Econ Exams 1-4

In the table shown above, the total cost of the market basket of commodities in 2005 was

$60.00.

If the multiplier is 4, the marginal propensity to consume (MPC) must be

0.25. 0.75.<<<<<< 0.5. 1.

Many economists estimate that for every 10 % increase in relative minimum wage rates, there is a corresponding decrease in employment of those affected equal to

1 - 2%

Refer to Table 11.1. What is the average tax rate of a person earning $40,000?

11.875%

The Federal Reserve System has

12 Districts

According to your textbook, the approximate rate of the natural rate of unemployment is

7%

In a small country, the adult population equals 5,000. There are 4,000 people in the labor force and 3,000 people are employed. The labor force participation rate equals

80 percent.

What will happen when there is a rightward shift in the demand curve?

A new, higher price is not instantaneously achieved, but the price will rise over time.

Fiscal policy is usually associated with

Adam Smith. Ronald Reagan. John Maynard Keynes.<<<<<<< Herbert Hoover.

If the government created a surplus of an agricultural product due to price supports, how might they dispose of this surplus?

Any of these answers might be a successful tool in disposing of agricultural surpluses.

The cost of inflation to society includes I. The opportunity costs of resources used by people to protect themselves against inflation II. The costs associated with recalculating prices

Both I and II

Use the above figure. The long-run Phillips curve is best depicted by graph

C. Vertical Line

In the U.S. economy, which of the following is NOT a generally accepted economic function of government?

Distributing consumer goods

Which of the following is true about product markets?

Goods and services flow from firms to households.

By going to school an individual will obtain which resource?

Human capital

The president of the United States promises that the nation's economy will simultaneously produce more defense goods without any decreases in the production of other goods. Under which of the following conditions could such a promise be valid?

If the United States were producing inside its production possibilities curve

When comparing Market and Collective (public sector) decision making, which statement is NOT true?

In both decision making sectors, majority rule is how things are done.

Which of the following is an example of a normative economic statement?

Income tax rates should be lower because that will increase government revenue.

Which definition of the money supply correlates best with economic activity?

M1. MZM. M2.<<<<<<<<< None of the above

Which of the following best represents the equation of exchange?

MV = PY

Are federal budget deficits related to trade deficits?

No. The budget deficit is entirely a domestic matter, while the trade deficit only affects U.S. citizens who travel abroad. Yes. If U.S. consumers buy too many imported goods, they do not have funds to save, and a budget deficit results. Yes. Higher deficit spending goes up results in more government borrowing, and foreign residents who lend funds to the U.S. government have fewer resources to spend U.S. export goods.<<<<<<<< Yes, but only if the quality of U.S. goods and services is deteriorating.

Which one of the following statements is true?

Over the years, real investment spending has been more volatile than real consumption spending.<<<<< Over the years, real consumption spending has been more volatile than real investment spending. In the Keynesian model, changes in the volume of real investment spending are fully explained by changes in the real interest rate. Domestic real investment in the United States was highest during the Great Depression.

Which one of the following statements is true?

The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the Keynesian model. <<<<<<<<< The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the classical model. The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the idea that increases in aggregate demand will increase the price level but will leave real GDP unchanged. The actual behavior of prices and real GDP during the decade of the 1930s is consistent with a vertical short-run aggregate supply curve.

How could Adam Smith's comment about the butcher, the brewer, and the baker be accurately rephrased in modern terms?

The butcher, the brewer, and the baker give us our dinner because they each earn a living by doing so.

What situation gives rise to a surplus?

The current price of the good is above its market clearing price.

More cattle are found to have mad cow disease. As a result, consumer confidence in the safety of beef is shaken. What would an economist predict will happen in the beef market?

The demand curve will shift to the left.

Which of the following checks issued by the government represents a transfer payment?

The federal government pays a retiree her Social Security benefits.

All of the following are characteristics of public goods EXCEPT

The goods are perfectly divisible.

Suppose there is a simultaneous increase in the demand for diamonds and increase in the supply of diamonds. Which of the following will occur as a result of these simultaneous events?

The market clearing price may rise, fall, or stay the same, but the equilibrium quantity will rise.

Which of the following has been the most likely effect of the Fed's credit policy?

