Econ2Test2

The housing shortages caused by rent controls are larger in the long run than in the short run because both the supply of housing and the demand for housing are more elastic in the long run. (True or False)

True

Trade allows a country to consume outside its production possibilities frontier. (True or False)

True

Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods (True or False)

True

Whenever a determinant of demand other than price changes, the demand curve shifts. (True or False)

True

Other than OPEC, the shortage of gasoline in the U.S. in the 1970s could also be blamed on

government regulations in the form of a price ceiling.

For two people who are planning to trade, it is impossible to

have a comparative advantage in both goods.

A price floor is binding if it is

higher than the equilibrium market price.

The real interest rate tells you

how fast the purchasing power of your bank account rises over time.

In a market economy, economic activity is guided by

self-interest and prices.

An advance in production technology will

shift the supply curve to the right.

Warrensburg is a small college town in Missouri. At the end of August each year, the market demand for fast food in Warrensburg

shifts right

Which of the following would NOT be a determinant of demand?

the prices of the inputs used to produce the good

The price index was 110 in the first year, 100 in the second year, and 96 in the third year. The economy experienced

9.1 percent deflation between the first and second years, and 4.0 percent deflation between the second and third years

Beef is a normal good. You observe that both the equilibrium price and quantity of beef has fallen over time. Which of the following would be most consistent with this observation?

Consumer tastes have changed so as to prefer beef less than before.

A production possibilities frontier will be linear and not bowed out if

the tradeoff between the two goods is always at a constant rate.

Consternation Corporation has an agreement with its workers to index completely the wage of its employees using the CPI. Consternation Corporation currently pays its production line workers $7.50 an hour and is scheduled to index their wages today. If the CPI is currently 130 and was 125 a year ago, the firm should increase the hourly wages of its workers by

$0.300.

Tyler and Camille both live in Oklahoma. A new-car dealer in Oklahoma bought a new car from the manufacturer for $18,000 and sold it to Tyler for $22,000. Later that year, Tyler sold the car to Camille for $17,000. By how much did these transactions contribute to U.S. GDP for the year?

$22,000

If the CPI was 104 in 1967 and is 390 today, then $10 in 1967 purchased the same amount of goods and services as

$37.50 purchases today

The country of Aceland produces two goods, televisions and computers. Last year, it produced 200 televisions and 500 computers. This year, it produced 250 televisions and 600 computers. Given no other information, which of the following events could not explain this change?

1) Aceland experienced a reduction in unemployment. 2) Aceland experienced an improvement in computer-making technology. 3) Aceland acquired more resources.

In the circular-flow diagram, firms produce

1) goods and services using factors of production. 2) output using inputs.

Economists, like mathematicians, physicists, and biologists,

1) make use of the scientific method. 2) try to address their subject with a scientist's objectivity. 3) devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.

GDP does not reflect

1) the value of leisure. 2) the value of goods and services produced at home. 3) the quality of the environment. 4) the value of unpaid services.

Jim and Julie meet Mr. Hemphill, the banker, to work out the details of a mortgage. They all expect that inflation will be 3 percent over the term of the loan, and they agree on a nominal interest rate of 8 percent. As it turns out, the inflation rate is 4 percent over the term of the loan. 1. What was the expected real interest rate? 2. What was the actual real interest rate? 3. Who benefited and who lost because of the unexpected inflation?

1. The expected real interest rate was 5 percent (8-3). 2. The actual real interest rate was 4 percent (8-4). 3. Mr. Hemphill, the banker, lost because he received less real interest income than he expected. Jim and Julie gained because they paid less real interest income than they expected.

If nominal GDP is $10 trillion and real GDP is $8 trillion, then the GDP deflator is

125, and this indicates that the price level has increased by 25 percent since the base year.

In 1970, Professor Plum earned $12,000; in 1980, he earned $24,000; and in 1990, he earned $36,000. If the CPI was 40 in 1970, 60 in 1980, and 100 in 1990, then in real terms, Professor Plum's salary was highest in

1980 and lowest in 1970.

Because it is counted as investment, why does the purchase of earthmoving equipment from China by a U.S. corporation not increase U.S. GDP?

Because it creates a positive addition to investment in the US but also a negative increase in imports to the US (net effect = 0).

A reduction in the price of a product and an increase in the number of buyers in the market affect the demand curve in the same general way. (True or False)

False

Some countries win in international trade, while other countries lose. (True or False)

False

Surpluses drive price up while shortages drive price down. (True or False)

False

The law of supply states that other things equal, when the price of a good rises, the quantity supplied of the good falls. (True or False)

False

The producer who has the smaller opportunity cost of producing a good is said to have an absolute advantage in producing that good. (True or False)

False

Which of the following statements is correct about the relationship between inflation and interest rates?

In order to fully understand interest rates, we need to know how to correct for the effects of inflation.

The signals that guide the allocation of resources in a market economy are

Prices

For market economies, which would NOT be correct?

Prices ensure that anyone who wants a product can get it.

Which of the following is NOT a function of prices in a market system?

Prices make an equitable distribution of goods and services among consumers possible.

Which of the following examples of production of goods and services would be included in U.S. GDP?

Samantha, a Canadian citizen, grows sweet corn in Minnesota and sells it to a grocery store in Canada.

Senator Green argues that replacing the income tax with a national sales tax would increase the level of output. Senator Brown objects that this policy would benefit the rich at the expense of the poor.

