review homework problems

suppose you buy a house for $175,000. one year leter, the market price of the house has risen to $190,000. if you made a down payment of 15% and took out a mortgage loan for the other 85%, the return on your investment in the house is if you made a down payment of 10 percent and borrowed the other 90%, the return on your investment in the house is

57%

which of the following beest describes scarcity? A) unlimited wants exceed the limited resources available B) prices of good are very high C) markets cannot properly allocate resources D) wants cannot be fulfilled and thus all goods must be rationed

answer (A) Unlimited wants exceed the limited resources available.

milton friedman agrued that the phillips curve did not represent a permanent trade off between unemployment and inflation, since A) there is no diffenence between the long run and the short run phillips curves. B) the long run phillips curve is vertical, there is no tradeoff between unemployment and inflation in the long run C) the long run phillips curve is downward sloping, there is a tradeoff betweeen unemployment and inflation in the long run D) the long run phillips curve is horizontal there is no trade off between unemployment and inflation in the long run

answer (B) the long run phillips curve is vertical there is no trade off between unemployment and inflation in the long run

centrally planned economies allocate resources based on decisions by _________________, while market economies answer these questions through decisions made by ____________________and _____________.

answer; government; households and firms

the level of total investment by firms in new machinery and equipment helps to determine how rapidly the economy grows. this is a ________________issue. however, to understand how much new machinery and equipment firms decide to purchase, one must analyze the incentives individual firms face, which is a ___________________ issue.

answer; macroeconomic; microeconomic

consider the long run phillips curve and the short run phillips curve in the graph at the right.. a movement from point a to point b could be caussed by______________and movement from point a to point c could be caused by _____________________.

short run effects of contractionary monetary policy; long run effects of contractionary monetary policy

according to the taylor rule, what is the federal funds target rate under the following conditions? Equilibrium real federal funds rate equals 2% target rate of inflation equals 2% current inflation rate equals 1% real gdp is 1% below potential real gdp the federal funds target rate equals

2.0%

opportunity cost is A) when consumers and firms use all available information as they act to achieve their goals B) the highest valued alternativve that must be given up to engage in an activity C) when unlimited wants exceed the limited resources available to fulfill those wants D) the idea that because of scarcity, producing more of one good or service means producing less of another good or service

ANSWER (B) the highest valued alternative that must be given up to engage in an activity

consider the following statement; the problem with economics is that it assues that consumers and firms always make the correct decisions. but we know that everyone makes mistakes. what is the correct response to this statement? A) economics has a lot of problems such as those that caused the great recession B) economics asumes that consumers and firms are rational, not that they always make the right decisions C)economics is a proven field of study, and it has already solved this problem D) economics does assume that consumers and firms always make the correct decisions

Answer (B) economics assumes that consumers are firms are rational, not that they always make the right decisions

economists use the word marginal to mean an extra or additional benefit or cost of a decision. an optimal decision occurs when A) marginal benefit is maximized B) marginal cost is zero C) marginal benefit equals marginal cost D) marginal benefit is greater than marginal cost

Answer; (C) marginal benefit equals marginal cost

the fed buys and sells bonds as a part of its policy to reach all of the following objectives except: A) economic growth B) stability of financial Markets and institutions C) price stability D) high unemployment

Answser; (D) high unemployment

according to lucas and sargent, workers and firms have rational expectations, and therefore if the fed pursues an expansionary monetary policy A) agents will immediately adjust their expectations of inflation up B) agents will cause an increase in the natural rate of unemployment C) agents will not change their expectations D) agents will cause an decrease in the natural rate of unemployment

answer (A) agents will immediately adjust their expectations of inflation up

which of the following will NOT have an effect on the natural rate of unemployment? A) changes in monetary policy B) changes in demographics C) changes in unemployment insurance D) extended periods of high unemployment

answer (A) changes in monetary policy

scarcity is central to the study of economics because it implies that A) every choice involves an opportunity cost B) wants are unlimited C) society must make decisions at the margin D) economic agents are rational

answer (A) every choice involves an opportunity cost

julia paul, an analyst at a research institute, lives very close to her office and walks to work every day. meanwhile, her colleague, amanda jones, dislikes the fact that it takes her almost an hour to commute to work every day. as a result, when julia decides to move to a suburb farther away, amanda is very suprised. which of the following, if true, would explain julia's behavior? A) julia saves more in rent than she spends on commuting to work. B) during weekends, julia teaches painting at an orphanage close to work C) the city has one of the highest crime rates in the country D) julia's office is located in the heart of the city E) amanda earns more than julia does.