The scope of asymmetric information problems in the banking industry has reduced. The money multiplier and the link between the money supply and the economy have become unstable.<<<<< The federal funds rate and the discount rate have dropped to negative levels. Banks and other financial institutions have taken more time to recover from the 2008-2009 financial meltdown.

Which of the following is a true statement?

The x-axix is the horizontal line and the y-axis is vertical.

Which of the following statements is true?

There is a tax rate where tax revenues are maximized.

Which of the following transactions is included in Gross Domestic Product?

Tips received by a waitress who reports them to the IRS

Which of the following assets is the most liquid in the United States?

U.S. currency<<<<<<<<<< an antique car U.S. Treasury Bonds corporate bonds

Which of the following statements about the classical model of the economy is FALSE?

Wages and prices are flexible. Savings and investment will always be equal. Individuals pursue the public interest, not their own self-interest.<<<<<<<<< The economy will always move toward, or be at, full employment.

Market failures include all but which one of the following

When supply equal demand.

If the government has no debt initially, but then has annual revenues of $10 billion per year for 4 years and annual expenditures of $10.5 billion per year for 4 years, then the government has

a budget deficit of $0.5 billion per year and a budget surplus of $2 billion at the end of the 4 years. a budget surplus of $0.5 billion per year and a debt of $2 billion at the end of the 4 years. a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years.<<<<<<<<< a budget surplus of $0.5 billion per year and a surplus of $2 billion at the end of the 4 years.

Cyclical unemployment occurs when

a downturn in economic activity decreases employment.

In the spring I enjoy the fragrance coming from my neighbors trees. This is an example of

a free-rider

According to Keynes, the impact of an increase in the money supply is

a lower interest rate and a larger growth in real GDP.

A price floor represents

a minimum price that can be legally charged for a good or service.

When the price of a good falls, there will be

a movement along the good's demand curve.

A graphical representation which shows the trade-off that occurs when more of one output is obtained at the sacrifice of another is called

a production possibilities curve.

The net-export effect of contractionary monetary policy is

a(n) appreciation of the value of the dollar and the decrease of U.S. net exports.<<<<<<<<< a(n) depreciation of the value of the dollar and the increase of U.S. net exports. a(n) appreciation of the value of the dollar and the increase of U.S. net exports. a(n)depreciation of the value of the dollar and the decrease of U.S. net exports.

Actions on the part of monetary and fiscal policymakers that are undertaken in response to some change in the overall economy are known as

active policymaking.

Holding money to meet unplanned expenditures and emergencies is known as

aggregate demand. transactions demand. precautionary demand.<<<<<<<< asset demand.

Which of the following are ways to ration goods and services?

all of the above are correct

Which of the following would likely result as a consequence of rent controls?

all of the above are correct

In deriving the demand schedule for a good, economists assume that

all other influences on demand except the product price are held constant.

Supply-side economists argue cuts in tax rates

always reduce tax revenues. have no effect on tax revenues. always increase budget deficits. may increase tax revenues.<<<<<<<<<

A capital gain results when

an asset is sold for more than it was purchased.

An example of a quantity restriction is

an import quota.

Which one of the following would cause an increase in the supply of cardboard?

an improvement in the technology used to produce cardboard

When the rate of interest in the economy falls, there will be

an increase in nominal Gross Domestic Product (GDP). an increase in the market price of existing bonds.<<<<<< less investment by businesses. a decrease in the transaction demand for money.

Which of the following would increase aggregate supply?

an increase in price level an increase in input prices a decrease in marginal tax rates<<<<<<<< a decrease in labor supplied

Ad valorem taxes

are assessed as a percentage of a good's price.

Public elementary and high school education in the United States is provided

as a subsidized good.

The real business cycle theory

assumes that instability is caused by shifts in the long-run aggregate supply curve.

When government expenditures are greater than tax revenues

automatic stabilizers do not kick in. the public debt will be reduced. there will be budget surplus. there will be budget deficit.<<<<<<<<

Asymmetric information before a transaction takes place generates the problem of

bank runs. intermediation. flawed bank regulation. adverse selection.<<<<<<<<<

The year that is chosen as the point of reference for comparison of prices in other years is known as the

base year

If all resources were perfectly adaptable for alternative uses, the production possibilities curve would

be a straight line.

