Macroeconomics Exam 1

A balanced budget is present when a. government revenues equal government expenditures. b. public sector spending equals private sector spending. c. the economy is at full employment. d. the actual level of aggregate spending equals the planned level of spending.

a

A general mismatch between the skills of unemployed workers and the skills needed by employers with job openings results in a. structural unemployment. b. a higher labor force participation rate. c. cyclical unemployment. d. frictional unemployment.

a

According to Friedrich Hayek and his followers, the booms and busts of the business cycle are primarily the result of a. excessive credit expansion and artificially low interest rates that trigger malinvestment. b. fluctuations in aggregate demand. c. the unwillingness of political decision-makers to follow the advice of macroeconomists who know how to alter fiscal policy in a manner that would virtually eliminate the ups and downs of the business cycle. d. the "animal spirits" of private investors.

a

According to public choice theory, which of the following groups will likely benefit the most from government income transfers under a system of representative democracy? a. concentrated interest groups b. consumers c. the poor d. small businesses

a

After a particular loan has been paid off, neither the borrower nor the lender has lost purchasing power. Therefore, it must be true that actual inflation was a. equal to expected inflation. b. greater than the nominal rate of interest. c. less than expected inflation. d. greater than expected inflation.

a

All but one of the following are elements of the economic way of thinking. Which one is not part of the economic way of thinking? a. The value of goods can be determined objectively. b. Information is scarce. c. Incentives matter. d. Economic thinking is marginal thinking.

a

An important difference between the GDP deflator and the consumer price index is that a. the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of some goods and services bought by consumers. b. the GDP deflator reflects the prices of all goods and services bought by producers and consumers, whereas the consumer price index reflects the prices of final goods and services bought by consumers. c. the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the consumer price index reflects the prices of final goods and services bought by consumers. d. the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price index reflects the prices of goods and services bought by consumers.

a

An increase in real per capita income will generally lead to a. a cleaner environment and more time for recreation. b. an increase in real GDP that is less rapid than the increase in population c. a reduction in life expectancy because working conditions are less desirable. d. an increase in the number of hours worked by residents.

a

An opinion based on personal preferences and value judgments is called a. a subjective concept. b. an unintended consequence. c. an objective concept. d. ceteris paribus.

a

Because information is costly to acquire, a. people will rationally choose not to become fully informed when making decisions. b. people will generally choose to become as fully informed as possible when making decisions. c. people will generally choose to acquire no information that would be relevant to their decisions. d. none of the above are true.

a

Compared to high-income developed countries, the per person income levels of poorer less developed countries are somewhat understated because a. the GDP figures omit the production within the household sector, which is generally larger in the poorer countries. b. the GDP figures omit net exports, which are generally larger in the high income countries. c. the GDP figures omit net exports, which are generally larger in the poorer countries. d. the GDP figures omit the production within the household sector, which is generally larger in the high-income countries.

a

Gross domestic product a. is the sum of the total spending on all final-user goods and services produced domestically during a period. b. includes financial transactions such as the purchase of stocks or bonds traded during a period. c. is the sum of all exchanges of goods and services during a period. d. is the sum of expenditures for both intermediate and final user goods.

a

In voluntary exchange, if the seller of a product gains, a. the buyer must also gain; mutual gain provides the foundation for exchange. b. someone else must lose an equal amount. c. the buyer will generally lose an amount greater than the gain to the seller. d. the buyer must lose an amount equal to what the seller gains.

a

Middlemen, such as grocers, stockbrokers, and Realtors, a. specialize in reducing transactions costs. b. do not exist in capitalist economies. c. have no effect on economic output in society. d. provide nothing of value to either the buyer or the seller.