answer (A) julia save more in rent than she spends on commuting to work

indicate which of the following statements represent positive analysis and which represent normative analysis A) a 50 cent per pack tax on cigarettes will reduce smoking by teenagers by 12 percent. this represents______________________ B) the federal government should spend more on aids research. this represents ______________________. C) rising paper prices will increase textbook prices. this represents ____________________. D) the price of coffee at starbucks is too high. this represents ________________________.

answer (A) positive analysis (B) normative analysis (C) positive analysis (D) normative analysis

one of the basic facts of life is that people must make choices as they try to attain their goals. this unavoidable fact comes from a reality an economist calls A) scarcity B) the market C) economics D) rationality

answer (A) scarcity

if the fed believes the inflation rate is about to increase, it should a) use a contractionary monetary policy to increase the interest rate and shift ad to the left B) use an expansionary onetary policy to lower the interest rate and shift ad to the right C) use a combination of tax increases and spending cuts to keep the =budget balanced D) use a contractionary fiscal policy to increase the interes rate and shift ad to the left

answer (A) use a contractionary monetary policy to increase the interest rate and shift ad to the left

if the fed wants to move from a point on the short run phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation, then it should A) use expansionary monetary policy B) use contractionary monetary policy C) use a combination of expansionary monetary and fiscal policies D) use expansionary fiscal policy

answer (A) use expansionary monetery policy

a student says the following, "I understand why the fed uses expansionary policy, but i don't understand why it would ever use contractionary polic. why would the government ever want the economy to contract?" the government would want the economy to contract when real gdp is A) above potential gdp and the price level is falling B) above potential gdp and the price level is rising C) below potential gdp and the price level is rising D)below potential gdp and the price level is falling

answer (B) abvove potential gdp and the price level is rising

if actual inflation is higher than expected inflation, the A) actual real wage is greater than the expected real wage; unemployment rises. B) actual real wage is less than the expected real wage; unemployment falls C) actual real wage is greater than the expected real wage; unemployment falls D) actual real wage is less than the expected real wage; unemployment rises

answer (B) actual real wage is less than the expected real wage; unemployment falls

an article in the new york times in 1993 stated the following about fed chairman alan greenspan's decision to no longer announce targets for the money; since the late 1970, the fed reserve has made many of its most important decisions by setting a specific target for growth in the money supply.....and often adjusted interest rates to meet them. if the fed would no longer have a specific target for the money supply, it would be targeting the A)discount rate B) federal funds rate C) reserve ratio D) savings rate

answer (B) federal funds rate

suppose that when the fed decreases the money supply, households and firms initially hold less money than they wan to, relative to other financial assets. as a result, households and firms will__________treasury bills and other financial assets, thereby _____________ their prices, and __________their interest rates A) buy; decreasing; decreasing B) sell; decreasing' increasing C) buy; increasing; decreasing D) sell; increasing; decreasing

answer (B) sell; decreasing; incrreasing

macroeconomics is the study of A) how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices. B) the economy as a whole, including topics such as inflation, unemployment, and economic growth. C) why the US has spent so much money on wars and government surveillance of its own citizens

answer (B) the economy as a whole, including tipics such as inflation, unemployment and economic growth.

consider the table year potential gdp real gdp price level 2012 $14.9 trillion 14.9t 110 2013 15.3 15.2 112 what can we expect from the federal reserve bank if it seeks tomove the economy in the direction of long run macroeconoomic equilibrium A) the fed will pursue a contractioonary fiscal policy B) the fed will pursue an expansionary monetary policy C) the fed will pursue a contractionary monetary policy D) the fed will pursue an expansionary fiscal policy

answer (B) the fed will pursue an expansionary monetary policy

if inflation increases beyond expectations of inflation, A) the real wage paid by employers and received by workers will remain the same B) the real wage paid by employers and received by workers will decrease C) the real wage paid by employers and received by workers will increase D) the nominal wage for both employers and workers will increase.

