question

What is the best definition of economics?

answer

the study of the choices people make as we cope with scarce resources.

question

People can make rational decisions by comparing _____ and making decisions _____.

answer

costs and benefits; at the margin.

question

Positive statements deal with how the economy operates. Normative statements deal with economic policy. Karl says "A sales tax on cigarettes will raise the price and reduce cigarette sales." Maria says "College students smoke too much, so a tax should be put on cigarettes to reduce consumption." We can conclude that:

answer

Karl's statement is positive; Maria's statement is normative.

question

Economics is divided into macroeconomics and microeconomics. Microeconomics approaches the study of economics from the viewpoint of:

answer

households and firms and how they interact in markets.

question

When a curve has a negative slope, this means that the curve will:

answer

tilt from the upper left to the lower right.

question

When the price of bottled water goes up, consumers will buy less bottled water. This is a _____ relationship.

answer

negative (inverse).

question

In the example in the textbook, the price of hamburgers is a location variable for the demand curve for pizzas. When the price of hamburgers goes up, the demand curve for pizzas will:

answer

shift to the right (more pizzas will be demanded at each price level).

question

The intangible output ("action") of the production process where production and consumption usually occur at the same time and place is called a:

answer

service.

question

We associate biological wants, cultural wants, and demonstration wants with (respectively):

answer

necessities, conveniences, luxuries.

question

Structures and equipment are the ______ input into the production process.

answer

capital.

question

The authors use four factors of production in their textbook. What the authors call "entrepreneurship" we are calling a part of:

answer

labor.

question

According to the handout (economic problem handout), the "Economic Problem" is:

answer

the wants and needs of a society for goods and services will always exceed the productive capacity of the society.

question

In the handout, "technical efficiency" refers to producing the _____ of goods and services, while "allocative efficiency" refers to producing the _____ of goods and services.

answer

maximum amount; best mix.

question

In Asia, construction projects use a lot of human labor. In the USA, construction projects use a lot of machinery. This reflects which economic function?

answer

how to produce.

question

Which economic system is based on private ownership and private control of the factors of production?

answer

capitalism.

question

Which economic system was used before the industrial revolution?

answer

traditional.

question

Refer to the PPF diagram. In terms of technical efficiency, this economy will achieve maximum production if it produces at:

answer

any point on the production possibilities frontier.

question

As we move down the PPF curve, we are producing more of good x, but we have to give up larger amounts of good y. This is because the opportunity cost of producing good x is ____.

answer

increasing.

question

Economic growth is shown by:

answer

the PPF curve shifting outward (to the right).

question

Jack and Jill are farmers, and grow apples and oranges. When Jack produces one pound of apples, he must give up one pound of oranges. When Jill produces one pound of apples, she must give up two pounds of oranges. Jack and Jill combine their production (a joint marketing agreement). If they want to produce one pound of apples, then _____ should do it because they give up _____ oranges. We call this comparative advantage.

answer

Jack; fewer.

question

In the two sector circular flow model, the economic activity of _____ occurs in the household sector, while the economic activity of _____ occurs in the business sector.

answer

production; consumption.

question

The two-sector circular flow model includes the product market and the factor market. In the factor market, the business sector represents the _____ side and the household sector represents the _____ side.

answer

supply; demand.

question

In our handout, the demand model for bread contains the following variables. Which variable is the dependent variable?

answer

the quantity demanded of bread.

question

The demand schedule for bread combines the quantity demanded of bread with:

answer

the price of bread.

question

Which of the following best illustrates the post hoc, ergo propter hoc fallacy?

answer

I planted a new lawn, so we had a dry summer.

question

The law of demand states that:

answer

price and quantity demanded are inversely related.

question

If the level of income decreases, bread buyers will want to purchase less bread at each price level. This is called a change in demand, and represents a decrease in demand. It will be shown by:

answer

the demand curve will shift to the left (a negative shift).

question

Necessities that are purchased by low income households because they cannot afford anything better are called _____. When their income rises, they will purchase less of these goods and services.

answer

inferior goods.

question

Beef and chicken are substitutes in consumption. If the price of chicken decreases, then the demand curve for beef will:

answer

shift to the left.

question

The media has reported that electric automobiles are dangerous to drive because of battery fires. As a result, the demand curve for electric automobiles will:

answer

shift to the left.

question

The law of supply states that:

answer

price and quantity supplied are directly related.

question

Wages and productivity have opposite effects on the location of the supply curve. Higher productivity will shift the supply curve to the _____, while higher wages will shift the supply curve to the _____.

