Economy

When a firm operates under conditions of pure competition, marginal revenue always equals: A. price. B. average cost. C. marginal cost.

A. LOS 15.a When a firm operates under conditions of pure competition, MR always equals price. This is because, in pure competition, demand is perfectly elastic (a horizontal line), so MR is constant and equal to prices. To maximize the profit, MR=MC.

Which of the following factors would be least likely to shift the aggregate demand curve? A. The price level increases. B. The federal deficit expands. C. Expected inflation decreases.

A. LOS 16.h Since the y-axis of the aggregate supply/demand model is the price level, a change in the price level is a movement along the AD curve. As long as inflation expectations are unchanged, an increase in the price level will not shift the aggregate demand curve.

Labor productivity is most likely to increase as a result of a(n): A. increase in physical capital. B. decrease in net immigration. C. increase in the labor force participation rate.

A. LOS 16.m Increased investment in physical capital can increase labor productivity. Labor force participation rates and net immigration affect the size of the labor force and the aggregate number of hours worked, but do not necessarily affect labor productivity.

The most likely motivation for establishing a trading bloc is to: A. increase economic welfare in the member countries. B. increase tariff revenue for the member governments. C. protect domestic industries in the member economies.

A. LOS 19.f The motivation for establishing a trading bloc is to increase economic welfare in the member countries by eliminating barriers to trade. Joining a trading bloc may have negative consequences for some domestic industries and may decrease tariff revenue for the government.

A current account deficit is most likely to decrease as a result of an increase in: A. domestic savings. B. private investment. C. the fiscal budget deficit.

A. LOS 19.i Current account balance = private savings + government savings - private investment government savings = T - G = government surplus = - government deficit

In which market structure(s) can a firm's supply function be described as its marginal cost curve above its average variable cost curve? A. Oligopoly or monopoly. B. Perfect competition only. C. Perfect competition or monopolistic competition.

B. LOS 15.c The supply function is not well-defined in markets other than those that can be characterized as perfect competition.

Long-term sustainable growth of an economy is least likely to result from growth in: A. the supply of labor. B. capital per unit of labor. C. output per unit of labor.

B. LOS 16.m The sustainable rate of economic growth is a measurement of the rate of increase in economy's productive capacity. An economy's sustainable rate of growth depends on the growth rate of the labor supply and the growth rate of labor productivity. Due to diminishing marginal productivity, and economy generally cannot achieve long-term sustainable growth through continually increasing the stock of capital relative to labor. growth in potential GDP = growth in labor force + growth in labor productivity

In a production function model of economic output, total factor productivity represents the output growth that can be accounted for by: A. capital growth but not labor growth. B. neither labor growth nor capital growth. C. the combined effects of labor growth and capital growth.

B. LOS 16.n Total factor productivity (A) represents output growth in excess of that resulting from the growth in labor and capital. Development of technology.

Suppose an economy has a real trend rate of 2%. The central bank has set an inflation target of 4.5%. To achieve the target, the central bank has set the policy rate at 6%. Monetary policy is most likely: A. balanced. B. expansionary. C. contractionary.

B. LOS 18.m neutral interest rate = real trend rate of economic growth + inflation target = 2% + 4.5% =6.5%. Because the policy rate is less than the neutral rate, the supply of money will increase, thus monetary policy is expansionary.

Other things equal, which of the following is most likely to decrease a country's trade deficit? A. Increase its capital account surplus. B. Decrease expenditures relative to income. C. Decrease domestic saving relative to domestic investment.

B. LOS 20.h X - M = (S - I) + (T - G) -> BT = Y(national income) - E(total expenditure)

An oligopolistic industry has: A. few barriers to entry. B. few economies of scale. C. a great deal of interdependence among firms.

C. LOS 15.a An oligopolistic industry has a great deal of interdependence among firms. One firm's pricing decisions or advertising activities will affect the other firms.

When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where the: A. ATC curve intersects the MR curve. B. MR curve intersects the demand curve. C. ATC curve intersects the demand curve.

C. LOS 15.e When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where the ATC curve intersects the market demand curve. A problem in using this method is actually determining exactly what the ATC is.

A short-run macroeconomic equilibrium in which output must decrease to restore long-run equilibrium is most accurately characterized as: A. stagflation. B. a recessionary gap. C. an inflationary gap.

C. LOS 16.j, 16.k If output must decrease to restore long-run equilibrium, the short-run equilibrium must at an output level greater than long-run aggregate supply. This describes an inflationary gap.

Which of the following is least likely to reduce substitution bias in a consumer price index? A. Use a chained index. B. Use a Paasche index. C. Adjust for the bias directly using hedonic pricing.

C. LOS 17.g Adopting a chained price index method addresses substitution bias, as does using a Paasche index. Hedonic pricing adjusts for improvements in the quality of products over time, not substitution bias.

In which of the following inflation scenarios does short-run aggregate supply decrease due to increasing wage demands? A. Cost-push inflation. B. Demand-pull inflation. C. Both cost-push and demand-pull inflation.

C. LOS 17.h Both inflation scenarios can involve a decrease in short-run aggregate supply due to increasing wage demands. In a wage-push scenario, which is a form of cost-push inflation, the decrease in aggregate supply causes real GDP to fall below full employment. In a demand-pull inflation scenario, an increase in aggregate demand causes real GDP to increase beyond full employment, which creates wage pressure that results in a decrease in short-run aggregate supply.

A country that targets a stable exchange rate with another country's currency least likely: A. accepts the inflation rate of the other country. B. will sell its currency if its foreign exchange value rises. C. must also match the money supply growth rate of the other country.

C. LOS 18.f The money supply growth rate may need to be adjusted to keep the exchange rate within acceptable bounds, but is not necessarily the same as that of the other country.

Purchases of securities in the open market by the monetary authorities are least likely to increase: A. excess reserves. B. cash in investor accounts. C. the interbank lending rate.

C. LOS 18.i Open market purchases by monetary authorities decrease the interbank lending rate by increasing excess reserves that banks can lend to one another and therefore increasing their willingness to lend.

A government enacts a program to subsidize farmers with an expansive spending program of $10 billion. At the same time, the government enacts a $10 billion tax increase over the same period. Which of the following statements best describes the impact on aggregate demand? A. Lower growth because the tax increase will have a greater effect. B. No effect because the tax and spending effects just offset each other. C. Higher growth because the spending increase will have a greater effect.

C. LOS 18.p The amount of the spending program exactly offsets the amount of the tax increase, leaving the budget unaffected. The multiplier for government spending is greater than the multiplier for a tax increase. Therefore, the balanced budget multiplier is positive. All of the government spending enters the economy as increased expenditure, whereas spending is reduced by only a portion of the tax increase.

The monetary authority of The Stoddard Islands will exchange its currency for U.S. dollars at a one-for-one ratio. As a result, the exchange rate of the Stoddard Islands currency with the U.S. dollar is 1.00, and many businesses in the Islands will accept U.S. dollars in transactions. This exchange rate regime is best described as: A. a fixed peg. B. dollarization. C. a currency board.

C. LOS 20.i This exchange rate regime is a currency board arrangement. The country has not formally dollarized because it continues to issue a domestic currency. A conventional fixed peg allows for a small degree of fluctuation around the target exchange rate.