In a market system, the what, how and for whom questions in economics are determined by

buyers and sellers together.

The publication Consumer Reports reduces transaction costs on many purchases

by providing reliable information on product quality so consumers don't have to spend time doing the research themselves.

Last year there were 6 pizza shops in town. This year there are only 4. Other things equal, the decrease in the number of suppliers will

cause a decrease in the quantity supplied at each price.

An increase in the money supply, other things constant,

causes the purchasing power of money to increase. causes interest rates to rise. generates a decrease in the demand for money. causes the price level to increase.<<<<<<<

Wage and price stickiness causes

changes in aggregate demand to have short-run effects on real GDP.

Static tax analysis assumes

changes in the tax rates have no effect on the tax base.

Which of the following is a microeconomic concern?

consumer behavior

Which of the following statements is true?

consumption + saving = disposable income<<<< consumption - saving = personal income consumption - investment = disposable income consumption + saving = personal income

Should prices increase in the near term due to decreases in the short-run aggregate supply, the result would be

cost-push inflation.<<<<<<< demand-pull inflation. cost-pull expansion. demand-pull recession.

A recessionary gap can be closed by fiscal policy if the government

cuts taxes and increases government spending.<<<< increases taxes and cuts government spending. increases taxes and does not change government spending. does not change either taxes or government spending.

If the price of margarine falls, the demand for butter will

decrease

When the current short-run equilibrium is to the left of the long-run aggregate supply, appropriate discretionary fiscal policy used to address this problem would be to

decrease government spending. increase the discount rate. decrease taxes.<<<<<<< increase taxes.

The Keynesian multiplier process assumes that __________.

disinflation must occur for the multiplier to be effective deflation is necessary inflation is necessary the price level is constant<<<<<<

The fact that individuals whose credit worthiness is less than it appears to be are those who are most willing to borrow money at any given interest rate is an example of

diverse origins. adverse selection.<<<<<<<< symmetric information. moral bonuses.

According to the concept of comparative advantage, a good should be produced in that nation in which

domestic opportunity cost is the smallest.

When data on the economy requires some time to gather and interpret, we have a(n)

effect time lag. action time lag. aggregate time lag. recognition time lag.<<<<<<<

When excess capacity exists in the Keynesian model, as aggregate demand increases

equilibrium real GDP decreases. unemployment decreases. prices fall. equilibrium real GDP increases.<<<<<<

Scarcity

exists in all human societies.

A decrease in long run aggregate supply could be caused by

fewer regulatory impediments to business. a rapid increase in tareffs and protectiionism. <<<<<<< the discovery of new oil reserves in another country. a decrease in taxes.

If the price level increases, then

foreigners buy fewer American goods, leaving more goods for Americans and an increase in the quantity demanded for goods and services produced domestically. domestic goods are more expensive relative to foreign goods, which reduces quantity demanded for domestic goods. <<<<<<<<<<<< imports increase but exports do not change. Therefore, there is no effect on the quantity demanded for goods and services. the exchange rate will increase, causing U.S. goods to become cheaper and increasing the quantity demanded for domestic goods.

Aggregate demand reflects

foreigners buy fewer American goods, leaving more goods for Americans and an increase in the quantity demanded for goods and services produced domestically. domestic goods are more expensive relative to foreign goods, which reduces quantity demanded for domestic goods. <<<<<<<<<<<<< imports increase but exports do not change. Therefore, there is no effect on the quantity demanded for goods and services. the exchange rate will increase, causing U.S. goods to become cheaper and increasing the quantity demanded for domestic goods.

If the government borrows to purchase goods and services, today's consumption of government goods and services will be paid for by

future taxpayers.<<<<<<<<< government employees. today's taxpayers. today's taxpayers and tomorrow's taxpayers in even shares.

Economic goods are

goods that are scarce, for which the quantity demanded exceeds the quantity supplied at zero price.

According to the government budget constraint, any excess of public expenditures and transfers over taxes and user fees must be funded by

government borrowing.