answer

right; left.

question

Skinny jeans and short cut jeans are substitutes in production. Skinny jeans have suddenly become very popular and the price of skinny jeans has increased. As a result, clothing plants are producing more skinny jeans which means the supply curve of short cut jeans will:

answer

shift to the left.

question

If the government increases business taxes, this will shift the location of the supply curve to the left. As a result, the equilibrium price will _____ while equilibrium quantity will ______.

answer

increase; decrease.

question

If demand increases (shifts to the right) and supply increases (shifts to the right), then equilibrium price will _______.

answer

can't say.

question

Refer to the previous question. If demand increases by a large amount, and supply increases by a small amount, then equilibrium price will ______.

answer

increase.

question

The year is 1960, and four young musicians come to your music store to buy the most recent Elvis Presley record album. The most money each is willing to pay is: John $12, Paul $9, George $6, and Ringo $3. If the market price of the record is $7, you will sell:

answer

two records.

question

In the question above, the consumer surplus of Paul is:

answer

two dollars.

question

We may define consumer surplus as:

answer

the dollar amount a buyer is willing to pay minus the amount the buyer actually pays, the value that a consumer places on a good in excess of the price of the good, the area above the price line and below the demand curve.

question

Which type of business organization has the largest number of individual firms?

answer

proprietorship.

question

Overall, the corporation is the most important type of business organization due to two advantages - immortality and ______.

answer

limited personal liability.

question

Corporations are owned by the stockholders, but are operated by professional manager. Frequently, the interests of management and the stockholders will conflict, and the managers will operate the corporation for their interests. This is called the ______ problem.

answer

principal-agent.

question

One way a business firm can raise additional financial capital is to:

answer

reinvest retained earnings back into the firm, recruit additional owners, borrow from banks and/or sell bonds.

question

One source of external funds for a large corporation is indirect finance. This source is usually called _____ capital and involves borrowing by selling ______.

answer

debt; bonds.

question

The two types of financial statements are the Income Statement and the Balance Sheet. The Income Statement shows:

answer

income, costs, and profits.

question

Congratulations! Your Tennessee lottery ticket is a winner. Your prize is $200,000 paid over five years ($40,000 per year) or $130,000 paid now. How do you select the better payout? You should calculate the _____ of the $200,000 paid over five years, and if it is smaller than the $130,000 paid now, then you want _____.

answer

present value; the $130,000 paid now.

question

The two important financial statements used to analyze the performance of a business firm are the Income Statement and the Balance Sheet. The Income Statement covers a period of time (usually a quarter or a year) and shows revenues, costs, and profits. In 2014, Acme Corporation had revenues of $100 million, costs of _____, and profits of $20 million.

answer

$80 million.

question

The two important financial statements used to analyze the performance of a business firm are the Income Statement and the Balance Sheet. The Balance Sheet shows a point in time (usually the end of a quarter or a year) and cover assets, liabilities, and net worth. At the end of 2014, Acme Corporation had assets of $300 million, liabilities of $260 million, and a net worth of _____.

answer

$40 million.

question

According to the textbook, the four leading exporting nations are China, ______, Germany, and Japan.

answer

United States.

question

Small economies (like Belgium and the Netherlands) tend to ______ most of their production of goods and services; and to ______ most of the goods and services they consume.

answer

export; import.

question

Jack and Jill are farmers, and grow apples and oranges. When Jack produces one pound of apples, he must give up two pounds of oranges. When Jill produces one pound of apples, she must give up one pound of oranges. Jack and Jill combine their production (a joint marketing agreement). If they want to produce one pound of apples, then _____ should do it because they give up _____ oranges. We call this comparative advantage.

answer

Jill; fewer.

question

In international trade, the nation with the lower cost of production has the comparative advantage. Both Japan and Europe can produce computers. Europe can produce one computer for $2000 while Japan can produce one computer for $1000. Therefore, _____ has a comparative advantage in computers and will tend to ______ computers.

answer

Japan; export.

question

In international trade, the nation with the lower cost of production has the comparative advantage. Both Japan and Europe can produce autos. Europe can produce one auto for $20,000 while Japan can produce one auto for $30,000. Therefore, _____ has a comparative advantage in autos and will tend to _____ autos.

answer

Europe; export.

question

With free trade between Japan and Europe, Europe imports ______ and exports ______.

answer

computers; autos.

question

Recall that GDP = C + I + G + X - M. A large share of U.S. exports goes to Europe. When the European economy is expanding, U.S. exports to Europe will ______ and the level of U.S. real GDP will ______.