answer (B) the real wage paid by employers and received by workers will decrease

the fed gave up targeting the money supply because A) inflationn was out of control and so the fed changed the target B) the relationship between monetary aggregates and other economic variables was becoming unreliable C) the relationship between interest rates and the money supply was more certain D) congress objected to monetary targets

answer (B) the relationship bbetween monetary aggregates and other economic variables was bcoming unreliable

the phillips curve exhibits A) the direct relationship between the unemploymeent and the inflation rates B) the relationship between the unemployment and the inflation rates C) the situation where cyclical unemployment becomes zero D) the inverse relationship between the actual and the natural rate of unemployment

answer (B) the relationship between the unemployment and the inflation rates

if the fed believes the economy is about to fall into recession, it should A) use an expansionary fiscal policy to increase the interest rate and shift ad to the right B) use an expansionary monetary policy to lower the interest rate and shift ad to the right C) use its judgement to do nothing and let the economy make the self adjustment back to potential gdp D) use a contractionary monetary policy to lower the interest rate and shift ad to the left

answer (B) use an expansionary monetary policy to lower the interest rate and shift ad to the right

suppose, in an effort to prevent the population from declining, italy begins offering new mothers extended periods of paid family leave from work and, consequently, the birthrate per woman increases. If so, then this could best be characterized as an example of people responding to A) religious beliefs B) accounting principles C)economic incentives D) compassion E) envy

answer (C) economic incentives

which of the following statements is correct A) a company is owned bny one person, while a firm is owned by more than one person B) a business has multiple locations, while a company has only a single location C) economistsd use the terms firm, company, and business interchangeably D) a business is always larger than a firm

answer (C) economists use the terms firm, company, and business interchangeably

the federal reserve cannot affect the unemployment rate directly; therefore, the fed typically uses the following at its policy target A) taxes B) inflation C) interest rates D) government expenditures

answer (C) interest rates

tradeoffs force society to make chooices, particularly when answering the following three fundamental questions: A) one, what good and seervices will be produced domestically? two, how will the goods and services be produced? three, is the distribution of goods and services fair? B) one, what goods and services will be produced? two, how will the goods and services be produced? thr3ee, is the distribution of goods and services fair? C)one, what goods and services will be produced? two, how will the goods and services be produced? three, who will receive the goods and services producec? D) one, what goods and services will be produced in foreign countries. Two, who will produce the goods and services? three, who will receive the goods and services produced:?

answer (C) one, what goods and services will be produced? two, how will the goods and services be produced, three who will receive the goods and services produced?

germany has a market economy. as such, german's economy (relative to centrally planned economies) tend to result in A) allocative efficiency and equity but not necessarily productive efficiendy B) allocativve efficiency but not necessarily productive efficiency or equity C) productive efficiency and allocative efficiency but not necessarily equity. D) equity but not necessarily productive efficiency or allocative efficiency. E) productive efficiency but not necessarily allocative efficiency or equity

answer (C) productive efficiency and allocative efficiency but not necessarily equity

according to milton friedman, differences between the actual and expected inflationrate could lead the actual unemployment rate to A) fall below the natural rate, but not rise above it B) remain equal to the natural rate for a long time C) rise above or fall below the natural rate D) rise above the natural rate but not fall below it

answer (C) rise above or fall below the natural rate.

the short run tradeoff between the rate of inflation and the unemployment rate is best represented by; A) the aggregate demand curve B) the short run aggregate supply curve C) the phillips curve D) the long run aggregate supply curve

answer (C) the phillips curve

suppose that the expected inflation rate increases from 4% to 6%. what will happen to the short run phillips curve A) the economy will go back to equilibrium with a lower inflation rate and a higher unemployment B) the short run tradeoff between unemployment and inflation will better than before as the economy moves to a lower short fun phillips curve C) the short run trade off between unemployment and inflation will be worse than before as the economy moves to a higher short run phillips curve D) the real wage will fall, unemployment will fall and the4 economy will go back to equilibrium with an even higher inflation rate

answer (C) the short run trade off between unemployment and inflation will be worse than before as the economy moves to a higher short run phillips curve

allocative efficiency means that A) a good or service is produced at the lowest possible cost B) every good or service is distributed fairly C) a good or service is produced as quickly as possible D) every good or service is produced up to the point where marginal benefit is equal to marginal cost

answer (D) every good or service is produced up to the point where marginal benefit is equal to marginal cost

microeconomics is the study of A) how individuals make good decisions for themselves but hurt society B) how individuals and firms act altruistically to better society C) the economy as a whole, including topics such as inflation, unemployment, and economic growth D) how households and firms make choices, how they interact in market, and how the government attempts to influence their choices

answer (D) how households and firms make choices, how they interact in markets and how the government attempts to influence their choices.

