EC final

Assume the government imposes a $3 tax on buyers, which results in a shift of the demand curve from D1 to D2. The amount of the tax (per unit) paid by the consumer is Doc 1.14 A) $1 B) $2 C) $3 D) $8

A) $1

A commercial bank has checkable-deposit liabilities of $50,000 and a required-reserve ratio of 20%. What is the amount of required reserves? A) $10,000 B) $50,000 C) $250,000 D) $1 million

A) $10,000 0.20*$50,000 = $10,000 (following Question 3).

Use the aggregate expenditures model to answer the following question. Assume the marginal propensity to consume (MC) is 0.9. What is the change in equilibrium real GDP following an increase in government spending of $300? A) $3,000 B) $300 C) $270 D) $2,400

A) $3,000

A new law substantially increases the penalties for drunk driving and the police resources devoted to catching drunk drivers Doc 1.13 A) (1) B) (2) C) (3) D) (4)

A) (1)

The following table shows the production schedule of producing soybean and corn. Doc 1.54 What Is the opportunity cost or producing one bushel of corn? A) 0.5 bushel of soybeans B) 1 bushel of soybeans C) 2 bushels of soybeans D) 20 bushels of soybeans

A) 0.5 bushel of soybeans

Use the following table to answer the question below. Doc 1.2 If they are given 3 days to work how many sweaters could Natalia make if she spent all of her time knitting sweaters? A) 12 B) 24 C) 8 D) 16

A) 12 Based on Natalia's production possibilities schedule, if she knits 0 scarves per a day, she can knit 4 sweaters in one day. Over a 3-day period, this means that Natalia could knit 12 sweaters if she spent the whole day knitting sweaters. 4 sweaters per a day X 3 days = 12 sweaters

Which of the following fiscal policy changes would be the most expansionary? A) A $40 billion increase in government purchases B) A $20 billion tax cut and $20 billion increase in government purchases C) A $10 billion tax cut and $30 billion increase in government purchases D) A $40 billion tax cut

A) A $40 billion increase in government purchases Recall that the tax multiplier is -MPC/(1-MPC) and government spending multiplier is 1/(1_MPC). Since the two multipliers have the same denominator and the tax cut is a minus sign, we can compare the change by comparing nominators: MPC and 1. Since 1>MPC, we conclude that government spending multiplier is strictly larger than the tax multiplier. Now we want to compare $40 billion tax cut and $40 billion increase in government spending. Since the government spending multiplier is larger, the answer is A.

The below graph illustrates what happens when (𝑃 by convention is international price): Doc 1.49 A) A small country begins to import a good whose international price was lower than the no-trade price B) A small country begins to export a good whose international price was lower than the no-trade price C) A tariff is instituted on a product the country had been importing D) Other countries institute a tariff on this country's production

A) A small country begins to import a good whose international price was lower than the no-trade price Note that 𝑃W is below where Supply and Demand intersect, so the world price is below the domestic price. When this happens, consumers will choose to buy (import) the lower-price internationally-The "New CS" triangle arises because consumers now benefit from low-priced imports.

What is one significant consequence of fractional reserve banking? A) Banks are vulnerable to "panics" or "bank runs." B) Banks can only lend an amount equal to its deposits. C) Banks hold a portion of their deposits in gold. D) Banks can serve the withdrawals of all their depositors.

A) Banks are vulnerable to "panics" or "bank runs." Fractional reserve banking subject a bank to the vulnerability of not being able to meet the liquidity needs of its borrowers in the event of a bank run. This is because at any one time, banks have only but a fraction of the total amount they owe to depositors.

When the fed increases the money supply, which of the following is true: A) Bond prices go up, which means that interest rates on bonds go down B) Bond prices go up, which means that interest rates on bonds go up C) Bond prices go down, which means that interest rates on bonds go down D) Bond prices go down, which means that interest rates on bonds go up

A) Bond prices go up, which means that interest rates on bonds go down When the money supply increases, interest rates on money go down. People hold less savings in bank accounts (because the interest rate paid went down) and more in bonds. This pushes up the price of bonds. Low (high) prices correspond with high (low) interestrates. For example, if you pay $99 for a $100 bond, you will get $100 next year (approx. a 1% return). If you pay $50 for a $100 treasury bond, you would double your money in one year.

