question

In economics, scarcity means that:

answer

Society's desires exceed the want-satisfying capability of the resources available to satisfy those desires.

question

Given that resources are scarce:

answer

Opportunity costs are experienced whenever choices are made.

question

Opportunity cost may be defined as the:

answer

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

question

The market mechanism may best be defined as:

answer

The use of market prices and sales to signal desired output.

question

When the invisible hand does not produce optimal outcomes for the economy, there is evidence of:

answer

Market failure.

question

Macroeconomics focuses on the performance of:

answer

The overall economy.

question

Scarcity results when available resources cannot satisfy all desired uses of those resources.

answer

True

question

Which of the following statements is true about the United States economy?

answer

The U.S. produces approximately one-fifth of the world's production.

question

The government establishes the rules of the game for economic transactions in order to:

answer

Legitimatize and enforce contracts.

question

The term externalities refer to:

answer

The costs and benefits of a market activity borne by a third party.

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

Which of the following is purchased in a factor market?

answer

The labor of a state university professor

question

Individual consumers supply ____ and purchase ____.

answer

Factors of production; final goods and services

question

According to the law of demand, during a given period of time, the quantity of a good demanded:

answer

Increases as its price falls, ceteris paribus.

question

According to the law of demand, a demand curve:

answer

Has a negative slope.

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 that pencils and pens are substitutes. If the price of pencils rises, then we will see:

answer

An increase in the demand for pens.

question

Which of the following is a determinant of supply?

answer

Available technology

question

Which of the following events would cause a rightward shift in the market supply curve for automobiles?

answer

A technological improvement which reduces the cost of production

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 surplus at a given price, then:

answer

That price is greater than the equilibrium price.

question

Market failure implies that the market mechanism:

answer

Leads the economy to the wrong mix of output.

question

When external costs result from the production of a good:

answer

Both producers and consumers have an incentive to produce and consume too much.

question

The market will overproduce goods that have external costs because:

answer

Producers experience lower costs than society.

question

Antitrust activity addresses:

answer

Market power.

question

Which of the following is a source of government failure but is not typically an example of market failure?

answer

Waste

question

According to cost-benefit analysis, a government project should be undertaken as long as the:

answer

Benefits exceed the opportunity costs.

question

The GDP per capita is the most practical way to:

answer

Make international comparisons of the standard of living.

question

If GDP grows more rapidly than population for a particular country over a period of time, then we can determine that:

answer

GDP per capita has increased.

question

Suppose a friend claims he is helping the economy by throwing trash on the street rather than in trash cans because the extra expenditures necessary to clean up the streets will increase GDP. Your friend is:

answer

Right. GDP will increase, ceteris paribus.

question

When an individual makes repairs to her own home instead of hiring a company to make the repairs, the activity is:

answer

Productive but excluded from GDP because it is a nonmarket activity.

question

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

answer

Intermediate good.

question

Value added is the:

answer

Increase in market value of a product that takes place at each stage of the production process.

question

The sum of value added:

answer

Is one way to compute the GDP.

question

The value of final output produced in a given period, measured in current prices is:

answer

Nominal GDP.

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

In calculating GDP imports are:

answer

Subtracted from exports because they are part of another country's GDP.

question

The value of total output must equal the value of total income in an economy for all of the following reasons except:

answer

Government expenditures must equal government revenues.

question

The value of final output produced in a given period, measured in current prices is:

answer

Nominal GDP.

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

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

Investment is the:

answer

Expenditure on new plant, equipment, and structures plus changes in business inventories.

question

An increase in business inventories during a time period, ceteris paribus, will:

answer

Increase GDP during that period.

question

Net exports are:

answer

The value of exports minus the value of imports.

question

In calculating GDP imports are:

answer

Subtracted from exports because they are part of another country's GDP.

question

The components of GDP are:

answer

C + I + G + (X - M).

question

The labor-force participation rate is the number:

answer

In the labor force divided by the working-age population.

question

The type of unemployment that economists generally associate with normal growth of the labor force and expanding job opportunities in a dynamic economy is:

answer

Frictional unemployment.

