The fundamental problem of economics is:
The scarcity of resources relative to human wants
A consequence of the economic problem of scarcity is that:
Choices have to be made about how resources are used.
Opportunity cost may be defined as the:
Goods or services that are forgone in order to obtain something else.
At which point is society employing some of its available technology but not all of it? (See Figure 1.1.)
C (point inside the curve)
At which point is society producing the most output possible with the available resources and technology? (See Figure 1.1.)
B (point on the curve)
According to the law of increasing opportunity costs:
Greater production of one good requires increasingly larger sacrifices of other goods.
A point on a nation’s production-possibilities curve represents:
The full employment of resources to achieve a particular combination of goods and services.
Investment goods, as defined by economists, include:
If all nations specialize in their area of comparative advantage and then trade, total world output will:
The investment in human capital through education and training can result in:
The goal of the consumer in a market economy is to use his/her limited income to buy:
The set of goods and services that maximizes their utility.
he goal of the business firms in a market economy is to maximize:
Ceteris paribus, if the price of a digital camera rises, then we can expect:
A decrease in the quantity demanded of digital cameras
Ceteris paribus, which of the following would you expect to have no effect on the demand for automobiles?
An increase in the price of automobiles
If bagels and donuts are substitutes, then a decrease in the price of donuts will result in:
A decrease in the demand for bagels.
Ceteris paribus, which of the following is most likely to cause a decrease in the supply of skateboards?
An increase in the cost of materials used to produce skateboards
Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then:
The supply curve for monkey wrenches will shift to the left.
If there is a shortage at a given price, then:
That price is less than the equilibrium price.
As a result of a shortage:
Producers increase output and raise the price.
An increase in the supply of gasoline, ceteris paribus, will cause equilibrium price:
To fall and quantity to rise.
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?
Shortages of building materials and a slower recovery from the storm
The equilibrium price and quantity in Figure 3.2 are, respectively:
$9 and 30 units.
If the actual market price were fixed at $15 per unit in Figure 3.2:
There would be a surplus of 40 units.
Market failure leads to:
Public goods being under-produced.
When market failure occurs, the role of government is to:
Push market outcomes closer to the ideal.
A public good:
Experiences the free-rider dilemma.
The government’s role in limiting smoking in many buildings is justified by considerations of:
Social demand is equal to:
Market demand plus or minus externalities.
A natural monopoly is:
An industry in which one firm can achieve economies of scale over the entire range of market supply.
National-income accounts assist:
Economic policy makers in formulating policies and evaluating performance.
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:
If real GDP falls from one period to another and the price level stays the same we can conclude that:
Nominal GDP decreased.
An increase in the average level of prices of goods and services.
National income is a measure of:
The income earned by the factors of production in producing GDP.
Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should be:
A decrease in the demand for airline tickets.
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:
Demand for baseballs to decrease.
Which of the following is not held constant along a given supply curve for a good?
If the quantity demanded of a good is greater than the quantity supplied of the good at the current price, then:
Price will increase until it reaches the equilibrium price.
A rightward shift of the market demand curve for MP3 players, ceteris paribus, causes equilibrium:
Price to increase and quantity to increase.
National-income accounting is defined as the:
Measurement of aggregate economic activity.
A furniture factory produces dining room sets. The lumber they purchase from the lumberyard is a/an:
Real GDP is more accurate than nominal GDP in making comparisons of output over time because:
Nominal GDP can increase simply because of price increases over time.
A nation’s production possibilities curve should, ceteris paribus, shift:
Outward if net investment is positive.
To measure an economy’s output adjusted for changes in the price level, one would use:
Any imperfection in the market mechanism that prevents optimal outcomes is known as:
The macro consequence of unemployment is:
Lost output for the economy.
To be officially counted as unemployed, one must be:
Actively seeking employment and currently not working.
What is the unemployment rate in 2006 in Table 6.1?
Do not actively seek employment, although they desire to be employed.
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:
During an economic downturn, consumers spend considerably less on goods and services. This results in layoffs, and the laid off workers are classified as:
An increase in the average level of prices of goods and services.
Which of the following measures changes in the average price of consumer goods and services?
The inflation rate is the:
Annual percentage rate increase in the average price level.
If the CPI increases from 250 to 275 for one year, the rate of inflation for that year is:
The price index that refers to all goods and services produced is the:
Based on Table 7.1, the rate of inflation between 2002 and 2004 using the GDP deflator is:
Alternating periods of economic growth and contraction in real GDP define:
The business cycle.
According to classical economists, market-driven economies:
Are typically self-adjusting.
Which of the following is characteristic of a downturn in the business cycle?
