ECON EXAM 2 Study Guide
A company sells steel to a scooter company for $150. The scooter company uses the steel to produce a scooter, which it sells for $290. Taken together, these two transactions contribute
$290 to GDP
The imposition of a binding price ceiling on a market causes
(A) quantity demanded to be greater than quantity supplied.
If a price floor is not binding, then
(A) the equilibrium price is above the price floor.
Which of the following statements about tax burden is correct?
(B) Who bears the burden of a tax depends on the price elasticities of supply and demand.
Which of the following causes the price paid by buyers to be different than the price received by sellers?
(C) Tax on the good
If a binding price floor is imposed on the drone market, then
(C) a surplus of drones will develop
A shortage results when a
(C) binding price ceiling is imposed on a market
A $1.39 tax levied on the buyers of elderberry juice will shift the demand curve
(C) downward by exactly $1.39
Suppose the government imposes a 20-cent tax on the sellers of artificially-sweetened beverages. The tax would shift:
(C) supply, raising the equilibrium price and lowering the equilibrium quantity in the market for artificially sweetened beverages.
Under rent control, landlords can cease to be responsive to tenants' concerns about the quality of the housing because
(C) with shortages and waiting lists, they have no incentive to maintain and improve their property.
When a tax is placed on the buyers of lemonade, the
(D) burden of the tax will be shared by the buyers and the sellers, but the division of the burden is not always equal.
If a tax is levied on the sellers of a product, then the demand curve will
(D) not shift
If a price ceiling is not binding, then
(D) there will be no effect on the market price or quantity sold.
A price floor is
A legal minimum on the price at which a good can be sold
U.S. GDP and U.S. GNP are related as follows:
GNP = GDP − Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad
Micheal, a U.S. citizen, travels to Jamaica and buys a newly manufactured motorcycle made there. His purchase is included in
Jamaica's GDP, but it is not included in U.S. GDP.
44. Which of the following items is the one type of household expenditure that is categorized as investment rather than consumption?
The purchase of a new house
1. For a closed economy, GDP is $31 trillion, consumption is $7 trillion, taxes are $3.0 trillion and the government runs a surplus of $4 trillion. What are private saving and national saving? a. $21.0 trillion and $25.0 trillion, respectively b. $25.0 trillion and $21.0 trillion, respectively c. −$21.0 trillion and −$25.0 trillion, respectively d. −$21.0 trillion and $25.0 trillion, respectively
a
10. The price index was 105 in Year 1 and 111 in Year 2. What was the inflation rate? a. 5.7 percent b. 0.057 percent c. -5.7 percent d. 105.7 percent
a
14. An increase in the price of bread produced domestically will be reflected in a. both the GDP deflator and the consumer price index. b. neither the GDP deflator nor the consumer price index. c. the GDP deflator but not in the consumer price index. d. the consumer price index but not in the GDP deflator.
a
15. The CPI and the GDP deflator a. generally move together. b. generally show different patterns of movement. c. always show identical changes. d. always show different patterns of movement.
a
19. When the quality of a good improves while its price remains the same, the purchasing power of the dollar a. increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. b. increases, so the CPI understates the change in the cost of living if the quality change is not accounted for. c. decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for. d. decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
a
21. If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is a. −2 percent. b. 0.4 percent. c. 2 percent. d. 12 percent.
a
22. Suppose a closed economy had public saving of −$7 trillion and private saving of $16 trillion. What are national saving and investment for this country? a. $9 trillion, $9 trillion b. $9 trillion, $23 trillion c. $23 trillion, $9 trillion d. $23 trillion, $23 trillion
a
25. To open a print shop you need printers, computers, and furniture. Economists call these expenditures a. capital investment. b. investment in human capital. c. business consumption expenditures. d. personal saving.
a
26. Given that Sarah's income exceeds her expenditures, Sarah is best described as a a. saver or as a supplier of funds. b. borrower or as a demander of funds. c. saver or as a demander of funds. d. borrower or as a supplier of funds.