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

Tom worked at NASA for thirteen years. In the fourteenth year, his job was automated, resulting in him losing his job. He looked for a new job for eighteen months before finding a job that paid less. During his eighteen month job search, Tom was considered to be:

answer

Structurally unemployed.

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

Inflation means:

answer

Average prices are rising, but it is not certain what is happening to relative prices.

question

Relative price is:

answer

The price of one good in comparison with the price of other goods.

question

Changes in relative prices may occur in a period of:

answer

Stable prices, inflation or deflation.

question

Which of the following explains why redistribution occurs during inflation?

answer

People buy different combinations of goods and services and own different combinations of wealth

question

The term "nominal income" refers to:

answer

Money income measured in current dollars.

question

Your real income is:

answer

The purchasing power of the money you receive.

question

The Consumer Price Index is:

answer

A measure of changes in the average price of consumer goods and services.

question

A sudden increase in inflation, ceteris paribus:

answer

Raises the CPI and reduces real income.

question

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

answer

The business cycle.

question

According to classical theory:

answer

Flexible wages and prices allow a laissez-faire economy to adjust to shifts in aggregate demand.

question

According to classical economists, market-driven economies:

answer

Are typically self-adjusting.

question

Say's Law states that:

answer

Supply creates its own demand.

question

Unlike the Classical economists, Keynes asserted that:

answer

The economy was inherently unstable.

question

A decline in total output for two or more consecutive quarters is referred to as:

answer

A recession.

question

Determinants of macro performance work on macro outcomes through:

answer

Aggregate supply and demand.

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

The aggregate demand curve is downward-sloping because, other things being equal:

answer

People buy more goods and services at lower average prices.

question

The real-balances effect says that an increase in the price level:

answer

Reduces the value of savings, which reduces the purchase of goods and services.

question

Ceteris paribus, if average prices in the U.S. economy fall, then the:

answer

Foreign-trade effect will lead to a higher quantity of output demanded.

question

Ceteris paribus, if average prices in the U.S. economy fall, then the:

answer

Interest-rate effect will lead to a higher quantity of output demanded.

question

Macro equilibrium always occurs when:

answer

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

question

The unique situation in which the behavior of buyers and sellers is compatible is referred to as:

answer

Macro equilibrium.

question

Alternating periods of economic growth and contraction are:

answer

The result of recurrent shifts of aggregate demand and aggregate supply.

question

If full employment is associated with an output that is greater than the current macro equilibrium, which of the following best describes the impact of a rightward shift of the aggregate supply curve, ceteris paribus?

answer

A lower price level and a higher level of output

question

Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP?

answer

Demand shifts to the right and supply shifts to the right

question

Which of the following economic perspectives focuses on the need for government to shift aggregate supply to correct problems of unemployment and inflation?

answer

Supply-side

question

A vertical aggregate supply curve:

answer

Implies that aggregate demand shifts have no impact on output.

question

The only policy lever that is effective against unemployment when the AS curve is vertical is:

answer

Supply-side policy.

question

Aggregate demand is the total quantity of output:

answer

Demanded at alternative price levels in a given time period.

question

The components of aggregate demand are:

answer

Consumption, government spending, net exports, and investment.

question

Which of the following is not true about the marginal propensity to consume?

answer

It is always equal to or greater than 1

question

The MPC indicates the portion of:

answer

An additional dollar of income that will be spent.

question

The MPC + MPS must always equal:

answer

1.

question

Which of the following statements is not true about the consumption function?

answer

It indicates that consumption is inversely related to disposable income

question

The line described by the consumption function C = a + bYD will change its slope when:

answer

The MPC changes.

question

An increase in the income-dependent portion of the consumption function would correspond to a:

answer

Movement along the consumption function to the right.

question

Investment spending includes expenditures on all of the following except:

answer

Stocks and bonds.

question

Which of the following is not considered to be an important determinant of investment?

answer

Current disposable income

question

Which of the following causes a movement along the investment demand curve?

answer

A change in the rate of interest

question

Which of the following will cause the aggregate-demand curve to shift to the left?

answer

A decrease in consumer and business confidence because of a terrorist attack

question

Which of the following is eliminated when output equals full-employment GDP?

answer

Cyclical unemployment

question

Keynes was concerned that at macroeconomic equilibrium the economy would experience:

answer

Neither full employment nor price stability.

question

A recessionary gap:

answer

Is the amount by which total spending exceeds GDP.

question

Which of the following occurs when the spending on final goods and services exceeds full-employment GDP?

answer

Inflationary gap

question

When the economy is at equilibrium:

answer

Leakages equal injections.

question

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

answer

An injection.

question

Injections include:

answer

Exports

question

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

answer

A GDP gap emerges.