Lower real output
Real GDP is better than nominal GDP for measuring growth because real GDP has been adjusted for changes in:
The price level.
Which of the following is illustrated by the aggregate demand curve?
How total quantity of output demanded varies with the average price level
Macro equilibrium always occurs when:
Aggregate demand equals aggregate supply at the average price level of the economy.
Which of the following is a potential problem at macro equilibrium?
It is inconsistent with the macroeconomic goals
Ceteris paribus, the price level will decrease if the aggregate:
Demand curve shifts to the left.
According to Keynesian theory, the correct fiscal policy to stimulate the economy would be to:
increase government expenditures to increase aggregate demand.
According to Keynes, unemployment resulted from:
Insufficient spending on the part of consumers, business, and government.
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:
Increase AD by increasing government spending.
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:
AD by reducing interest rates.
The components of aggregate demand are:
Consumption, government spending, net exports, and investment.
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:
0.75. The MPC is equal to the change in consumption spending divided by the change in disposable income. (1500/2000 = .75)
Suppose the consumption function is C = $200 + 0.85YD. If disposable income is $400, consumption is:
$540. The level of consumption is equal to autonomous consumption plus the disposable income multiplied by the MPC; .85×400 + 200 = 540.
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?
There is a recessionary gap
According to Keynes, cyclical unemployment is caused by too:
Little aggregate demand
The economy will not reach and maintain its goals of full employment and price stability if aggregate demand is too:
Great, too small or unstable
Using Figure 9.6, if full employment occurs at QC then aggregate demand is:
Too small causing cyclical unemployment.
Using Figure 9.6, if full employment occurs at QB then aggregate demand is:
An addition of spending to the circular flow of income is:
If an economy is at full employment and investment spending decreases while all other levels of spending remaining constant then the price level:
Decreases and output decreases.
If an economy is at full employment and consumption spending decreases while all other levels of spending remaining constant then:
Increased unemployment results.
The marginal propensity to consume is:
The fraction of each additional dollar of disposable income spent on consumption.
Suppose an economy can be described by the consumption function C = 250 + 0.90YD and I = $300. What is the multiplier?
10. The multiplier is equal to 1 ÷ (1 – MPC), and MPC is the slope variable.
If the MPC = 0.80, the cumulative decrease in total spending resulting from an initial $150 recessionary gap would be:
$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).
If leakages are greater than injections, then equilibrium output will be:
Less than full-employment output and a recessionary gap will occur.
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:
An amount greater than the recessionary GDP gap because the spending increase raises the price level.
In the short run, if AD increases the unemployment rate will:
Fall and the price level will rise.
When an economy is operating at “full employment,” as economists usually define the term:
The unemployment rate is between 4-6 percent.
To eliminate an AD shortfall of $100 billion when the economy has an MPC of 0.50, the government should increase spending by:
$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.
Given a $500 billion AD shortfall and an MPC of 0.75, the desired fiscal stimulus would be:
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.
Assume the MPC is 0.80. If the government wants to eliminate an AD shortfall of $300 billion it should:
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.
f the government cuts taxes by $200 million and simultaneously decreases government spending by $200 million, then:
People will spend only a part of their tax cut, so aggregate demand will eventually fall by $200 million.
Using Figure 11.1, which fiscal policy action would increase aggregate demand from AD1 to AD3?
A decrease in taxes
Which of the following is an argument against balancing the federal budget?
Doing so may prevent the government from pulling the economy out of recession.
The national debt is:
The accumulation of annual deficit flows
Refers to the annual interest payments on the debt.
The banking system can lend more than the sum of its excess reserves because:
Banks are required to keep only a fraction of deposits on reserve.
When the reserve requirement changes, which of the following will change for an individual bank?
Required reserves, excess reserves, lending capacity
A single bank with $10,000 of reserves and a reserve ratio of 25 percent could support total transactions account balances of at most:
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:
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:
The primary method for controlling the money supply in the United States is to limit the:
Volume of loans the banking system can make.
The government uses ____________ to regulate the amount of money banks lend.
Which of the following is responsible for the Fed’s daily activity in financial markets?
A change in the reserve requirement causes a change in all of the following except:
Which of the following is the market where reserves can be borrowed by one bank from another bank for very short periods of time?
Federal funds market
When the Fed raises the discount rate all of the following result except:
It expands the lending capacity of the banking system.
Which of the following is the tool used most frequently by the Fed?
Open market operations
When the Fed buys bonds from the public, it:
increases the flow of reserves to the banking system.