a
27. Crowding out occurs when investment declines because a budget a. deficit makes interest rates rise. b. deficit makes interest rates fall. c. surplus makes interest rates rise. d. surplus makes interest rates fall.
a
32. What would happen, all else equal, in the market for loanable funds if the government were to decrease the tax rate on interest income? a. There would be an increase in the equilibrium quantity of loanable funds. b. There would be a reduction in the equilibrium quantity of loanable funds. c. There would be no change in the equilibrium quantity of loanable funds. d. The change in loanable funds is uncertain.
a
35. As long as prices are rising over time, then a. the nominal interest rate exceeds the real interest rate. b. the real interest rate exceeds the nominal interest rate. c. the real interest rate is positive. d. the nominal interest rate is a better indicator than the real interest rate of how fast the purchasing power of your bank account is changing over time.
a
39. For any given year, the CPI is the price of the basket of goods and services in the a. given year divided by the price of the basket in the base year, then multiplied by 100. b. given year divided by the price of the basket in the previous year, then multiplied by 100. c. base year divided by the price of the basket in the given year, then multiplied by 100. d. previous year divided by the price of the basket in the given year, then multiplied by 100.
a
41. Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent? a. Substitution bias and introduction of new goods b. Introduction of new goods and unmeasured quality change c. Substitution bias and unmeasured quality change d. Income bias and substitution bias
a
42. Other things the same, a higher interest rate induces people to a. save more, so the supply of loanable funds slopes upward. b. save less, so the supply of loanable funds slopes downward. c. invest more, so the supply of loanable funds slopes upward. d. invest less, so the supply of loanable funds slopes downward.
a
43. If the price a consumer pays for a product is equal to a consumer's willingness to pay, then the consumer surplus relevant to that purchase is a. zero. b. negative, and the consumer would not purchase the product. c. positive, and the consumer would purchase the product. d. There is not enough information given to answer this question.
a
45. A budget deficit a. changes the supply of loanable funds. b. changes the demand for loanable funds. c. changes both the supply of and demand for loanable funds. d. does not influence the supply of or the demand for loanable funds.
a
47. Which of the following counts as part of the supply of loanable funds? a. Bank deposits and purchases of bonds b. Bank deposits but not purchases of bonds c. Purchases of bonds but not bank deposits d. Neither purchases of bonds nor bank deposits
a
49. The source of the supply of loanable funds a. is saving and the source of demand for loanable funds is investment. b. is investment and the source of demand for loanable funds is saving. c. and the demand for loanable funds is saving. d. and the demand for loanable funds is investment.
a
5. In a closed economy, private saving is a. the amount of income that households have left after paying for their taxes and consumption. b. the amount of income that businesses have left after paying for the factors of production. c. the amount of tax revenue that the government has left after paying for its spending. d. always equal to investment.
a
51. If the cost of producing tables increases causing the price of tables to increase, consumer surplus in the table market will a. decrease. b. increase. c. remain constant. d. increase for some buyers and decrease for other buyers.
a
56. Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market? a. An increase in the supply of or a decrease in the demand for loanable funds b. An increase in the supply of or an increase in the demand for loanable funds c. A decrease in the supply of or a decrease in the demand for loanable funds d. A decrease in the supply of or an increase in the demand for loanable funds
a
57. If the government instituted an investment tax credit, then which of the following would be higher in equilibrium? a. Saving and the interest rate b. Saving but not the interest rate c. The interest rate but not saving d. Neither saving nor the interest rate
a
59. If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, there is a a. shortage and the interest rate is below the equilibrium level. b. surplus and the interest rate is above the equilibrium level. c. surplus and the interest rate is below the equilibrium level. d. shortage and the interest rate is above the equilibrium level.
a
61. If there is a shortage of loanable funds, then a. neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium. b. the supply for loanable funds shifts right and the demand shifts left. c. the supply for loanable funds shifts left and the demand shifts right. d. neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.
a
7. An increase in the government's budget surplus means public saving is a. positive and increasing. b. positive and decreasing. c. negative and increasing. d. negative and decreasing.