Which of the following will result in a productivity increase? A) Corporations build larger, more efficient factories B) A country doubles its population by encouraging immigration C) Individuals work more overtime D) People choose to buy consumption goods instead of capital goods

A) Corporations build larger, more efficient factories

2 Blanks Suppose that the economy is in long run equilibrium. The US government decides to take on a multi-billion dollar project in order to repair and replace the transportation infrastructure. This investment is so large that it is able to shift the AD demand curve. In the short run, prices will ___ and GDP will ___? A) Increase; Increase B) Increase; Decrease C) Decrease; Increase D) Decrease; Decrease

A) Increase; Increase This increase in government spending shifts the AD curve to the right. So, the new short run equilibrium point will be one in which overall price level has increased and so has GDP .

The Fed decides to decrease the money supply. Which of the following is most likely to happen? A) Investment decreases B) Aggregate supply shifts out C) Money demand shifts out D) Price level increases

A) Investment decreases

Use the following graph to answer the next question. Doc 1.38 The economy is at equilibrium at point B. What would expansionary fiscal policy do? A) Move the economy from point B towards point A. B) Move the economy from point B towards point C. C) Move the economy from point B downward along AD2. D) Move the economy from point B upward along AD2.

A) Move the economy from point B towards point A. Expansionary fiscal policy shifts the AD curve to the right while AS is not affected; thus, from point B to point A.

Relative to the time period from 1000 - 1500, worldwide economic growth from 1700-1900 was A) Much higher B) Much lower C) About the same

A) Much higher

Use the following graph, which shows the supply and demand for British pounds, to answer the next question. Doc 1.48 D1 and S1 represent the initial demand and supply curves. What will be the new equilibrium point if there is an increase in consumer spending by the British on American products and a decrease in consumer spending by Americans on British products? A) Point A B) Point C C) Point H D) Point J

A) Point A This is because the supply of GBP (British Pounds) will increase as Brits seek to purchase more American goods, this is also met by a corresponding decrease in the demand for GBP by Americans as they switch their purchases to American goods. This will have the effect of causing the equilibrium point to settle at A (depreciation of GBP).

A recent NBC news article discusses the high prices that many prisons charge inmates to make phone calls. For example, in Kentucky, it costs $5.70 to make a 15-minute phone call. Several senators are calling for the federal government regulate these prices and force the phone providers to lower their rates. Suppose that phone calls and in-person visits are substitutes and prison visitors frequently purchase snacks from the vending machines in the visitation rooms. Which of the following would we expect to happen to the price and quantity of vending machine snacks if prisons were required to reduce their phone call prices? Note: Assume that a reduction in phone call rates will not result in phone companies reducing their service or lowering phone call quality. A) Price and quantity decrease B) Price increases. The effect on quantity is ambiguous. C) Price decreases. The effect on quantity is ambiguous D) Price increases and quantity decreases.

A) Price and quantity decrease

Use this information for the next two questions: the state of California has implemented a law that requires Uber drivers to be classified as employees of Uber. This resulted in Uber being required to provide its drivers with various benefits, such as guaranteed wages, paid sick days, and health care. This law effectively serves as a: A) Price floor for Uber driver wages B) Price ceiling for Uber driver wages C) Price ceiling for Uber rider fares

A) Price floor for Uber driver wages

Claire makes $50,000 per year and pays $5,000 in taxes. Madeline makes $100,000 per year and pays $25,000 in taxes. This tax system is A) Progressive B) Proportional C) Regressive D) Deficit

A) Progressive

The graph below is for the supply and demand of oil in the United States. The U.S. allows for the international trade of oil. Which of the following statements is most likely to be true: Doc 1.50 A) The U.S. will export some of the oil it produces B) The U.S. will import all of the oil it consumes C) The U.S. will export all of the oil it produces D) The U.S. will neither import nor export oil

A) The U.S. will export some of the oil it produces U.S. consumers will purchase 𝑄𝐷 in oil that is made in the U.S. The rest of the oil produced, 𝑄𝑆 − 𝑄𝐷, will be exported.

Use the following diagram to answer the next question. Doc 1.45 Which of the following would cause a move from MS1 to MS2? A) The banking system decides to hold less excess reserves and make more loans. B) The Federal Open Market Committee decides to sell bonds. C) The discount rate is increased by the regional Federal Reserve banks. D) The Federal Funds Rate increases.

A) The banking system decides to hold less excess reserves and make more loans. Money supply shifts from MS1 to MS2 would mean an increase in money supply. Option A means that money supply increases because of money multiplier effect. Options B, C and D are all powerful tools that the Fed can use to effectively manipulate money supply; however, they all lead to a decrease in money supply. Option B: when the FOMC sells bonds, they are mopping up excess liquidity in the market (selling bonds for money will reduce the money circulating in the economy), which will therefore reduce money supply.Option C: in real life, banks can borrow from the Fed if required reserves are insufficient. The interest rate for the borrowing is called "discount rate". The higher the discount rate, the more "expensive" it is for banks to borrow from the Fed so the more incentive for the banks to have more reserves. Hence, money supply decreases. Option D: in real life, the banks can also borrow from other banks to meet the regulations if the required reserves are not met. The interest rate for the borrowing is the "Federal Funds Rate". Similar argument from Option C applies here. Another similar rate used by major international banks as well as academia is the London Interbank Offered Rate (LIBOR).