scarcity implies that every society and every individual face trade offs because scarcity means that A) people are greedy and won't share with others B) government is unwilling to redistribute wealth C) people refuse to limit their wants D) human wants are greater than what available resources can produce

answer (D) humans wants are greater than what available resources can produce

economists during the early 1960's throught of the phillips curve as a "policy ment" because they thought that the phillips curve A) represented a direct relationship between unemployment and inflation in the short run B) presented policymakers with a reliable menu of conbinations of unemployment and inflation C) represented a relationship that did not depend on consumers and firms and could change over time. d) represented a structural relationship in the economy that would not change as a result of policy changes.

answer (D) represented a structural relationship in the economy that would not change as a result of policy changes. they were not correct to think of the phillips curve as a policy menu

which of these variables are the main monetary policy targets of the fed? A) the inflation rate and the unemployment rate B) real gdp and the price level C) economic growth and productivity D) the mooney supply and the interest rate

answer (D) the money supply and the interest rate

economist assume that people are rational in the sense that A) they do not respond to economic incentives B) they make decisions based on total, rather than marginal, variables. C) they genereally make the correct choices D) they use all available information as they take actions intended to achieve their goals

answer (D) they use all available information as they take actions intended to achieve their goalss

three economic questions that every society must answer are A) what economic system will be used, how will it be implemented, and who will make market decisions? B) what kind of government will the society have, how will it be run, and who will run it? C) what are the prices of goods, how are they determined, and who will pay for them? D) what goods will be produced, how will they be produced, and who will receive the goods?

answer (D) what goods will be produced, how will they be produced, and who will receive the goods?

based on the taylor rule use the following information to calculate the target federal funds rate variable value target inflation rate 2% current inflation rate 8% real equilibrium fed funds rate 2% output gap 10% in this case, the federal funds target rate is

answer 18%

why doesn't the phillips curve represent a permanent trade off between unemployment and inflation in the long run? A) in the long run, aggregate supply is upward sloping B) in the long run, aggregate demand sets the price level. C) in the long run, aggregate supply is vertical D) in the long run, we're all dead

answer : (C) in the long run, aggregate supply is vertical

every society faaces trade-offs because we live in a world of scarcity. Suppose a student athlete has the opportunity to earn $400,000 next year playing for a minor league baseball team, $700,000 next year playing for a european professional football team, or $0 returning to college for another year. TThe opportunity cost of the student athlete returning to college next year is ___________________.

answer ; $700,000

which of the following statements is correct A) an innovation is the practical application of an invention B) the work technology and the word invention have the same meaning C) an invention is the practical application of an innovation D) the word technology and the word innovation have the same meaning

answer ; (A) an innovation is the ractical application of an invention

which of the following statements about the idea that people are rational is correct A) the idea assumes that consumers and firms take into account the costs of their actions but ignore the benefits B) the idea assumes that consumers and firms use all available information as they act to achieve their goals C) the idea assumes that consumers and firms alwayus make correct decisions C) the idea assumes that consumers and firms take into account the benefits of their actions but ignore the costs

answer ; (B) the idea assumes that consumers and firms use all available information as they act to achieve their goals.

a primary difference between macroeconomics and microeconomics is A) microeconomics is concerned with present decisions while macroeconomics is concerned with future decisions B) there are no true differences between microeconomics and macroeconomics C) microeconomics is concerned with market economies while macroeconomics is concerned with centrally planned economies D) microeconomics examines individual markets while macroeconomics examines the economy as a whole

answer ; (D) microeconomics examines individual markets while macroeconomics examines the economy as a whole

in the figure, the opportunity cost of holding money______________when moving from point a to point b on the money demand curve

answer ; decreases

if the feds policy is successful, what is the effect n the following indicators? actual real gdp; potential real gdp price level unemployment

answer actual real gdp increases potential real gdp does not change price level increases unemployment decreases

a firm operating in a market economy has a strong incentive to be productively effieient and allocatively efficient because the former enables it to ________________________ while the latter ensures it of ______________________________ If a firm is productively and allocatively efficient, it earns ___________________; if it is not, it ___________________________.