Using Figure 15.2, the equilibrium rate of interest is:
In Figure 15.2, if the money supply decreased from $200 billion to $100 billion, which of the following would be likely to occur?
Aggregate demand would decrease
The effectiveness of monetary policy is influenced by:
The time it takes for lower interest rates to make investment spending more profitable.
Long-term interest rates may not mirror short-term interest rates if:
Lenders are reluctant to make loans.
Which of the following is a series of events that accurately describes the steps by which restrictive monetary policy is effective?
Decrease in M1, increase in interest rate, decrease in I
A decrease in aggregate demand could be caused by:
Contractionary monetary policy.
If the Federal Reserve raises the discount rate, we would expect the:
AD curve to decrease.
If the Fed’s objective is to stimulate the economy, which of the following gives the correct sequence of events?
The money supply increases, interest rates decrease, investment increases, AD increases
In a graph showing investment demand, the effect of a higher discount rate could best be represented by, ceteris paribus:
A movement up the investment demand curve.
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:
Increase the investment in human capital.
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?
A combination of monetary policy and supply-side policy
Supply-side economists favor tax incentives that:
Which of the following is likely to occur because of a decrease in marginal tax rates?
An increase in aggregate supply because of an increased incentive to work
Which of the following policies is a supply-side lever?
Human capital investment
Stagflation refers to:
The simultaneous occurrence of inflation and unemployment.
Supply-side policies are designed to achieve a:
Lower inflation rate and a lower unemployment rate.
According to Figure 17.7, a shift in the long run aggregate supply from LRAS1 to LRAS2 would most likely result from:
An increase in labor skills.
A movement from point C to point E in Figure 17.5 illustrates:
An increase in the capacity to produce.
Tax credits for new investment are likely to:
Increase physical capital investment.
Countries that have higher savings rates are likely to have:
A higher investment rate as a percentage of GDP and a higher growth rate of real GDP.
Human capital is:
The knowledge and skills possessed by the labor force.
Economic growth implies a:
Rightward shift of the long-run aggregate supply curve
Which of the following must occur to achieve large and lasting increases in output?
An increase in potential GDP
Which of the following is not true about macroeconomic models?
They tend to agree with each other about how the economy works
Which of the following is true about stagflation?
It can be corrected by policies that increase aggregate supply
If the United States raises tariffs on foreign goods it may achieve:
Greater profitability of import-competing firms.
Protectionism achieves which of the following goals?
Protection of infant industries
Producers of paper products are most likely to be in favor of:
Protectionism in the paper product market but free trade in the lumber market.
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:
Japan has a comparative advantage.
A country with a comparative advantage in producing computer chips:
Has a lower opportunity cost of producing computer chips than its trading partners.
The expansion of world output as a result of trade is mainly due to the effects of:
Specialization according to comparative advantage.
When a country has a lower opportunity cost in producing a good than any other country:
Consumption possibilities will increase with specialization and trade.
Refer to Figure 20.3 for the dollar-Swiss franc foreign-exchange market. Which of the following is true?
An increase in supply from S1 to S2 could be caused by an increase in the U.S. demand for Swiss chocolate.
Suppose the supply of dollars increased from S1 to S2 in Figure 20.3. As a result of this change:
U.S. computer exports to Switzerland will be lower priced.
Ceteris paribus, if African countries experience a drought and purchase food from the United States, the currencies of the African countries should:
Depreciate, and the dollar should appreciate.
Which of the following groups would be aided by a depreciation of the American dollar?
American producers of goods for export.
The depreciation of a country’s currency causes the price of imports to:
Rise and the prices of exports to fall.
A depreciation of the Korean won against the U.S. dollar will:
Raise the won price of U.S. goods.
If the exchange rate between the U.S. dollar and Japanese yen changes from $1 = 100 yen to $1 = 90 yen, then
Japanese tourists to the U.S. will benefit.
When Americans buy Mercedes-Benz automobiles made in Germany, they are generating a:
Supply of U.S. dollars and a demand for a foreign currency.
Which of the following statements is true?
U.S. GDP per capita is five times larger than the world average.
According to the World Bank, _______ people are classified as being in extreme poverty.
Over 1 billion
The market demand curve for money is:
Downward sloping to the right because people wish to hold less money at higher interest rates and more money at lower interest rates.
The equilibrium rate of interest is determined by:
Money demand and money supply.
Which of the following is true about the equilibrium rate of interest?
The Fed can change it by changing the money supply
Ceteris paribus, if the Fed sells bonds through open market operations, the money:
Supply curve should shift leftward.
The success of Fed intervention depends on how well:
Changes in long-term interest rates mirror changes in short-term interest rates.