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

When unwanted inventories pile up in retail stores, retail managers will take actions that lead to greater:

answer

Unemployment.

question

The multiplier process can occur when a decrease in investment spending:

answer

Reduces household incomes causing consumers to buy fewer goods and services.

question

The marginal propensity to consume is:

answer

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

question

An initial (autonomous) decrease in aggregate demand will likely be:

answer

Much smaller than the eventual decline in spending.

question

Assuming an upward-sloping aggregate supply curve, when aggregate demand decreases, unemployment:

answer

Increases and the price level decreases.

question

A decrease in a recessionary GDP gap will most likely be associated with a decrease in:

answer

Cyclical unemployment.

question

Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to $10 billion. If AD shifts to the left by $10 billion:

answer

Real output will fall by less then $10 billion.

question

Fiscal policy works primarily through:

answer

Shifts of the AD curve.

question

Which of the following fiscal policies would cause a decrease in aggregate expenditures?

answer

An increase in taxes and a decrease in government spending

question

From a Keynesian perspective, the way out of recession is to:

answer

Get consumers to spend more on goods and services.

question

A tax cut intended to increase aggregate demand is an example of:

answer

Fiscal stimulus.

question

In a diagram of aggregate demand and supply curves, the GDP gap is measured as the:

answer

Horizontal distance between the equilibrium output and the full-employment output.

question

The AD shortfall is the amount of additional aggregate demand needed to achieve full employment after allowing for:

answer

Price-level changes.

question

Fiscal policy works primarily through:

answer

Shifts of the AD curve.

question

A tax cut intended to increase aggregate demand is an example of:

answer

Fiscal stimulus.

question

If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward sloping:

answer

A recessionary GDP gap will still exist.

question

The AD shortfall is the amount of additional aggregate demand needed to achieve full employment after allowing for:

answer

Price-level changes.

question

Given an economy that is experiencing high unemployment, the amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is:

answer

The AD excess.

question

Ceteris paribus, if the AD shortfall equals $600 billion, then the federal government can close it by increasing:

answer

Government spending by less than $600 billion.

question

Which of the following is true when the government attempts to move the economy to full employment by increasing spending?

answer

The total change in spending includes both the new government spending and the subsequent increases in consumer spending.

question

Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment?

answer

The multiplier process will contribute to an additional increase in aggregate demand which will cause an inflationary gap.

question

The desired tax cut to close a GDP gap is given by:

answer

Desired fiscal stimulus ÷ MPC.

question

A tax cut:

answer

Contains less fiscal stimulus than an increase in government spending of the same size.

question

Which of the following would cause the level of income to change by the greatest amount, ceteris paribus?

answer

An increase in defense spending of $10 billion

question

When the macro equilibrium is above full employment, fiscal policy should be used to shift aggregate demand by the amount of:

answer

The AD excess.

question

The desired fiscal restraint is equal to:

answer

Excess AD divided by the multiplier.

question

Deficit spending results whenever the government:

answer

Finances expenditures that exceed tax revenues.

question

Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?

answer

Less government expenditure and higher taxes

question

If full-employment output exceeds equilibrium output, greater deficit spending will result in a:

answer

Smaller recessionary gap.

question

A budget surplus is:

answer

An excess of government revenues over government expenditures in a given time period.

question

When there is excess aggregate demand, the appropriate policy would be for the government to:

answer

Make budget surpluses larger.

question

The elements of the federal budget not determined by past legislative or executive commitments are:

answer

Discretionary fiscal spending.

question

Much of each year's federal budget is considered "uncontrollable" because:

answer

Most of the current revenues and expenditures are the result of decisions made in prior years.