answer

increase; decrease.

question

Recall that GDP = C + I + G + X - M. Most imports into Canada are from the United States. When the Canadian economy has a recession, U.S. exports to Canada will ______ and the level of U.S. real GDP will ______.

answer

decrease; decrease.

question

If the world price is below a nation's domestic market clearing price for a good, the nation will tend to _____ the good.

answer

import.

question

If the world price is above a nation's domestic market clearing price for a good, the nation will tend to _____ the good.

answer

export.

question

When a tariff is placed on imports, the price of the good will ______ and the protected industry will ______.

answer

increase; benefit.

question

When a quota is placed on imports, the price of the good will _____ and consumers of the good in the nation will ______.

answer

increase; be hurt.

question

The national security argument is used to justify import protection for:

answer

industries vital for national defense.

question

The dumping argument is used to justify import protection for:

answer

industries hurt by unfair price competition.

question

"The market value of all final goods and services produced within the borders of the United States during the period of one year" is the definition of:

answer

gross domestic product.

question

GDP is the sum of final demands for consumption, investment, government, and net exports. The most important (largest) component is:

answer

consumption.

question

In the three sector circular flow model, production occurs in the business sector and in the government sector, while consumption occurs in the household sector. The business sector produces ______ goods which are sold through the product markets, while the government sector produces ______ goods which are paid for by tax revenues.

answer

private; public.

question

Which of the following goods and services is included in the value of GDP?

answer

capital goods.

question

The term "real GDP" refers to:

answer

GDP data adjusted for changes in the price level.

question

The term "nominal GDP" refers to:

answer

GDP data expressed in current prices and not adjusted for inflation.

question

Real GDP per person is used as a measure of well-being. If real GDP is growing faster than the population, then the standard of living is _____. If real GDP is growing slower than the population, then the standard of living is _____.

answer

rising; falling.

question

Four important NIPA concepts are gross national product, national income, personal income, and disposable personal income. Which of the following is personal income?

answer

income received by households from all sources.

question

Assuming the total civilian labor force is 100 million, and 95 million are employed, the unemployment rate is:

answer

5%.

question

Over the last 60 years, the labor force participation rates have been ____ for men and ____ for women.

answer

falling; rising.

question

The full employment ("natural") rate of unemployment includes structural unemployment and:

answer

frictional unemployment.

question

Mary is a textile worker in Georgia and the textile mills have closed and the jobs have moved to Latin America and Asia. Mary's unemployment is:

answer

structural.

question

The effect of the minimum wage law is to create a higher wage that:

answer

increases the wages of low-wage workers but decreases the number of jobs.

question

Through their collective bargaining contracts with employers, labor unions create a higher wage that:

answer

increases the wages of their members but reduces the number of jobs.

question

Inflation means that:

answer

the general price level is rising.

question

The CPI (consumer price index) value for 2014 is 237. The base period for the CPI is 1982-84, when the CPI value is set to equal 100. The difference between the 1982-84 and 2014 CPI values means:

answer

the prices paid on average by a typical family have risen 137 percent since 1982-84.

question

If short term interest rates are 3% and the inflation rate is 1%, then the real interest rate is:

answer

2%.

question

In 2014 Steve's money (nominal) income rose by 4% and the price level rose by 2%. We can conclude that Steve's real income:

answer

rose by 2%.

question

According to our handout, real GDP in the United States reached a high point in December 2007 and a low point in June 2009. The time period in between is called a:

answer

recession.

question

In 2006 and 2007, the participation rate was 67%, and the official unemployment rate was about _____. We call this the full employment ("natural") rate of unemployment.

answer

5%.

question

The participation rate and the official unemployment rate have been gradually declining since the 2008-09 recession. The participation rate is now 63% and the official unemployment rate is now about _____.

answer

5%.

question

The "core rate of inflation" in the U.S. economy includes all consumer items except food and energy, and is much more stable than the "all items" CPI. Over the past few years, the core rate of inflation has been about:

answer

2%.

question

To deal with the 2008-09 recession, the central bank lowered interest rates and _____ the "adjusted reserves" in the financial system. The federal government ______ spending, making the deficit much larger.

answer

increased; increased.

question

Over the long run, real GDP in the United States is growing about three percent a year (one percent population plus two percent productivity). According to the "Rule of 70" real GDP (output) should double in about _____ years. (70/growth rate)

answer

23.

question

By potential real GDP the authors are referring to:

answer

the full employment level of real GDP.