a
7. As a result of a decrease in price, a. new buyers enter the market, increasing consumer surplus. b. new buyers enter the market, decreasing consumer surplus. c. existing buyers exit the market, increasing consumer surplus. d. existing buyers exit the market, decreasing consumer surplus.
a
8. If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals a. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 1] × 100. b. [(CPI in Year 2 − CPI in Year 1)/CPI in Year 2] × 100. c. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 1] × 100. d. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 2] × 100.
a
8. Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then a. the marginal buyer's willingness to pay for the 100th unit of the good is $25. b. the sum of the five buyers' willingness to pay for the 100th unit of the good is $25. c. the average of the five buyers' willingness to pay for the 100th unit of the good is $25. d. all of the five buyers are willing to pay at least $25 for the 100th unit of the good.
a
Which of the following is included in the calculation of GDP? a. The purchase of tutoring services from a tutor who holds citizenship outside the country but resides within the country. b. The purchase of a new edition of a foreign textbook that was produced in a different nation. c. The purchase of ink and paper supplies by a textbook company for the production of new textbooks. d. The purchase of a used textbook from a friend who took the same class last year.
a
GDP and GNP are identical when
all domestic production is by domestically owned producers and no foreign production is carried out by domestic producers
In a simple circular-flow diagram, total income and total expenditure are
always equal because every transaction has a buyer and a seller.
Most goods and services produced at home and most goods and services produced illegally are excluded from GDP
and most goods and services produced illegally are excluded from GDP
When a tax is placed on the sellers of cell phones, the size of the cell phone market
and the effective price received by sellers both decrease
1. In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 237 for 2015. President Hoover's 1931 salary was equivalent to a 2015 salary of about a. $4,965. b. $1,169,408. c. $1,057,894. d. $16,080,001.
b
10. Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then a. Dallas's consumer surplus would be unaffected. b. Dallas's consumer surplus would increase. c. Dallas's consumer surplus would decrease. d. Dallas should buy fewer strawberries than before.
b
10. The country of Cedarland does not trade with any other country. Its GDP is $17 billion. Its government purchases $5 billion worth of goods and services each year and collects $6 billion in taxes. Private saving in Cedarland is $5 billion. For Cedarland, investment is a. $6 billion and consumption is $7 billion. b. $6 billion and consumption is $6 billion. c. $7 billion and consumption is $7 billion. d. $7 billion and consumption is $6 billion.
b
11. During periods of deflation, the nominal interest rate will be a. higher than the real interest rate. b. lower than the real interest rate. c. the same as the real interest rate. d. possibly higher, lower, or the same as the real interest rate. The answer depends on how much deflation there is in the economy.
b
11. Joe and Bob purchase oranges at a grocery store, but Bob also grows oranges in his backyard. Regarding these two practices, which of the following statements is correct? a. Only Joe's grocery store purchases are included in GDP. b. Only Joe's and Bob's grocery store purchases are included in GDP. c. Joe's and Bob's grocery store purchases are included in GDP. The oranges from Bob's backyard garden are included at their market value. d. Joe's and Bob's grocery store purchases are included in GDP. The oranges from Bob's backyard garden are included at their market value, if Bob provides this information.
b
14. Moving production from a high-cost producer to a low-cost producer will a. lower total surplus. b. raise total surplus. c. lower producer surplus. d. raise producer surplus but lower consumer surplus.
b
17. If the consumer price index was 93 in Year 1, 97 in Year 2, and 100 in Year 3, then the base year must be a. Year 2. b. Year 3. c. Year 1. d. the base year cannot be determined from the given information.
b
17. Suppose there is an early freeze in California that reduces the size of the lemon crop. As the price of lemons rises, what happens to consumer surplus in the market for lemons? a. Consumer surplus increases b. Consumer surplus decreases c. Consumer surplus is not affected by this change in market forces d. We would have to know whether the demand for lemons is relatively elastic or inelastic to make this determination
b
2. If a consumer places a value of $14 on a particular good and if the price of the good is $12, then the a. consumer does not purchase the good. b. consumer enjoys consumer surplus if he or she buys the good. c. market is not a competitive market. d. price of the good will rise due to market forces.