a

The student government associations at several universities have experimented with purchasing bicycles to leave around campus for everyone's use. Anyone who needs the bike can use it, and they are not allowed to lock the bike up or take it home, but rather must leave it on campus for someone else to use. Economic theory would predict that a. students will not take as good of care of these commonly owned bicycles as they do their own bicycles. b. because universities have a lot of money, these bikes will be better maintained than the ones owned privately by college students who tend to have little money. c. students will take better care of these commonly owned bicycles than they do their own bicycles. d. students will take equally as good care of these commonly owned bicycles as they do their own bicycles.

a

Three basic decisions must be made by all economies. What are they? a. what will be produced, how goods will be produced, and for whom goods will be produced b. what the price of each good will be, who will produce each good, and who will consume each good c. how much will be produced, when it will be produced, and how much it will cost d. how the opportunity cost principle will be applied, if and how the law of comparative advantage will be utilized, and whether the production possibilities constraint will apply

a

Which of the following countries has had the highest growth rate of per capita GDP over the past 25 years? a. India b. Haiti c. Niger d. Zimbabwe

a

"After every fall election, the weather starts to turn cold, therefore elections cause cold weather." This statement a. confuses macroeconomics with microeconomics. b. fails to recognize that association is not causation. c. confuses positive and normative analysis. d. commits the fallacy of composition.

b

"If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding statement is a. essentially correct. b. incorrect; it confuses the elimination of poverty with the elimination of the constraint imposed by scarcity. c. incorrect because scarcity has already been eliminated among the poor in wealthy countries such as the United States. d. incorrect; it fails to recognize that poverty will be present as long as resources are scarce.

b

"There is no such thing as a free lunch." This statement best reflects the fact that a. consumers are unwilling to pay for a good unless it provides them with value. b. an opportunity cost is always present when scarce resources are used to produce a good. c. the value of a good to consumers will decrease as they have more of it. d. it generally requires enormous effort to search out the best place to eat lunch.

b

(I) Governments that respect property rights and freedom of exchange while following monetary (and fiscal) policies consistent with relative price stability, establish the foundation for economic growth. (II) Governments have often diminished the economic prospects of a nation by levying high taxes, instituting price controls, and following inflationary monetary policies. a. I is true; II is false. b. Both I and II are true. c. I is false; II is true. d. Both I and II are false.

b

A production possibilities curve indicates that when resources are being used efficiently, a. you can only produce more of one good only if you produce more of another good. b. you can only produce more of one good only if you produce less of another good. c. it is impossible to expand the total output of goods over time. d. you can only produce more of one good only if you lower its price.

b

A rational decision maker takes an action if and only if a. the opportunity cost of the action is zero. b. the marginal benefit of the action exceeds the marginal cost of the action. c. the marginal cost of the action exceeds the marginal benefit of the action. d. the marginal cost of the action is zero.

b

A tradeoff exists between a clean environment and a higher level of income in that a. by employing individuals to clean up pollution, employment and income both rise. b. laws that reduce pollution raise costs of production and reduce incomes. c. efforts to reduce pollution typically are not completely successful. d. studies show that individuals with higher levels of income actually pollute less than low-income individuals

b

Actual GDP will be below potential GDP a. during an economic boom. b. during a recession. c. when resources are fully utilized. d. when the economy is at full employment.

b

An American-owned McDonald's opens in Russia. How would the net revenue earned by this restaurant affect the GDP and GNP of the United States? a. It would leave both GDP and GNP unchanged. b. It would increase GNP and leave GDP unchanged. c. It would increase GDP and leave GNP unchanged. d. It would increase GNP and GDP.

b

An individual who is employed part time but is looking for a full-time job is classified as a. frictionally unemployed. b. employed. c. structurally unemployed. d. cyclically unemployed.

b

During the past 200 years, income per person has a. increased in the developed countries of Western Europe and North America, but declined in the rest of the world. b. increased far more rapidly in both developed and less developed countries than during the centuries prior to 1800. c. Increased far less rapidly in both developed and less developed countries than during the centuries prior to 1800. d. declined in the developed countries of Western Europe and North America, but increased in the rest of the world.