Which of the following is a drawback of using a fixed exchange rate? A) The country loses the ability to set monetary policy B) The country loses the ability to increase taxes or cut government spending C) Provides stability to economies dependent on U.S. dollars D) Causes instability for foreign investors considering investing in developing countries

A) The country loses the ability to set monetary policy The correct answer is option A. As a country commits to fixed exchange rate, the country needs all monetary policy tools to maintain the fixed exchange rate. Hence, the country loses the ability to set monetary policy. The question asks the drawback of a fixed exchange rate system, ruling out option C, which is a positive characteristic of a fixed exchange system. Option D is wrong, for a fixed exchange rate country, the stability of a country's currency would be attractive to investors. Option B describes fiscal policy, which is unrelated (for the scope of this course) to exchange rate system.

Which of the following would best be categorized as macroeconomics : A) The effect of a stimulus plan where every household is sent $1,000 B) Studying the impact of increasing the sales tax in East Lansing C) The long-term effects of smoking on health care spending D) Looking at ways to prevent high school students from vaping

A) The effect of a stimulus plan where every household is sent $1,000 The correct answer is 'the effect of a stimulus plan where every household is sent $1,000'. Recall that macroeconomics studies the entire economy of a society. To this end, it is clear the stimulus package will be affecting the whole economy, rather than select individuals. The remaining three answer choices are all topics of applied microeconomics.

Which of the following is a reason why Fed policy might be ineffective? A) The liquidity trap B) Crowding out C) The foreign substitution effect D) The wealth effect

A) The liquidity trap The liquidity trap is a situation in which increasing the money supply does not lower interest rates due to a flattening of the money demand curve. This can be shown by the graph below. Therefore, the policies created by the Fed may be ineffective (see slides p.88-p.91). Doc 1.36

Suppose the price of roses increases. Assume that roses and oranges tend to have similar growing climates, and that farmland that currently grows one of them can easily grow the other crop instead. Which of the following responses is likely? (Note: that we are looking for what happens after the price changes, not for what caused the price change) A) The price of oranges increases B) Quantity of roses demanded increases C) The quantity of oranges sold increases

A) The price of oranges increases

Use the following graph to answer the next question. Doc 1.46 Assume that Japan and the United States are engaged in a system of flexible exchange rates. If more people in the United States decide to purchase Japanese cars, what effect will this have on the market for yen? A) The price of yen will increase. B) The price of yen will decrease. C) The supply of yen will increase. D) The supply of yen will decrease.

A) The price of yen will increase. The price of the yen will increase. This is because as US consumer demand more Japanese cars, there will be an outward (right) shift of the Demand curve for yen as consumers need Japanese yen to buy cars from Japan. This will therefore result in a depreciation of the USD shown by a corresponding equilibrium price above price above $0.80 (e.g. $1.10) i.e. more dollars required to buy a yen representing a yen price increase

When the general price level in our economy increases, which of the following effects does NOT occur? A) The purchasing power of people's savings will increase. B) The interest rate will also tend to increase. C) Foreign buyers will buy less of our output, and we tend to import more. D) Our net exports will tend to decrease.

A) The purchasing power of people's savings will increase. For someone with a fixed amount of saving, if the price level goes up, then the individual can buy less goods with the same amount of saving. Imagine someone with $1000 saving, if the price level of real GDP goes up from $1 to $10, then the real output that she can purchase decreases from 1000 units to 100 units. Hence, the purchase power of people's saving will decrease.

When the price of Nike soccer balls decreased, Ronaldo purchased more Nike soccer balls and fewer Adidas soccer balls. Which of the following best explains Ronaldo's decision to buy more Nike soccer balls? A) The substitution effect B) The income effect C) An increase in the demand for Nike soccer balls D) The price effect

A) The substitution effect Again, the substitution effect is the effect that a change in the price of one good has on the demand for another good. Since Nike soccer balls became cheaper, Ronaldo will now buy more Nike soccer balls and fewer Adidas soccer balls. To Ronaldo, the soccer balls are similar goods, but the price of the soccer balls affects his purchasing decision.