Senator Green's argument is primarily about efficiency, while Senator Brown's argument is primarily about equality.

If Shawn can produce donuts at a lower opportunity cost than Sue, then

Shawn has a comparative advantage in the production of donuts.

Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot.

The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.

The local Chevrolet dealership has an increase in inventory of twenty-five cars in 2006. In 2007, it sells all twenty-five cars. Which of the following statements is correct?

The value of the cars in inventory will be counted as part of 2006 GDP, and the value of the cars sold in 2007 will not increase 2007 GDP.

Which of the following is NOT correct?

Trade is based on absolute advantage.

A binding minimum wage in a competitive labor market creates unemployment.

True

International trade may make some individuals in a nation better off, while other individuals are made worse off. (True or False)

True

Gina, a U.S. citizen, works only in Germany. The value of Gina's production is included in

U.S. GNP and German GDP.

Which of the following is correct?

Unemployment Rate = number of unemployed (number of employed + number of unemployed) 100

Rent control is

a common example of a price ceiling.

without trade

a country's production possibilities frontier is also its consumption possibilities frontier.

An early frost in the vineyards of Napa Valley would cause

a decrease in the supply of wine, increasing price.

The minimum wage is an example of

a price floor

A binding price ceiling causes

a shortage, which cannot be eliminated through market adjustment.

Which of the following transactions does not take place in the markets for factors of production in the circular-flow diagram?

a woman buys corn for dinner

When we move up or down a given demand curve,

all nonprice determinants of demand are assumed to be constant.

Water shortages caused by droughts can be most efficiently lessened by

allowing price to equate the quantity demanded of water with the quantity supplied of water.

A minimum wage will

alter both the quantity demanded and quantity supplied of labor.

Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see

an increase in the demand for chocolate pudding

If a good is "normal," then an increase in income will result in

an increase in the demand for the good.

Currently you purchase 6 packages of hot dogs a month. You will be graduating in December and will start your new job January 2nd. You have no plans to purchase hot dogs in January. For you, hot dogs are

an inferior good

One advantage market economies have over centrally-planned economies is that market economies

are more efficient.

Changes in nominal GDP reflect

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

For each good produced in a market economy, demand and supply determine

both price and quantity.

In economics, capital refers to

buildings and machines used in the production process.

For an economy as a whole, income must equal expenditure because

every dollar of spending by some buyer is a dollar of income for some seller.

The production possibilities frontier is a graph that shows the various combinations of output that an economy

can produce

Price ceilings and price floors

cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.

Which of the following is an example of depreciation?

computers becoming obsolete

Lead is an important input in the production of crystal. If the price of lead decreases, all else equal, we would expect the supply of

crystal to increase

If the price of a substitute to good X increases, then the

demand for good X will increase.

In the circular-flow diagram, which of the following items flows from households to firms through the markets for goods and services?

dollars spent on goods and services

Ipo did not work last week because flooding forced an evacuation of her workplace. The Bureau of Labor Statistics counts Ipo as

employed and in the labor force.

Factors of production are

inputs into the production process.

When countries specialize according to their comparative advantage,

it is possible to increase world output of all goods.

The labor force equals the

number of people employed plus the number of people unemployed.

Consider the following three items of spending by the government: (1) the federal government pays a $500 unemployment benefit to an unemployed person; (2) the federal government makes a $2,000 salary payment to a navy lieutenant; (3) the city of Bozeman, Montana, makes a $10,000 payment to ABC Lighting Company for street lights in Bozeman. Which of these payments contributes directly to government purchases in the national income accounts?

only items (2) and (3)

Where can an economy not produce?

outside its production possibilities frontier

The adage, "There is no such thing as a free lunch," means

people face tradeoffs.

The invisible hand works to promote general well-being in the economy primarily through

people's pursuit of self-interest.

An economy's scarce resources are allocated by

prices for resources

Unemployment would cause an economy to

produce inside its production possibilities frontier.

The business cycle is measured by the

production of goods and services. number of people employed.

steep demand curve indicates that

quantity demanded will adjust only slightly to a price change.

Other things equal, when the price of a good rises, the

quantity supplied of the good rises.

Two goods are complements if a decrease in the price of one good.

raises the demand for the other good.

A recession has traditionally been defined as a period during which

real GDP declines for two consecutive quarters.

Efficiency

refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society.

Production possibilities frontiers are usually bowed outward. This is because

resources are specialized; that is, some are better at producing particular goods rather than other goods.

The law of demand says that when price

rises, quantity demanded falls.

A model can be accurately described as a

simplification of reality.

In a free market, who determines how much of a good will be sold and the price at which it is sold?

suppliers and demanders together

Binding price ceilings result in each of the following EXCEPT

surpluses.

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because

the CPI better reflects the goods and services bought by consumers.

Markets move toward equilibrium of supply and demand because of

the actions of buyers and sellers.

The scientific method is

the dispassionate development and testing of theories about how the world works.

bowed shape of the production possibilities frontier can be explained by the fact that

the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing.

If, at the current price, there is a shortage of a good,

the price is below the equilibrium price

When computing the opportunity cost of attending a concert you should include

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

For most students, the largest single cost of a college education is

the wages given up to attend school.

A competitive market is one in which

there are so many buyers and many sellers that each has a negligible impact on price.

A production possibilities frontier can shift outward if

there is a technological improvement.

The opportunity cost of an item is

what you give up to get that item.

"Full-employment" unemployment could be defined as

zero percent cyclical unemployment.