The difference between the gross public debt and the net public debt is that the

gross public debt includes entitlements while the net public debt does not. gross public debt includes government interagency borrowing while the net public debt does not.<<<<<< gross public debt is based on budget deficit while the net public debt is not based on budget deficits. the gross public debt is expressed as a percentage of GDP while the net public debt is not.

An increase in the money supply will

increase aggregate supply. increase aggregate demand.<<<<<<<<< decrease aggregate demand. decrease aggregate supply.

A subsidy to carrot farmers will

increase the supply of carrots.

If a $1 million open market purchase by the Fed generates a new deposit at a bank that immediately causes the bank's reserves held at the Fed to increase by $1 million, then the T-account effects are that the bank's assets and liabilities ________ by $1 million and that the Fed's assets and liabilities ________ by $1 million.

increase; increase

In the above figure, a movement from point B to point C could be explained by

increased government spending.<<<<<<<<<< the real-balance effect. an increase in the price level. a decrease in the price level.

If the aggregate supply curve is upward sloping, then increases in aggregate demand lead to

increases in output. no change in the price level. increases in the price level. decreases in the price level. A and C<<<<<<<<<<

In the United States, the labor-force participation rate since 1960 has been

increasing for females.

A legal maximum price that a good can be sold for

is a price ceiling

During normal times, discretionary fiscal policy

is probably not very effective.<<<<<<<<< is very effective. is more effective than automatic stabilizers. works well because there are no lag problems

The theory of public choice

is the study of collective decision making.

Durable consumer goods are goods that

last for more than three years.

In the long run, persistent inflation in the United States is caused by

leftward shifts in the aggregate demand curve while the position of the long-run supply curve is unchanged. leftward shifts in both the long-run aggregate supply curve and in the aggregate demand curve. a faster rightward shift of the aggregate demand curve than the rightward shift of the long-run aggregate supply curve.<<<<<<<<<< rightward shifts in the long-run aggregate supply curve and the leftward shift of the aggregate demand curve.

Government payment of a per-unit subsidy for medical care causes the out-of-pocket price that consumers pay for care to be

less than the price that producers receive for providing care.

The opportunity cost of more consumption of goods today is

lower consumption of goods in the future.

To function as money, something must hold its purchasing power over time. That is, it must be a

medium of exchange. store of value.<<<<<<<<< unit of accounting. standard of deferred payment.

Suppose the actual federal funds rate is below the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that

monetary policy is contractionary. monetary policy is neither expansionary or contractionary. fiscal policy is contractionary. monetary policy is expansionary.<<<<<<<<<

Consider the above figure. Suppose there is a long-run increase in the price of oil, which reduces total planned production at any given price level. The resulting change in the economy's long-run equilibrium position would be represented by a

movement from B to C. movement from C to A. movement from A to C.<<<<<<<< movement from A to B.

In the long run, a higher government budget deficit causes

no change in private spending but a decrease in equilibrium real GDP. a decrease in private spending while equilibrium real GDP remains unchanged.<<<<<<<<< an increase in both private spending and equilibrium real GDP. a decrease in both private spending and equilibrium real GDP.

The government has decided to give every person in the U.S. a $5 coupon that they can use at the grocery store to purchase their choice of cheese. We would expect this policy to lead to

no increase in aggregate demand due to the Ricardian equivalence theorem. an increase in aggregate demand equivalent to the full impact of all of the coupons redeemable. an increase in aggregate demand but not equivalent to the full impact of all of the coupons redeemed due to some direct expenditure offset.<<<<<<<<< no increase in aggregate demand because there would be no direct expenditure offset.

Many economists argue that real GDP is

not a good measure of economic well-being because it excludes increases in leisure time.

One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that

only unpredictable policy actions by the Fed will have an effect on the real economy.

The value of the best alternative sacrificed to obtain something you want is referred to as

opportunity cost.

Gross Domestic Product (GDP) does not include

overseas production of U.S. subsidiaries.

The fastest-growing part of the federal budget is

payments for services rendered. government salaries. entitlements. <<<<<<<<<< national defense.

The rationality assumption states that

people do not intentionally make decisions that would leave them worse off.