question

Which of the following is not an automatic stabilizer?

answer

Defense spending

question

Automatic stabilizers:

answer

Help to moderate the extremes of the business cycle.

question

Which of the following is most likely to increase a federal budget surplus?

answer

A higher inflation rate and a lower unemployment rate

question

For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy, the actual deficit is divided into which of the following components?

answer

Structural and cyclical deficits

question

In contrast to the structural deficit, the cyclical deficit reflects:

answer

Fluctuations in economic activity.

question

The major reason why budget deficits were reduced during the 1990s and why there was a budget surplus in 1998-2000 is because of:

answer

The growth of the U.S. economy.

question

A decrease in private-sector borrowing and spending caused by increased government borrowing is:

answer

Crowding out.

question

The opportunity cost of the debt is:

answer

Less of an issue if the economy is below full employment since crowding out is less likely to occur.

question

The national debt is:

answer

The accumulation of annual deficit flows.

question

Policies designed to pay off the national debt will result in:

answer

A smaller level of AD.

question

Interest payments on the national debt:

answer

Are a redistribution of income from taxpayers to bondholders.

question

The "real burden" of the debt is directly related to:

answer

The idea of opportunity cost.

question

When money serves as a mechanism for transforming current income into future purchases it is functioning as a:

answer

Store of value.

question

Which of the following is not included in the narrowest definition of the money supply?

answer

Credit card balances

question

The different components of the money supply reflect:

answer

Variations in liquidity and accessibility of assets.

question

Deposit creation occurs when:

answer

A bank lends money.

question

One of the essential functions a bank performs is that of:

answer

Transferring money from savers to spenders.

question

When cash or coins are initially deposited into a bank:

answer

The composition of the money supply changes, but the size of the money supply does not change.

question

The ratio of a bank's reserves to its total transactions deposits is known as the:

answer

Reserve ratio.

question

The minimum amount of reserves a bank is required to hold is known as:

answer

Required reserves.

question

Which of the following sets the legal minimum reserve ratio?

answer

The Federal Reserve

question

Excess reserves are:

answer

Total reserves less required reserves.

question

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

answer

Monetary policy

question

The Federal Reserve System was created by:

answer

The Federal Reserve Act in 1913.

question

Which of the following services is performed by the regional Federal Reserve banks?

answer

Providing currency to private banks

question

The Board of Governors consists of:

answer

7 members, appointed for 14 year terms.

question

The Federal Open Market Committee includes:

answer

All 7 governors and 5 of the regional Reserve bank presidents.

question

The current chairman of the Federal Reserve is:

answer

Ben Bernanke.

question

All of the following are tools available to the Fed for controlling the money supply except:

answer

Taxes.

question

The federal funds rate is the interest rate charged when:

answer

One bank lends to another bank.

question

The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the:

answer

Discount rate.

question

By raising and lowering the discount rate, the Fed changes the:

answer

Incentive for banks to borrow reserves.

question

Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?

answer

Open market operations

question

Open market operations involve the Fed:

answer

Buying or selling bonds.

question

Stagflation is the result of

answer

A decrease in aggregate supply.

question

Which of the following characterizes stagflation?

answer

An increase in both unemployment and inflation.

question

The Phillips curve shows

answer

A historical (inverse) relationship between the rate of unemployment and the rate of inflation.

question

A movement along the Phillips curve shows that the unemployment rate and inflation rate are

answer

Inversely related to each other.

question

Demand-side policies alone result in which of the following?

answer

A movement along the Phillips curve.

question

According to supply-side theory, which of the following would cause a leftward shift in the aggregate supply curve?

answer

Increasing government regulations.

question

Supply-side policies are designed to achieve a

answer

Lower inflation rate and a lower unemployment rate.

question

Which of the following is NOT an example of positive supply-side policy?

answer

Higher marginal tax rates.

question

According to supply-side theorists, taxes

answer

Alter disposable income and affect the incentives to work and produce.

question

Supply-side economists favor tax incentives that

answer

Encourage investment.

question

Supply-side economists favor tax incentives that

answer

Encourage investment.

question

Supply-side economists favor tax incentives that

answer

Encourage investment.

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