b
23 On a graph, the area below a demand curve and above the price measures a. deadweight loss. b. consumer surplus. c. producer surplus. d. willingness to pay.
b
23. National saving is a. the total income in the economy that remains after paying for consumption. b. the total income in the economy that remains after paying for consumption and government purchases. c. always greater than investment for a closed economy. d. equal to private saving minus public saving.
b
28. Amir tutors in his spare time for extra income. Students are willing to pay $54 per hour for as many hours Amir is willing to tutor. On a particular day, he is willing to tutor the first hour for $18, the second hour for $27.0, the third hour for $32.0, and the fourth hour for $54. Assume Amir is rational in deciding how many hours to tutor. His producer surplus is a. $63.0. b. $85.0. c. $149.0. d. $77.0.
b
28. Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium a. interest rates and the equilibrium quantity of loanable funds rise. b. interest rates rise and the equilibrium quantity of loanable funds fall. c. interest rates fall and the equilibrium quantity of loanable funds rise. d. interest rates and the equilibrium quantity of loanable funds fall.
b
32. If the consumer price index was 100 in the base year and 103 in the following year, then the inflation rate was a. -3 percent. b. 3 percent. c. 1.03 percent. d. 0.3 percent.
b
34. Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then the a. demand for loanable funds would shift rightward, initially creating a surplus of loanable funds at the original interest rate. b. demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate. c. supply of loanable funds would shift rightward, initially creating a surplus of loanable funds at the original interest rate. d. supply of loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.
b
34. Which of the following is true when the price of a good or service falls? a. Buyers who were already buying the good or service are worse off. b. More buyers enter the market. c. The total consumer surplus in the market decreases. d. The total value of purchases before and after the price change is the same.
b
36. In the United States, if the price of imported oil rises so that the prices of gasoline and heating oil rise, then the a. GDP deflator rises much more than does the consumer price index. b. consumer price index rises much more than does the GDP deflator. c. GDP deflator and the consumer price index rise by about the same amount. d. consumer price index rises slightly more than does the GDP deflator.
b
36. The slope of the supply of loanable funds curve represents the a. positive relation between the interest rate and investment. b. positive relation between the interest rate and saving. c. negative relation between the interest rate and investment. d. negative relation between the interest rate and saving.
b
37. Which of the following statements is correct? a. The percentage change in the CPI is a measure of the inflation rate, but the percentage change in the GDP deflator is not a measure of the inflation rate. b. The CPI can be used to compare dollar figures from different points in time. c. Compared to the CPI, the GDP deflator is the more common gauge of inflation. d. The GDP deflator better reflects the goods and services bought by consumers than does the CPI.
b
39. The slope of the demand for loanable funds curve represents the a. positive relation between the real interest rate and investment. b. negative relation between the real interest rate and investment. c. positive relation between the real interest rate and saving. d. negative relation between the real interest rate and saving.
b
4. In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would happen to private and national saving? a. Private and national saving would rise. b. Private saving would rise and national saving would fall. c. Private and national saving would fall. d. Private saving would fall and national saving would rise.
b
40. What basket of goods and services is used to construct the CPI? a. A random sample of all goods and services produced in the economy b. The goods and services that are typically bought by consumers as determined by government surveys c. Only food, clothing, transportation, entertainment, and education d. The least expensive and the most expensive goods and services in each major category of consumer expenditures
b
9. Consider a closed economy. If national saving is greater than zero, which of the following must be true? a. Either public saving or private saving must be negative. b. Y - C - G > 0 c. Investment is negative. d. Y - C - G < 0
b
Scenario 24-1 Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year. 5. Refer to Scenario 24-1. Mia's son current year income in 1944 dollars is a. $513,000. b. $244,604. c. $298,033. d. $19,025.
b
Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct? a. GDP would definitely increase, despite the fact that GDP includes leisure. b. GDP would definitely increase because GDP excludes leisure. c. GDP could either increase or decrease because GDP includes leisure. d. GDP could either increase or decrease because GDP excludes leisure.