Which of the following is consistent with secular deflation?

persistent increasing price level caused by several periods of economic growth with decreasing AD persistent decreasing price level caused by several periods of economic growth with stable AD<<<<<< persistent decreasing price level caused by money being withdrawn from the economy persistent decreasing price level caused by increases in government expenditures

If you take national income and add transfer payments, then subtract income earned but not received, the result will be

personal income.

Those who favor passive policy making do so because they conclude that

price and wage flexibility is a common and speedy occurrence.

Other things being equal, if price is at P 2 in the above figure, we would expect

price to decline until an equilibrium is achieved at P0.

The marginal tax rate and the average tax rate are the same under a

proportional income tax system.

One economic theory states that people combine the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes, and react accordingly. This theory is known as the

rational expectations hypothesis.

If nominal Gross Domestic Product (GDP) in 1996 was $1 trillion, nominal Gross Domestic Product (GDP) in 2006 was $2 trillion, and the 1996 and 2006 price indexes were 100 and 250 respectively,

real Gross Domestic Product (GDP) decreased between 1996 and 2006.

The simplifying assumptions made in the Keynesian model lead to the conclusion that

recessions are a thing of the past. the equilibrium level of real GDP is determined by supply. cause of recessions is the radical fluxuations in exports. the equilibrium level of real GDP is demand determined.<<<<<<<<

In economics, ________ are limited but ________ are unlimited.

resources; wants

Using the fiscal year 2007 estimates, the largest component of state and local revenue is the

revenue from the federal government.

If economists are making the assumption that business people try to maximize profits, the best way to determine whether this assumption is useful or not is to

see whether it generates accurate predictions about the choices of business people.

In the above figure, a change in autonomous consumption to 100 would cause the consumption function to

shift up.<<<<<< become steeper. shift down. become flatter.

Imposing a tax on sales of a product

shifts the market supply curve for the product.

The long-run aggregate supply curve is

sloping upward due to the effects of price level changes on real Gross Domestic Product (GDP). horizontal at the full-employment level of real Gross Domestic Product (GDP). the same as the short run aggregate supply (SRAS) curve. vertical at the full-employment level of real Gross Domestic Product (GDP). <<<<<<<<<<<

Costs of renewing contracts or printing new price lists are known as

small menu costs

The proposition that an increase in the government budget deficit has no effect on aggregate demand is

supply-side economics. fiscal policy. Keynes' Law. the Ricardian equivalence theorem.<<<<<<<

A government budget surplus occurs during a budget year when

tax revenues + government spending = personal income. tax revenues = government spending. tax revenues > government spending.<<<<<<<< tax revenues < government spending.

If the marginal propensity to save (MPS) = 0.1, then

the APC = 0.9. the APS = 0.1. consumption equals $1,800 when income equals $2,000. the MPC = 0.9.<<<<

The fiscal agent for the Federal government is

the Federal Reserve System.<<<<<<<<<< the Comptroller of Currency. the United States Treasurer. the United States Treasury.

The official dating of recessions is done by

the National Bureau of Economic Research.

In the Keynesian model whenever planned investment is less than planned savings

the amount of planned investment will decrease and real GDP will decrease. there will be an unplanned inventory increase and GDP will eventually decrease.<<<<<<<< there will be an unplanned inventory decrease and GDP will eventually increase. the amount of planned investment will decrease and real GDP will remain unchanged.

An increase in the public debt would most likely indicate that

the budget deficit has increased.<<<<<< national saving has increased. the trade deficit has decreased. the budget deficit has decreased.

To compare the net public debt of various countries, the debt has to be compared to

the country's national defense expenditure. the country's real GDP.<<<<<<<<<< the country's current budget deficit or surplus. the country's trade deficit.

Suppose we observe the price level increasing and real GDP decreasing. An explanation for this is that

the dollar weakened and the effect on aggregate supply was less than the effect on aggregate demand. the dollar weakened and the effect on aggregate supply was greater than the effect on aggregate demand.<<<<<<<<<< the dollar strengthened and the effect on aggregate supply was greater than the effect on aggregate demand. the dollar strengthened and the effect on aggregate supply was less than the effect on aggregate demand.

The unemployment rate will rise when

the duration of unemployment increases.