question

The textbook lists three sources of long term growth in real GDP. Which of the following does NOT belong on the list?

answer

growth in the money supply.

question

The financial system provides three key services for savers and borrowers. Which of the following does NOT belong on the list?

answer

disintermediation.

question

Assume there is no change in the demand for loanable funds, and that the supply of loanable funds increases. Equilibrium interest rates will _____ and the equilibrium quantity of loanable funds will _____.

answer

decrease; increase.

question

According to the textbook, when the federal government has large budget deficits, this will decrease the supply of loanable funds to private sector borrowers. This is called "crowding out". It means that interest rates should rise and business borrowing and real capital investment should _____.

answer

decrease.

question

The turning points in the business cycle are determined by the National Bureau of Economic Research in Boston. The high points are called _____ and the low points are called _____.

answer

peaks; troughs.

question

During a recession, the sales of consumer durable goods (such as household appliances) will ______ and the unemployment rate will _______.

answer

decrease; increase.

question

The NBER (National Bureau of Economic Research) has identified business cycles since the 1850s. Since 1950 the federal government has used fiscal and monetary policies to "stabilize" the macroeconomy. According to the textbook, the fluctuations in business activity are smaller, recessions are ______, ad expansions (including recoveries) are _______.

answer

shorter; longer.

question

According to the textbook, long-run economic growth is determined by labor productivity, and labor productivity is due to three factors. Which factor does NOT belong on the following list?

answer

reduction in the national debt.

question

Increases in human capital come from:

answer

higher levels of on-the-job training, higher levels of formal education, higher levels of job experience.

question

In order for the United States to increase its stock of real physical capital, household savings must be _____. This means that household consumption must be reduced.

answer

increased.

question

"Capital deepening" refers to providing _____ capital per hour of work which ______ the output per hour.

answer

more; increases.

question

Given a constant level of real capital per hour of work, increases in output per hour are due to technological change (increased productivity). Increases in productivity are due to three factors. Which one does NOT belong on the list?

answer

better buddies.

question

The new growth theory is based on the idea of the accumulation of knowledge capital. The authors list three government policies that can help increase knowledge capital. Which one does NOT belong on the list?

answer

subsidize low income households.

question

If output (real GDP) doubles over 50 years while population also doubles, then:

answer

the standard of living will not change.

question

Real GDP in high income nations tends to grow at a rate of three percent a year. For a low income nation to catch up to the high income nations, the economy of the low income nation must grow:

answer

more than three percent.

question

Which of the following situations can block the economic growth of a low-income nation?

answer

failure to enforce the rule of law, low rates of domestic savings and investment, wars and revolutions.

question

According to the textbook, there are three reasons for the negative slope of the aggregate demand (AD) curve. Which one of the following is NOT a reason for the negative AD slope?

answer

special effect.

question

There are three location variables in the aggregate demand model. Which one does NOT belong on the following list?

answer

the price level.

question

The positive slope of the aggregate supply curve (AS) is due to ______.

answer

sticky prices.

question

There are five location variables in the aggregate supply model. The level of potential GDP (LRAS) increases by three percent a year. This will cause the aggregate supply (AS) curve to shift:

answer

to the right.

question

There are five location variables in the aggregate supply model. Assume that productivity increases. According to the textbook, this will cause the AS curve to shift:

answer

to the right.

question

[Monetary Policy] When the Fed increases interest rates, investment spending will decrease, and the aggregate demand curve will shift:

answer

to the left.

question

[Fiscal Policy] The federal government increases expenditures on defense by $500 billion. The aggregate demand curve will shift ______..

answer

to the right.

question

Assume that the U.S. economy is at full employment output (potential real GDP). Then AD increases while AS remains unchanged. Real GDP _______ and the price level would _______.

answer

increase; increase.

question

Based on our handout, the financial markets consist of:

answer

equity markets and debt markets.

question

The New York Stock Exchange is the leading stock exchange in the world. Stock prices on this exchange are measured by the Dow-Jones Industrial Stock Index and the:

answer

Standard and Poor 500 Index.

question

You own a $1000, 30 year bond issued by the State of Tennessee in 1995 which carries a coupon yield of 4%. The annual interest payment is:

answer

$40.

question

Refer to the previous question. The present long term interest rate is 2%. The current market price of your bond is:

answer

more than $1000.

question

It is 2015 and your bond is redeemed by Tennessee. Long term interest rates are now 5%, so what is the redemption price of your Tennessee bond?

