practice test

Which of the following is the correct formula for calculating the consumer price index? a. [(price of basket of goods and services in current year/price of basket in base year)] × 100 b. [(price of basket of goods and services in base year/price of basket in current year)] × 100 c. [(CPI in Year 1 − CPI in Year 2)/CPI in Year 2] × 100 d. [(price of basket of goods and services in current year − price of basket in base year)/price of basket in base year] × 100

a. [(price of basket of goods and services in current year/price of basket in base year)] × 100

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 consumer price index but not in the GDP deflator. d. the GDP deflator but not in the consumer price index.

a. both the GDP deflator and the consumer price index.

Making rational decisions at the margin means that people a. compare the marginal costs and marginal benefits of each decision. b. make those decisions that do not impose a marginal cost. c. always calculate the dollar costs for each decision. d. evaluate how easily a decision can be reversed if problems arise.

a. compare the marginal costs and marginal benefits of each decision.

If total spending rises from one year to the next, then a. either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both. b. goods and services must be selling at higher prices. c. employment or productivity must be rising. d. the economy must be producing a larger output of goods and services.

a. either the economy must be producing a larger output of goods and services, or goods and services must be selling at higher prices, or both.

Social Security payments are a. excluded from GDP because they do not reflect the economy's production. b. included in GDP because they represent current income. c. excluded from GDP because they are not private pensions. d. included in GDP because they represent potential consumption.

a. excluded from GDP because they do not reflect the economy's production.

Jackie, a Canadian citizen, works only in the United States. The value of the output she produces is a. included in U.S. GDP, but it is not included in U.S. GNP. b. included in U.S. GNP, but it is not included in U.S. GDP. c. included in neither U.S. GDP nor U.S. GNP. d. included in both U.S. GDP and U.S. GNP.

a. included in U.S. GDP, but it is not included in U.S. GNP.

Trade between countries tends to a. increase both competition and specialization. b. reduce both competition and specialization. c. reduce competition and increase specialization. d. increase competition and reduce specialization.

a. increase both competition and specialization.

People are willing to pay more for a diamond than for a bottle of water because a. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water. b. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water. c. water prices are held artificially low by governments, since water is necessary for life. d. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices.

a. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

In a market economy, who makes the decisions that guide most economic activity? a. Government b. Firms and households c. Households only d. Firms only

b. Firms and households

What basket of goods and services is used to construct the CPI? a. The least expensive and the most expensive goods and services in each major category of consumer expenditures 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. 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

Net exports equal a. imports minus exports. b. Y − (C + I + G). c. Y − (C − I − G). d. exports plus imports.

b. Y − (C + I + G).

If the United States decides to trade with Yemen, we know that a. Yemen will benefit, but trade with a less developed country could not benefit the United States. b. Yemen and the United States can both benefit. c. it will not benefit Yemen because workers in the United States are more productive. d. it will not benefit either country because their cultural differences are too vast.

b. Yemen and the United States can both benefit.

Changes in the GDP deflator reflect a. neither changes in prices nor changes in the amounts being produced. b. both changes in prices and changes in the amounts being produced. c. only changes in prices. d. only changes in the amounts being produced.

b. both changes in prices and changes in the amounts being produced.

Real GDP is the yearly production of final goods and services valued at a. current prices. b. constant prices. c. the ratio of current prices to constant prices. d. expected future prices.

b. constant prices.

The law of supply states that, other things equal, when the price of a good a. rises, the supply of the good falls. b. rises, the quantity supplied of the good rises. c. falls, the supply of the good rises. d. falls, the quantity supplied of the good rises.

b. rises, the quantity supplied of the good rises.

When computing the opportunity cost of attending a concert you should include a. neither the price of the ticket nor the value of your time. b. the price you pay for the ticket and the value of your time. c. the value of your time, but not the price you pay for the ticket. d. the price you pay for the ticket, but not the value of your time.

b. the price you pay for the ticket and the value of your time.

If the nominal interest rate is 5 percent and the real interest rate is 7 percent, then the inflation rate is a. 0.4 percent. b. −2 percent. c. 12 percent. d. 2 percent.

b. −2 percent.