Which of the following is a term of trade that both Brian and Sally will agree on A) Trade 1 bookshelf for 3 chairs B) Trade 3 bookshelves for 1 chair C) Trade 1 bookshelf for 1 chair D) There are no terms of trade acceptable to both parties

A) Trade 1 bookshelf for 3 chairs It costs Brian 2 chairs to make 1 bookshelf. It costs Sally 1 bookshelf to make 4 chairs. The purpose of trade is to make individuals better off. Any acceptable term of trade will be between these two rations, that is, between 1 bookshelf for 2 chairs and 1 bookshelf for 4 chairs. So, an acceptable term of trade in this situation is 1 bookshelf for 3 chairs.

Suppose that a more efficient way to produce a good is discovered, thus lowering production costs for the good. This will cause A) a rightward shift of the supply curve. B) a leftward shift of the supply curve. C) a movement up along the current supply curve. D) a movement down along the current supply curve.

A) a rightward shift of the supply curve. A lowered production cost for a good leads to an increase in supply because it now costs less to produce and supply that good. An increase in supply is a shift of the supply curve downward and rightward.

What function is money serving when you deposit it in a savings account? A) a store of value B) a unit of account C) a checkable deposit D) a medium of exchange

A) a store of value You can deposit your money only because money can help you store value.

The Federal Reserve System regulates the money supply primarily by _______. A) altering the reserves of commercial banks, largely through sales and purchases of government bonds. B) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. C) altering the discount rate and thereby the ability of the banks to make loans. D) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans.

A) altering the reserves of commercial banks, largely through sales and purchases of government bonds.

Use the above figure to answer this question. The combination of sixty-five pounds of corn and fifteen pounds of green beans is A) attainable and efficient. B) not attainable but efficient. C) not attainable. D) not efficient.

A) attainable and efficient. The combination of sixty-five pounds of corn and fifteen pounds of green beans is attainable and efficient. It is attainable because you can produce a maximum combined amount of 80 pounds, and sixty-five pounds of corn plus fifteen pounds of green beans equals 80 pounds, so this would be a point on the PPF curve. This combination is an efficient allocation of resources because to increase the production of one good, you have to decrease the production of another -- you can only produce 80 pounds total, and you're currently producing 80 pounds, so if you want to produce more green beans, you have to produce less corn.

Use the following graph to answer the next question. Doc 1.17 A 3% general sales tax would have a structure that is illustrated by A) curve A. B) curve B. C) curve C. D) none of the curves.

A) curve A. The general sales tax of 3% is applied on the sale of a good and is marked up over and above the original price of the product. This means that it is independent of an individual's income level. That therefore makes the sales tax a regressive one in that it would constitute a greater share of the income of a low-income earner relative to an individual with a higher income.In the diagram, this relationship is shown by Curve A, where a rising income leads to the payment of a smaller percentage of income in tax.

2 Blanks The United States runs a current account _______ and a financial account __________. A) deficit; surplus B) deficit; deficit C) surplus; surplus D) surplus; deficit

A) deficit; surplus

Use the following graph to answer the next question. Doc 1.47 All else held constant, a rightward shift of the demand curve would ________. A) depreciate the dollar B) appreciate the dollar C) reduce the equilibrium quantity of euros D) depreciate the euro

A) depreciate the dollar Please refer to the answer key above.:

A decrease in consumer spending can be expected to shift the aggregate expenditures curve ________. A) downward and the aggregate demand curve leftward B) upward and the aggregate demand curve leftward C) downward and the aggregate demand curve rightward D) upward and the aggregate demand curve rightward

A) downward and the aggregate demand curve leftward A change in consumption behavior reduces aggregate expenditures. Remember that AE = C + I + G + NX. If we reduce C, then we are shifting AE downward. This means that at any given price level, GDP has been reduced. Thus, the aggregate demand curve will shift to the left.

The demand curve for federal funds is ________. A) downward-sloping, because higher interest rates discourage commercial banks from borrowing federal funds, but lower rates encourage borrowing B) downward-sloping, because higher interest rates encourage commercial banks to borrow federal funds C) upward-sloping, because higher interest rates encourage commercial banks to lend federal funds D) upward-sloping, because higher interest rates discourage commercial banks from lending federal funds

A) downward-sloping, because higher interest rates discourage commercial banks from borrowing federal funds, but lower rates encourage borrowing The opportunity cost for the borrowing from other banks is the Federal Funds Rate. We can think of the Fed Funds Rate as the price of borrowing: if the federal funds rate increases the quantity demanded of reserved deceases because it becomes more expensive to borrow. The opposite is true as well. The demand curve can be shown as: Doc 1.35

The economy's long-run AS curve assumes that wages and other resource prices ________. A) eventually rise and fall to match upward or downward changes in the price level B) are flexible upward but inflexible downward C) rise and fall more rapidly than the price level D) are relatively inflexible both upward and downward

A) eventually rise and fall to match upward or downward changes in the price level The idea of having a long-run aggregate supply curves means that we are depending on the fact that no matter the price level, eventually resources prices will adjust so that we are producing at the long-run capacity of our economy. GDP is allowed flexibility in the short-run depending on the AD and AS curves, but we assume that in the long-run, the resource markets eventually adjust their prices so that we are producing at capacity.