answer

equal to the face value of $1000.

question

Corporations get money to buy physical capital by selling shares of stock to owners (equity capital) and selling bonds to lenders (debt capital). If XYZ Corporation stops paying dividends on its shares of stock, then:

answer

nothing will happen.

question

Your grandparents give you $100 for your birthday and you spend it on a video game. What function of money are you using?

answer

medium of exchange.

question

The M2 measure of the money supply includes currency outside of banks and certain types of bank deposits. Which of the following does NOT belong on this list?

answer

life insurance policies.

question

Banks create money (M1 and M2) by making ______ and adding the funds to the ______.

answer

loans; borrower's checking account.

question

The lending capacity of an individual bank is equal to the amount of excess _____.

answer

reserves.

question

You are a billionaire and you deposit $2 million in cash in the Bank of America. If the M2 money supply increases by $20 million, then the simple deposit multiplier is:

answer

10.0

question

The Federal Reserve System uses three monetary policy tools to manage the money supply. Which tool is the most important?

answer

open market operations.

question

What is the name of the group within the Federal Reserve System that meets every six weeks and determines monetary policy (interest rates and the size of the money supply)?

answer

Federal Open Market Committee.

question

The "shadow banking system" refers to financial institutions that are not banks, and usually deal in intermediate and long-term financial activities, such as mortgages, life insurance policies, and pension funds. These institutions were involved in _____ activities which led to the 2007-2009 financial crisis.

answer

securitization.

question

The equation of exchange is MV=PY. These terms are (respectively):

answer

M2; velocity; GDP chain price index; real GDP.

question

Assume real GDP is growing three percent each year. If the Fed increases the money supply (M2) by six percent per year, velocity is increasing one percent per year, then according to the equation of exchange, inflation should be about:

answer

four percent per year.

question

According to your handout, fiscal policy is:

answer

changes in federal government taxing and spending to change the level of AD.

question

According to your handout, monetary policy is:

answer

changes in interest rates and the money supply to change the level of AD.

question

The textbook lists four goals for monetary policy. Which of the following is NOT on that list?

answer

high unemployment.

question

The Fed typically uses the _____ rate as its policy target.

answer

interest.

question

The relationship between the nominal interest rates and the _____ money is _______ due to the opportunity cost of holding money.

answer

demand for; inverse.

question

When the economy expands (real GDP increases), the demand for money will ______. Assume no change in the supply of money, then the equilibrium nominal interest rate will ______.

answer

increase; increase.

question

The FOMC sees an "inflationary gap" in the economy - real GDP is too high and price inflation is too high. The Trading Desk at the New York FRB will be instructed to _____ securities in the open market which will ______ the reserves in the banking system. Bank lending and M2 will decline as a result.

answer

sell; decrease.

question

The FOMC sees a "recessionary gap" in the economy - real GDP is too low and unemployment is too high. The Trading Desk at the New York FRB will be instructed to ______ securities in the open market which will ______ the reserves in the banking system. Bank lending and M2 will increase as a result.

answer

buy; increase.

question

The FRB makes an open market purchase of $100 million in U.S. Treasury bonds. If the M2 money supply increases by $200 million, then the money multiplier is:

answer

2.00

question

Which of the following describes the cause-effect chain of a "tight" (contradictory) monetary policy?

answer

A decrease in the money supply will raise the interest rate, decrease investment spending, increase AD, and decrease real GDP.

question

The interest rate which the Fed uses as the primary interest rate target is the:

answer

federal funds interest rate.

question

The Fed Oversight Reform and Modernization Act (FORM) would require the Federal Reserve System to set federal funds target rates according to a rule. The rule that is mentioned in the textbook is the:

answer

Taylor Rule.

question

Many economists feel that the Fed should not target interest rates, but use other macroeconomic variables instead. For example, the inflationary rule targets the growth rate of:

answer

the price level.

question

The Housing Market Bubble (2002-2007) resulted in a spike in housing prices and housing sales. The bubble was linked to the securitization activities of the shadow banking system. To deal with the financial crisis in 2008 (part of the Great Recession), the FOMC _____ the target federal funds rate, and ______ the banking system.

answer

reduced; added reserves to.

question

Monetary policy has been described as "asymmetrical". That means monetary policy is _____ in reducing AD in an overheated, inflationary expansion. But monetary policy is _______ in expanding AD in a recession if confidence levels are low. In a recession, fiscal policy is stronger.

answer

effective; not effective.

ECON 2210 Principles of Macroeconomics Final Exam – Flashcards

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