b

Government purchases include spending on goods and services by a. state and federal governments only. b. local, state and federal governments. c. the federal government only. d. local, state and federal governments, as well household spending by employees of those governments.

b

How do high tariffs and other restraints on international trade affect a nation's prosperity? a. They increase employment and thereby promote the growth of real GDP. b. They prevent the nation from fully realizing the potential gains from specialization, exchange, and competition. c. They protect domestic producers and thereby promote economic growth. d. Both a and c are correct.

b

If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted? a. Japan's, because Honda is a Japanese company b. The GDP of the United States because that is where it was built c. Both Japan and the United States d. Japan's because that is where the car is purchased

b

If the consumer price index (CPI) at the end of year one was 100 and was 108 at the end of year two, the inflation rate during year two was a. 108 percent. b. 8 percent. c. 5 percent. d. zero; the CPI of 100 indicates that prices were stable.

b

A 2 percent growth rate will bring about a doubling of real GDP in about how many years? a. 70 b. 1 c. 2 d. 35

d

Which of the following is important in the development of a large economy dominated by trade between parties who do not know each other (depersonalized exchange)? a. heavy government regulation and control of prices so that individuals do not try to take advantage of one another in market exchange b. having a sound legal system that protects property and enforces contracts c. having few or minimal constitutional rules to avoid preventing the democratic institutions of a country from working to their fullest potential d. the presence of abundant natural resources

b

"If there is unemployment, the average wage rate will decline as the unemployed workers choose lower wages rather than going without a job. The demand curve for labor slopes downward and to the right so that more workers would be hired at the lower wage rate, restoring full employment." According to the Keynesian view, this quote is a. incorrect because the demand for labor, other things constant, will not be negatively related to wages. b. essentially correct. c. incorrect because wages and prices tend to be highly inflexible downward. d. incorrect because widespread unemployment would cause wages to rise, not decline.

c

(I) With trade, individuals will be able to use more of their time and resources producing items they can supply economically and less time and resources producing goods that they can supply only at a high cost. (II) Reductions in trade barriers will expand the productive potential of the economy. a. I is true, II is false. b. Both I and II are false. c. Both I and II are true. d. I is false, II is true.

c

A decrease in aggregate demand and the subsequent cutbacks in production lead to a. structural unemployment. b. cost-push unemployment. c. cyclical unemployment. d. frictional unemployment. e. transitory unemployment.

c

A good is considered nonexcludable if a. the consumption of the good by one individual lowers the amount available for others. b. many individuals can share in the consumption of the same unit of the good. c. it is impossible or very costly to exclude nonpaying customers from receiving the good. d. its production is financed through tax revenue rather than market prices.

c

A good is considered nonrival-in-consumption if a. the consumption of the good by one individual lowers the amount available for others. b. even nonpaying customers can receive the full benefit from the good. c. many individuals can share in the consumption of the same unit of the good. d. its production is financed through tax revenue rather than market prices.

c

A marginal change usually is a a. change that involves little, if anything, that is important. b. change for the worse, and so it is usually a short-term change. c. small, incremental adjustment. d. large, significant adjustment.

c

A person who argues that inflation "robs us of the purchasing power of our paychecks" should also consider that inflation a. does not affect the value of the dollar, either in paychecks or in prices. b. increases the value of the dollar, making paychecks worth more. c. will increase the size of paychecks as well as the prices of goods. d. only affects the prices of things that we buy, not the prices of things that we sell.

c

A special-interest issue is one that a. benefits a small, well-organized interest group but makes that group pay for the cost of the program. b. allocates the cost of the activity in accordance with the benefits received. c. benefits a small, well-organized interest group at the expense of taxpayers or consumers. d. benefits everyone and imposes a cost on everyone.