b
Which of the following is correct? a. Rent control and the minimum wage are both examples of price ceilings. b. Rent control is an example of a price ceiling, and the minimum wage is an example of a price floor. c. Rent control is an example of a price floor, and the minimum wage is an example of a price ceiling. d. Rent control and the minimum wage are both examples of price floors.
b
A surplus results when a
binding price floor is imposed on a market
A tax on the buyers of smart watches encourages
buyers to demand a smaller quantity at every price
1. If an allocation of resources is efficient, then a. consumer surplus is maximized. b. producer surplus is maximized. c. all potential gains from trade among buyers are sellers are being realized. d. the allocation achieves equality as well.
c
12. Refer to Scenario 24-1. Mia's 1943 income in current year dollars is a. $39,900. b. $424,200. c. $23,180. d. $298,033.
c
16. In a closed economy, public saving is the amount of a. income that households have left after paying for taxes and consumption. b. income that businesses have left after paying for the factors of production. c. tax revenue that the government has left after paying for its spending. d. spending that the government undertakes in excess of the taxes it collects.
c
19 A supply curve can be used to measure producer surplus because it reflects a. the actions of sellers. b. quantity supplied. c. sellers' costs. d. the amount that will be purchased by consumers in the market.
c
2. Two common measures of the overall level of prices are a. the inflation rate and the consumer price index. b. the inflation rate and the GDP deflator. c. the GDP deflator and the consumer price index. d. the cost of living index and nominal GDP.
c
20. In a closed economy, if Y, C, and T remained the same, a decrease in G would a. reduce private saving and public saving. b. increase private saving but not public saving. c. increase public saving but not private saving. d. increase neither private nor public saving.
c
22. The CPI differs from the GDP deflator in that a. the CPI is a price index, while the GDP deflator is an inflation index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator.
c
25. The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the a. CPI is easier to measure. b. CPI includes more goods and services that the GDP deflator does. c. CPI better reflects the goods and services bought by consumers. d. GDP deflator cannot be used to gauge inflation.
c
3. Suppose that in a closed economy GDP is equal to $33,000, consumption equal to $18,000, government purchases equal $6,500, and taxes equal $6,750. What are private saving, public saving, and national saving? a. $250, $8,250, and $8,500, respectively b. $15,000, $26,250, and $13,250, respectively c. $8,250, $250, and $8,500, respectively d. $26,250, $15,000, and $13,250, respectively
c
31. Katleen is considering expanding her dress shop. If interest rates rise she is a. less likely to expand. This illustrates why the supply of loanable funds slopes downward. b. more likely to expand. This illustrates why the supply of loanable funds slopes upward. c. less likely to expand. This illustrates why the demand for loanable funds slopes downward. d. more likely to expand. This illustrates why the demand for loanable funds slopes upward.
c
32. Billie Jo values a stainless steel dishwasher for her new house at $500, but she succeeds in buying one for $425. Billie Jo's willingness to pay for the dishwasher is a. $150. b. $425. c. $500. d. $850.
c
35. Other things the same, when the interest rate rises, people would want to lend a. more, making the supply of loanable funds decrease. b. less, making the supply of loanable funds increase. c. more, making the quantity of loanable funds supplied increase. d. less, making the quantity of loanable funds supplied decrease.
c
38. A larger budget deficit a. raises the interest rate and investment. b. reduces the interest rate and investment. c. raises the interest rate and reduces investment. d. reduces the interest rate and raises investment.
c
38. If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as a. $25.00 purchased in 1975. b. $33.33 purchased in 1975. c. $40.00 purchased in 1975. d. $135.55 purchased in 1975.
c
38. Producer surplus is a. measured using the demand curve for a good. b. always a negative number for sellers in a competitive market. c. the amount a seller is paid minus the cost of production. d. the opportunity cost of production minus the cost of producing goods that go unsold.