If we observe an increase in real GDP and an increase in the price level after an increase in aggregate demand, we can conclude that

the economy is now at full employment. the aggregate supply curve is upward sloping.<<<<< the aggregate supply curve is vertical. the aggregate supply curve is horizontal.

At one time, many economists believed that

the government could decide at which point on the Phillips curve the economy should be.

When the profits of a corporation are taxed and the dividends paid to stockholders are also taxed

the government is engaging in double taxation.

Economic growth will be associated with a constant price level when

the increase in aggregate demand exactly equals the increase in long-run aggregate supply.<<<<<<<< the increase in aggregate demand is more than the increase in long-run aggregate supply. the increase in aggregate demand is accompanied by a reduction in short-run aggregate supply. the increase in aggregate demand is less than the increase in long-run aggregate supply.

The nominal rate of interest is

the interest rate observed in today's market.

The level of real GDP identified by the long-run aggregate supply curve is

the level of GDP at which no one is below the poverty line. the full-employment level of real GDP. <<<<<<<< the level of GDP at which each business firm is experiencing growth in sales. the level of GDP at which each industry is experiencing growth in sales.

The level of unemployment that is equal to the frictional and structural rate in the long run is sometimes referred to as

the natural rate of unemployment.

Automatic stabilizers are so-named because

the policy suggestions of the Council of Economic Advisors are automatically followed. they occur automatically when real GDP changes.<<<<< the policy suggestions of the Office of Management and Budget are automatically followed. they are automatically undertaken by the Federal Reserve Bank to reduce budget deficits.

The foreign exchange rate is

the price of one currency in terms of another.

Among economists, it is generally believed that

the public debt will be paid off within 10 years. the federal budget deficit will be eliminated within 10 years.<<<<<<<<<<< entitlement spending will continue to decline. the federal government will find it difficult to cut entitlement programs.

The price of a new textbook increases from $75 to $90 while the price of used copies of the textbook increases from $50 to $65. Other things equal, we would expect to observe

the quantity demanded of the used textbook to decrease and the quantity demanded of the new textbook to increase.

Depreciation is

the reduction in the value of capital goods due to physical wear and tear.

Say's Law says that

the seller is sovereign. desired expenditures will equal actual expenditures.<<<< the consumer is sovereign. people produce the goods they want.

A direct relationship occurs when

the two variables being compared change in the same direction, or when one goes up the other also goes up.

If banks engage in fractional reserve banking, it means that

they do not hold any excess reserves. a fraction of their legal reserves are held as top-grade government securities. they never run short of currency. they hold less than 100 percent of their deposits as reserves.<<<<<<<<<

According to the circular flow, the dollar value of a nation's output is equal to

total income.

If, at some level of output, total planned expenditures are less than real Gross Domestic Product (GDP),

unplanned inventories will increase and real GDP will fall.<<<<<<<< real GDP will either fall or remain unchanged, depending on the MPC. real GDP will rise. real GDP remains unchanged.

The aggregate supply curve in the classical model is

upward sloping. horizontal. vertical.<<<<<<<< downward sloping.

According to the bounded rationality hypothesis, an individual confronting a large number of complicated choices is most likely to respond by

using a simple rule of thumb to choose among a subset of easiest-to-evaluate options.

The purchasing power of the dollar

varies inversely with the price level.<<<<<<<<< varies directly with the purchasing power of other major currencies such as the euro and the Japanese yen. varies directly with the price of gold. varies directly with the price level.

Specialization can occur because

varying skills differentiate workers.

In the classical model

voluntary unemployment is zero, but involuntary unemployment often is fairly high. only voluntary unemployment exists.<<<<< unemployment cannot exist. unemployment is a major concern.

An example of a negative externality created in the market system would be

water pollution.

According to proponents of the interest-rate-based monetary policy transmission mechanism, any increase in the money supply

will increase Gross Domestic Product (GDP) only if interest rates fall and investment is sensitive to decreasing interest rates.<<<<<<<<<< will move the economy from the "liquidity trap" during times of recession if interest rates fall enough to stimulate private investment. causes velocity to increase, and so in the short run nominal Gross Domestic Product (GDP) must increase. is effective in increasing Gross Domestic Product (GDP) only if it causes an outward shift of the aggregate supply curve.