c

According to the Keynesian view, capitalism a. is a highly productive form of economic organization that works best when government intervention is least. b. experiences fluctuations in aggregate demand that cannot be controlled with fiscal policy. c. experiences booms and busts because of the instability of private investment that is driven by fickle changes in business optimism. d. experiences booms and busts that are primarily the result of inappropriate monetary policy.

c

At the most basic level, the distinguishing characteristic of government that makes it different from private firms is its ability to a. direct resources in a manner that serves the public interest rather than the private interest of individuals. b. escape the constraints imposed by scarcity. c. use coercive force against adults to modify their behavior or force them to pay for a good or service. d. produce goods and services that people value.

c

During the past several decades, foreign aid to sub-Saharan Africa a. has declined and as a result the poverty rate in sub-Saharan Africa has risen sharply. b. has been smaller than the aid to other regions, but the reduction in the extreme poverty rate has been larger in Africa than in other areas of the world. c. has been larger than the aid to other regions, but the reduction in the extreme poverty rate has been smaller in Africa than in other areas of the world. d. has risen and, as a result, the poverty rate in sub-Saharan Africa has declined substantially.

c

Economic growth is likely to be faster when a. the supply of money is increased rapidly so individuals have more money to spend. b. dramatic changes in political and legal institutions occur often. c. domestic markets are opened to foreign sellers and foreign investors. d. higher tax rates are imposed on high income individuals in order to provide greater cash payments to the poor.

c

If U.S. net exports are negative, a. U.S. consumers are spending less on foreign goods than foreign consumers are spending on U.S. goods b. U.S. disposable income is low c. U.S. consumers are spending more on foreign goods than foreign consumers are spending on U.S. goods d. the government must promote imports to balance international trade e. U.S. consumers are spending more on foreign goods than they are spending on U.S. goods

c

In his book The Road to Serfdom, Friedrich Hayek argued that the growth of government a. was essential if the ups and downs of the business cycle were going to be controlled. b. could only be achieved if monetary policy-makers were willing to expand the supply of money more rapidly. c. endangered freedom and moved Western democracies toward tyranny, just as it had done in Nazi Germany and the Soviet Union. d. must be increased if western democracies were going to survive.

c

Which of the following will increase economic freedom? a. government spending that comprises a large share of the economy b. rapid and unpredictable inflation c. low rates of inflation and easy access to money that maintains its purchasing power d. high tariff rates

c

"Government failure" exists when political decision-makers choose actions that a. seek fair outcomes rather than efficient outcomes. b. conflict with the outcome favored by the majority of voters. c. seek efficient outcomes rather than fair outcomes. d. conflict with efficient allocation of resources.

d

"The resources now going into the War on Terrorism and into improved airport security would save more lives if they were invested in medical research." This statement most clearly reflects which of the following? a. The value of goods can be determined objectively. b. The best test of an economic theory is its ability to predict. c. selfishness; if people were not selfish, we could have more of everything. d. There is no such thing as a free lunch--the use of scarce resources always has an opportunity cost.

d

(I) Changes in the age composition of the labor force will affect the natural rate of unemployment (for example, an increase in the relative number of youthful workers). (II) Institutional changes such as an increase in the minimum wage may increase cyclical unemployment but will not affect the natural rate of unemployment. a. I is false; II is true. b. Both I and II are true. c. Both I and II are false. d. I is true; II is false.

d

(I) Countries with more economic freedom during the past quarter of a century had a lower average per capita GDP. (II) Countries with more economic freedom during the past quarter of a century generally achieved higher rates of economic growth. a. I is true; II is false. b. Both I and II are true. c. Both I and II are false. d. I is false; II is true.

d

A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result, a. U.S. investment and German GDP increase, but U.S. GDP is unaffected. b. U.S. investment, U.S. GDP, and German GDP all increase. c. U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods. d. U.S. investment and GDP increase, but German GDP is unaffected.