c
4. Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that a. the percentage change in the price of pretzels is equal to the percentage change in the price of cookies from year to year. b. the number of pretzels bought by the typical consumer is equal to the number of cookies bought by the typical consumer in each year. c. neither the number of pretzels nor the number of cookies bought by the typical consumer changes from year to year. d. neither the price of pretzels nor the price of cookies changes from year to year.
c
4. Dawn's bridal boutique is having a sale on evening dresses. The increase in consumer surplus comes from the benefit of the lower prices to a. only existing customers who now get lower prices on the gowns they were already planning to purchase. b. only new customers who enter the market because of the lower prices. c. both existing customers who now get lower prices on the gowns they were already planning to purchase and new customers who enter the market because of the lower prices. d. Consumer surplus does not increase; it decreases.
c
41. In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain both of these changes? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward.
c
42. Henry is willing to pay 45 cents, and Janine is willing to pay 55 cents, for 1 pound of bananas. When the price of bananas falls from 50 cents a pound to 40 cents a pound, a. Henry experiences an increase in consumer surplus, but Janine does not. b. Janine experiences an increase in consumer surplus, but Henry does not. c. both Janine and Henry experience an increase in consumer surplus. d. neither Janine nor Henry experiences an increase in consumer surplus.
c
42. The CPI is a measure of the overall cost of the goods and services bought by a. a typical consumer, and the CPI is computed and reported by the Department of the Treasury. b. typical consumers and typical business firms, and the CPI is computed and reported by the Department of the Treasury. c. a typical consumer, and the CPI is computed and reported by the Bureau of Labor Statistics. d. typical consumers and typical business firms, and the CPI is computed and reported by the Bureau of Labor Statistics.
c
51. If the nominal interest rate is 8 percent and the inflation rate is 3 percent, then the real interest rate is a. -5 percent. b. 11 percent. c. 5 percent. d. 3 percent.
c
52. If there is a shortage of loanable funds, then the quantity of loanable funds a. demanded is greater than the quantity of loanable funds supplied and the interest rate will fall. b. supplied is greater than the quantity of loanable funds demanded and the interest rate will rise. c. demanded is greater than the quantity of loanable funds supplied and the interest rate will rise. d. supplied is greater than the quantity of loanable funds demanded and the interest rate will fall.
c
58. Suppose the government changed the tax laws, with the result that people were encouraged to consume more and save less. Using the loanable funds model, a consequence would be a. lower interest rates and lower investment. b. lower interest rates and greater investment. c. higher interest rates and lower investment. d. higher interest rates and higher investment.
c
6. In the CPI, goods and services are weighted according to a. how long a market has existed for each good or service. b. the extent to which each good or service is regarded by the government as a necessity. c. how much consumers buy of each good or service. d. the number of firms that produce and sell each good or service.
c
8. When the government's budget deficit increases the government is borrowing a. less and public savings falls. b. less and public savings increases. c. more and public savings falls. d. more and public savings increases.
c
Which of the following is included in GDP? a. The market value of rental housing services, but not the market value of owner-occupied housing services b. The market value of owner-occupied housing services, but not the market value of rental housing services c. Both the market value of rental housing services and the market value of owner-occupied housing services d. Neither the market value of owner-occupied housing services nor the market value of rental housing services
c
For the purpose of calculating GDP, investment is spending on
capital equipment, inventories, and structures, including household purchases of new housing.
The Carters' oldest son attends Big State University. He and his parents pay all his fees and tuition. These payments count in GDP as
consumption of services.
12. Suppose private saving in a closed economy is $21b and investment is $8b. a. National saving must equal $21b. b. Public saving must equal $13b. c. The government budget surplus must equal $13b. d. The government budget deficit must equal $13b.
d
13. Alex buys 1,000 shares of stock issued by Greg Brewing. In turn, Greg uses the funds to buy new machinery for one of its breweries. a. Alex and Greg are both investing. b. Alex and Greg are both saving. c. Alex is investing; Greg is saving. d. Alex is saving; Greg is investing.