If the consumer price index was 100 in the base year and 106 in the following year, then the inflation rate was a. 106 percent. b. 10.6 percent. c. 6 percent. d. 1.06 percent

c. 6 percent

When the consumer price index rises, the typical family a. finds that its standard of living is not affected. b. has to spend more dollars to maintain the same standard of living. c. can spend fewer dollars to maintain the same standard of living. d. can offset the effects of rising prices by saving more.

c. can spend fewer dollars to maintain the same standard of living.

For any given year, the CPI is the price of the basket of goods and services in the a. base year divided by the price of the basket in the given year, then multiplied by 100. b. previous year divided by the price of the basket in the given year, then multiplied by 100. c. given year divided by the price of the basket in the base year, then multiplied by 100. d. given year divided by the price of the basket in the previous year, then multiplied by 100.

c. given year divided by the price of the basket in the base year, then multiplied by 100.

The basic principles of economics suggest that a. government should become involved in markets when trade between countries is involved. b. markets are seldom, if ever, a good way to organize economic activity. c. government should become involved in markets when those markets fail to produce efficient or fair outcomes. d. government should never become involved in markets.

c. government should become involved in markets when those markets fail to produce efficient or fair outcomes.

A circular-flow diagram is a model that a. explains how countries trade with each other. b. helps to explain how consumers and the government interact with one another. c. helps to explain how the economy is organized. d. incorporates all aspects of the real economy.

c. helps to explain how the economy is organized.

In the simple circular-flow diagram, the participants in the economy are a. firms and government. b. households and government. c. households and firms. d. households, firms, and government.

c. households and firms.

The consumer price index is used to a. monitor changes in the stock market. b. monitor changes in the level of real GDP over time. c. monitor changes in the cost of living over time. d. monitor changes in the level of wholesale prices in the economy.

c. monitor changes in the cost of living over time.

The GDP deflator is the ratio of a. nominal GDP to the inflation rate multiplied by 100. b. real GDP to nominal GDP multiplied by 100. c. nominal GDP to real GDP multiplied by 100. d. real GDP to the inflation rate multiplied by 100

c. nominal GDP to real GDP multiplied by 100.

The market demand curve a. slopes upward. b. is found by vertically adding the individual demand curves. c. represents the sum of the quantities demanded by all the buyers at each price of the good. d. represents the sum of the prices that all the buyers are willing to pay for a given quantity of the good.

c. represents the sum of the quantities demanded by all the buyers at each price of the good.

A rational decisionmaker a. ignores the likely effects of government policies when he or she makes choices. b. ignores marginal changes and focuses instead on "the big picture." c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action. d. takes an action only if the combined benefits of that action and previous actions exceed the combined costs of that action and previous actions.

c. takes an action only if the marginal benefit of that action exceeds the marginal cost of that action.

If the number of buyers in a market decreases, then a. supply will increase. b. supply will decrease. c. demand will increase. d. demand will decrease.

d. demand will decrease.

The law of demand states that, other things equal, when the price of a good a. rises, the demand for the good falls. b. falls, the demand for the good rises. c. rises, the quantity demanded of the good rises. d. falls, the quantity demanded of the good rises.

d. falls, the quantity demanded of the good rises.

In a market economy, economic activity is guided by a. public-interest groups. b. central planners. c. the government. d. self-interest and prices

d. self-interest and prices

The marginal benefit Sabrina gets from purchasing a third pair of gloves is a. more than the marginal cost of purchasing the third pair of gloves. b. the same as the total benefit she gets from purchasing three pairs of gloves. c. the total benefit she gets from purchasing four pairs of gloves minus the total benefit she gets from purchasing three pairs of gloves. d. the total benefit she gets from purchasing three pairs of gloves minus the total benefit she gets from purchasing two pairs of gloves.

d. the total benefit she gets from purchasing three pairs of gloves minus the total benefit she gets from purchasing two pairs of gloves.

GDP is defined as the a. value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. b. value of all goods and services produced within a country in a given period of time. c. value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. d. value of all final goods and services produced within a country in a given period of time.

d. value of all final goods and services produced within a country in a given period of time.