d

A firm purchases $400,000 worth of raw materials and pays wages and salaries of $300,000 and dividends of $100,000. If the firm sells its output for $1 million, the firm's value added to GDP is a. $1,000,000. b. $400,000. c. $800,000. d. $600,000.

d

A less-developed nation will be able to benefit substantially by adopting the technologies and the business practices that have been successful in other nations, but only if a. its wages are low enough. b. its population is large enough. c. it first educates its citizens well, so they can use the new ideas. d. it improves its institutions so that investors are willing to import the capital and any expertise needed to take advantage of the advanced production techniques that are available.

d

A person is considered unemployed if she is a. taking a vacation from a job. b. working at a full-time job in a foreign country. c. working at a part-time job. d. not working but is actively looking for work.

d

A politician may be considered an entrepreneur in the sense that a. identical personal characteristics are necessary for success in politics and in business. b. like the businessman, the politician selfishly attempts to gain at the expense of his customers. c. he is always open to bribery. d. the successful politician discovers and offers voters political goods when voter demand is strong for him.

d

A production possibilities curve graphically represents the maximum quantities of two products produced when all resources in the economy are efficiently utilized. An economy that operates inside this production possibilities curve a. lacks the resources to produce goods efficiently. b. is utilizing its available resources as efficiently as possible. c. lacks the necessary technology to produce efficiently. d. is using its resources inefficiently.

d

According to data on GDP growth between 1980 and 2009, a. poor nations grew rapidly, while the rich nations stagnated. b. most of the world's rapidly growing countries were located in Africa. c. poor nations stagnated, while the rich nations continued to grow. d. many poor nations grew more rapidly than wealthy nations, while others continued to stagnate.

d

Approximately what percent of government transfer payments are directed toward the poor (means tested)? a. one-half b. one-fourth c. three-quarters d. one-sixth

d

Country A and country B initially have the same per capita income. Suppose that A sustains an annual growth rate of 3.5 percent, while the annual growth rate of country B is 1.75 percent. The "rule of 70" indicates that after forty years, the per capita income of country A will be approximately ____ that of country B. a. one-half b. four times c. 70 percent greater than d. twice

d

Generally, the greater the amount of productive activities generated by the household sector, a. the more likely it is that the current GDP will be overstated. b. the more accurately GDP will measure current productive activity. c. the greater the GDP deflator. d. the more likely it is that the current GDP will be understated.

d

High income countries with larger governments as a share of GDP have generally a. seen the government decrease in size as real GDP rises. b. been able to be more economically efficient. c. experienced less deadweight losses resulting from taxes and/or government borrowing. d. grown less rapidly than their counterparts with smaller governments.

d

If a used-car dealer purchases a used car for $1,000, restores it, and resells it for $1,500, the dealer contributes a. nothing to production because only existing goods are involved. b. value added equal to $1,500, but only $500 is added to GDP. c. value added equal to $500, but nothing is added to GDP. d. value added equal to $500, and consequently $500 is added to GDP.

d

Keri decided to sleep in today rather than attend her 9 a.m. economics class. According to economic analysis, her choice was a. irrational, because oversleeping is not in Keri's self-interest. b. rational if Keri has not missed any other classes. c. irrational, because economic analysis suggests you should always attend classes that you have already paid for. d. rational if Keri values sleep more highly than the benefit she expects to receive from attending the class.

d

Private property rights exist when property rights are a. exclusively controlled by the owner or owners. b. transferable to others. c. protected by legal enforcement. d. all of the above.

d

Trade creates value by a. moving goods from people who value the goods less to people who value the goods more. b. permitting trading partners to expand output through specialization in areas where they each have a comparative advantage. c. permitting trading partners to expand output through the adoption of mass production methods. d. all of the above.

d

Opportunity cost is defined a. as the difference between the benefits from a choice and the benefits from the next best alternative b. as the difference between the benefits from a choice and the costs of that choice c. only in terms of money spent d. as the value of all alternatives not chosen e. as the value of the best alternative not chosen

e