d
13. Which of the following statements is correct about the relationship between inflation and interest rates? a. There is no relationship between inflation and interest rates. b. The interest rate is determined by the rate of inflation. c. In order to fully understand inflation, we need to know how to correct for the effects of interest rates. d. In order to fully understand interest rates, we need to know how to correct for the effects of inflation.
d
14. Consider the expressions T − G and Y − T − C. Which of the following statements is correct? a. Each one of these is equal to national saving. b. Each one of these is equal to public saving. c. The first of these is private saving; the second one is public saving. d. The first of these is public saving; the second one is private saving.
d
17. In a closed economy, national saving equals a. government deficit. b. private saving minus public saving. c. income plus the sum of consumption and government purchases. d. private saving plus public saving.
d
18. Suppose that in 2018, the producer price index increases by 1.5 percent. As a result, economists most likely will predict that a. GDP will increase in 2019. b. the producer price index will increase by more than 1.5 percent in 2019. c. interest rates will decrease in the future. d. the consumer price index will increase in the future.
d
19. In national income accounting, we use which of the following pairs of terms interchangeably? a. "Investment" and "private saving" b. "Investment" and "purchases of stocks and bonds" c. "Saving" and "national saving" d. "Public saving" and "government tax revenue minus government spending"
d
2. For an open economy, the equation Y = C + I + G + NX is an identity. If we define national saving, S, as the total income in the economy that is left after paying for consumption and government purchases, then for an open economy, it is true that a. S = I. b. S = 0. c. I = S + NX. d. S = I + NX.
d
21. Consider a closed economy. In which of the following cases national saving must equal private saving? a. Private saving is equal to government expenditures. b. Public saving is equal to investment. c. After paying their taxes and paying for their consumption, households have nothing left. d. The government's tax revenue is equal to its expenditures.
d
23. If the price of Italian shoes imported into the United States increases, then a. both the GDP deflator and the consumer price index will increase. b. neither the GDP deflator nor the consumer price index will increase. c. the GDP deflator will increase, but the consumer price index will not increase. d. the consumer price index will increase, but the GDP deflator will not increase.
d
24. Changes in the quality of a good a. do not present a problem in the construction of the consumer price index. b. present a problem in the construction of the consumer price index, and that problem is sometimes referred to as substitution bias. c. are not accounted for, as a matter of policy, by the Bureau of Labor Statistics. d. can lead to either an increase or a decrease in the value of a dollar.
d
25. The maximum price that a buyer will pay for a good is called a. consumer surplus. b. producer surplus. c. efficiency. d. willingness to pay.
d
29. A simultaneous increase in both the demand for tablets and the supply of tablets would imply that a. both the value of tablets to consumers and the cost of producing tablets has increased. b. both the value of tablets to consumers and the cost of producing tablets has decreased. c. the value of tablets to consumers has decreased, and the cost of producing tablets has increased. d. the value of tablets to consumers has increased, and the cost of producing tablets has decreased.
d
29. Core CPI is a. the CPI including only food, clothing, and energy. b. the CPI including only food and energy. c. the CPI excluding food, clothing, and energy. d. the CPI excluding food and energy.
d
31. Nate collected Social Security payments of $220 a month in Year 1. If the price index rose from 90 to 108 between Year 1 and Year 2, then his Social Security payments for Year 2 should have been a. $228. b. $238. c. $257. d. $264.
d
33. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI a. fails to account for consumer spending on housing. b. accounts only for consumer spending on food, clothing, and energy. c. fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller percentages of their incomes on other goods. d. fails to account for the introduction of new goods.
d
43. Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was a. 90.9. b. 104.0. c. 105.0. d. 110.0.
d
44. If we were to change the interpretation of the term "loanable funds" in such a way that government budget deficits would affect the demand for loanable funds, rather than the supply of loanable funds, then a. crowding out would not be a consequence of an increase in the budget deficit. b. higher interest rates would not be a consequence of an increase in the budget deficit. c. an increase in the budget deficit would cause the demand for loanable funds to decrease. d. we would be making only a semantic change in how we analyze the effects of government budget deficits.
d
45. The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate a. increases, and producer surplus increases. b. increases, and producer surplus decreases. c. decreases, and producer surplus increases. d. decreases, and producer surplus decreases.
d
55. Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted leftward. d. The supply of loanable funds shifted to the right.
d
6. In a closed economy, what does the difference between the tax revenue and government purchases, (T − G), represent? a. National saving b. Investment c. Private saving d. Public saving
d
A tax on the sellers of coffee will increase the price of coffee paid by buyers,
decrease the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee.