answer minimize production costs ; ample reserves a profit suffers a loss

the long run phillips curve is A) horizontal B) positively sloped C) the same as the short run aggregate supply curve D) vertical at the natural rate of unemployment

answer(D) vertical at the natural rate of unemployment

when the fed reserve increases the required reserve ratio as a part of a contractionary monetary policy, there is: A) a decrease in the money supply and a decrease in the inerest rate B) a decxrease in the money supply and an increase in the interest rate C) an increase in the oney supply and an increase in the interest rate D) an increase in the money supply and a decrease in the interest rate

answer: (B) a decrease in the money supply and an increase in the interest rate

if, in the long run, real gdp return to its potential level, then in the long run a) the phillips curve is vertical B) the phillips curve represents a structural relationship C) the phillips curve disappears D) the phillips curve is upward sloping

answer; (A) the phillips curve is vertical

suppose the economy is initially in long run eqilibrium. the fed decides to increase the required reserve ratio. In the sorrt-run, this contractionaary monetary policy will cause: A) a shift from sras1 to sras2 and a movement to point A with a higher price level and the same output. B) a shift from ad2 to ad1 and a movement to point D, with a lower price level and lower output C) a shift from sras2 to sras1 and a movement to pointB, with a lower price level and higher output D) a shift from ad1 to ad2 and a movement to point B, with a higher price level and higher output

answer; (B) a shift from ad2 to ad1 and a movement to point D with a lower price level and lower output.

suppose the economy is initially in long run equilibrium. The fed enacts a policy to buy bonds. in the short run, this expansionary monetary policy will cause; A) a shift from ad2 to ad1 and a movement to point C, with a lower price level and the same output B) a shift from sras2 to sras1 and a movement to point D with a higher price level and lower output C) a shift from ad1 to ad2 and a movement to point B with a higher price level and higher output. D) a shift from sras1 to sras2 and a movement to pointB, with a lower price level and higher output.

answer; (C) a shift from adq1 to ad2 and a movement to point B with a higher price level and higher output

microeconomics is most likely to include the study of A) economic growth B) religious decisions C) inflation D) unemployment E) firm interaction

answer; (E) firm interaction

efficiency means that goods are distriuted in a way that ______________________________________, while equity means that goods are distributed in a way that __________________.

answer; maximizes benefits to society; is fair

________________is concerned with what is, and _________________is concerned with what ought to be. Economics is about _________________, which measure the costs and benefits of different courses of action.

answer; positive analysis; normative analysis; positive analysis

a large corporation that runs nursing homes estimates that changes to medicare will result in lower payments by medicare to nursing homes for short term stays by patients that require therapy or care upon leaving hospitals. assume the corporation is considering expandiing the number of beds it offers at its nursing homess. given the changes to medicare, if the marginal benefit of offering an additional bed is 6,000 and the marginal cost is 7,000 per bed, then the corporation _____________________ offer additional beds

answer; should not

the short run phillips curve exhibits a trade off between inflation and unemployment where as the long run phillips curve shows

no trade off between inflation and unemployment

use the graphs to answer the followinig questions A) inflation rate B) price level

point e on the phillips curve graph respresents the same economiic situation as point b on the aggregate demand and aggregate supply curve point d on the phillips curve graph represents the ssame economic situation as point c on the aggregate demand and aggregate supply graph

suppose over time firms begin to expect higher inflation in the future

shift srpc curve to the right

as expectations of inflation increase, the short run phillips curve will

shift to the right

suppose the inflation rate has beenn at 5 % for several years. the fed decided to increase th discount rate which will reduce aggregate demand and reduce the expected inflation rate. what happens to the phillips curve

sras curve shifts up

given that the phillips curve is derived from the aggregate demand and aggregate supply model, why use the phillips curve?

the answer is that while the aggregate demand and aggregate supply model show the price level, the phillips curve explicitly shows the inflation rate. further, the aggregate demand and aggregate supply model explicity shows changes in the level of real gdp, while the phillips curve explicitylu shows the unemployment rate.

suppose that the equilibrium real gederal funds rate is 5% and the target rate of inflation is 1%. use the following information and the taylor rule to calculate the federal funds rate target; current inflation rage = 4% potential real gdp = $ 14.05 real gdp = $ 14.86 trillion

the federal funds target rate is 13.38%

friedmans defined the natural rate of unemployment as the

unemployment rate that exists when the economy prouces potential gdp