S. dollar will:

answer

Raise the won price of U.S. goods.

question

If the exchange rate between the U.S. dollar and Japanese yen changes from $1 = 100 yen to $1 = 90 yen, then

answer

Japanese tourists to the U.S. will benefit.

question

When Americans buy Mercedes-Benz automobiles made in Germany, they are generating a:

answer

Supply of U.S. dollars and a demand for a foreign currency.

question

Which of the following statements is true?

answer

U.S. GDP per capita is five times larger than the world average.

question

According to the World Bank, _______ people are classified as being in extreme poverty.

answer

Over 1 billion

question

The market demand curve for money is:

answer

Downward sloping to the right because people wish to hold less money at higher interest rates and more money at lower interest rates.

question

The equilibrium rate of interest is determined by:

answer

Money demand and money supply.

question

Which of the following is true about the equilibrium rate of interest?

answer

The Fed can change it by changing the money supply

question

Ceteris paribus, if the Fed sells bonds through open market operations, the money:

answer

Supply curve should shift leftward.

question

The success of Fed intervention depends on how well:

answer

Changes in long-term interest rates mirror changes in short-term interest rates.

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