In the actual economy, households
divide their income among spending, taxes, and saving
If the government wants to reduce the burning of fossil fuels, it should impose a tax on
either buyers or sellers of gasoline
41. According to the circular-flow diagram, GDP can be computed as
either the revenue firms receive from the sales of goods and services or the payments they make to factors of production.
45. If the price of a dress is three times the price of a pair of shoes, then a pair of shoes contributes
exactly one-third as much to GDP as does a dress
53. Social Security payments are
excluded from GDP because they do not reflect the economy's production
A transfer payment is a payment made by
government, but not in exchange for a currently produced good or service
Countries with low GDP per person tend to have
higher rates of infant mortality
Alyssa, a Mexican citizen, works only in the United Kingdom. The value of the output she produces is
included in U.K. GNP, but it is not included in U.K. GDP.
If an economy's GDP falls, then it must be the case that the economy's
income and expenditure both fall.
For an economy as a whole,
income must equal expenditure.
54. In the simple circular-flow diagram, with households and firms, GDP can be computed as the
income received by households, in the form of wages, rent and profit
If the government levies a $700 tax per motorcycle on sellers of motorcycles, then the price paid by buyers of motorcycles would
increase by less than $700
Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has
increased measured GDP by the value added by the restaurant's preparation and serving of the meals.
The value of goods added to a firm's inventory in a certain year is treated as investment, since GDP aims to measure the value of the economy's production that year.
investment, since GDP aims to measure the value of the economy's production that year
To say that a price ceiling is nonbinding is to say that the price ceiling
is set above the equilibrium price
43. International data on GDP and socioeconomic variables
leave no doubt that a nation's GDP is closely associated with its citizens' standard of living
Gross domestic product includes all
legal final goods and services, but it excludes illegal final goods and services.
A price ceiling is
legal maximum on the price at which a good can be sold
46. International studies of the relationship between GDP per person and quality of life measures such as life expectancy and literacy rates show that larger GDP per person is associated with
longer life expectancy and a higher percentage of the population that is literate
47. In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily,
market prices
The burden of a luxury tax usually falls
more on the middle class than on the rich.
When a tax is placed on the sellers of a product, buyers pay
more, and sellers receive less than they did before the tax
Unemployment compensation is
not part of GDP because it is a transfer payment.
Changes in the GDP deflator reflect
only changes in prices.
Changes in real GDP reflect
only changes in the quantity produced
The presence of a price control in a market for a good or service usually is an indication that
policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers.
55. The residents of Ireland earn $250 million of income from abroad. Residents of other countries earn $120 million in Ireland. Therefore, Ireland's net factor payments from abroad are
positive, and its GDP is lower than its GNP
Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the
quantity demanded of physicals increases, and the quantity supplied of physicals decreases.
If a nonbinding price floor is imposed on a market, then the
quantity sold in the market will stay the same
A country reported nominal GDP of $105 billion in 2018 and $85 billion in 2017. It also reported a GDP deflator of 130 in 2018 and 125 in 2017. Between 2017 and 2018
real output and the price level both rose
Suppose that in a particular market, the supply curve is highly inelastic and the demand curve is highly elastic. If a tax is imposed in this market, then the
sellers will bear a greater burden of the tax than the buyers
Disposable personal income is
the income that households and businesses have remaining after satisfying their obligations to the government.
If net exports is a negative number for a particular year, then
the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.
In the market for apartments, rent control causes the quantity supplied
to fall and quantity demanded to rise.
35. To encourage formation of small businesses, the government could provide subsidies; these subsidies would not be included in GDP because they are transfer payments
would not be included in GDP because they are transfer payments