When the federal government uses taxation and purchasing actions to stimulate the economy it is conducting A) fiscal policy. B) incomes policy. C) monetary policy. D) employment policy.

A) fiscal policy. "Incomes" and "Employment" policy are not real types of policy. Monetary Policy is when the government decides to increase/decrease the money supply using different means. See lecture slides p.11 for the definition of fiscal policy.

Economists refer to the talents, training, and education of workers as A) human capital. B) physical capital. C) average labor productivity. D) labor supply.

A) human capital. Human capital refers to the knowledge and skills that people acquire in order to increase productivity.

The table below shows the weekly demand for hamburgers in a market where there are just three buyers. Doc 1.7 Refer to the table. If the price of a hamburger decreases from $5 to $3, then the weekly market quantity of hamburgers demanded will A) increase from 24 to 52. B) decrease from 52 to 24. C) increase from 120 to 156. D) increase from 29 to 55.

A) increase from 24 to 52. The weekly market quantity of hamburgers = Quantity Demanded by Buyer 1 + Quantity Demanded by Buyer 2 + Quantity Demanded by Buyer 3 This weekly demand is at one specific price. Be careful not to add the Quantity Demanded for all prices. The weekly market quantity of hamburgers at a price of $5: 9 + 7 + 8 = 24 The weekly market quantity of hamburgers at a price of $3: 21 + 15 + 16 = 52 So, if the price of a hamburger decreases from $5 to $3, then the weekly market quantity of hamburgers demanded will increase from 24 to 52. Logically this increase makes sense because as the price of a good becomes cheaper, a person will buy more of that good.

A nation can produce two products: steel and wheat. The table below is the nation's production possibilities schedule: Doc 1.1 In moving stepwise from possibility A to B to C ... to F, the opportunity cost of a unit of steel in terms of wheat A) increases. B) decreases. C) remains constant. D) increases at first then decreases.

A) increases. From A to B, the opportunity cost of a unit of steel is 10; in order to get 1 more unit of steel (go from 0 units to 1 unit), you need to give up 10 units of wheat (100 units to 90). From B to C, to get 1 more unit of steel, you have to give up 15 units of wheat (90 to 75) . This trend continues for C to D, D to E, etc.

The aggregate demand curve shows the ________. A) inverse relationship between the price level and the quantity of real GDP purchased B) direct relationship between the price level and the quantity of real GDP produced C) inverse relationship between interest rates and the quantity of real GDP produced D) direct relationship between real-balances and the quantity of real GDP purchased

A) inverse relationship between the price level and the quantity of real GDP purchased The AD curve shows the (inverse) relationship between the price level and the quantity of real GDP demanded/purchased. B describes AS curve. Interest rate and real balances are factors that shifts the AD curve. A curve only represents the relationship between the Y- axis (price level in AD-AS model) and X-axis (real GDP in AS-AS model).

If the Fed were to reduce the reserve requirement, we would expect ________. A) lower interest rates, an expanded GDP, and a higher rate of inflation B) lower interest rates, an expanded GDP, and a lower rate of inflation C) higher interest rates, a contracted GDP, and a higher rate of inflation D) higher interest rates, a contracted GDP, and a lower rate of inflation

A) lower interest rates, an expanded GDP, and a higher rate of inflation Reducing the reserve requirement is an example of expansionary monetary policy. More money→lower interest rate (from the money market using graphs as in slides p.11)→more investment→higher GDP and higher inflation rate (using graphs from p.23).

Assume that an increase in a household's disposable income from $40,000 to $48,000 leads to an increase in consumption from $35,000 to $41,000. This means that the household's A) marginal propensity to consume is 0.75. B) average propensity to consume is 0.75. C) marginal propensity to save is 0.20. D) marginal propensity to consume is 0.6.

A) marginal propensity to consume is 0.75. By definition, marginal propensity to consume is defined as the changes in consumption divided by the changes in (disposable) income, MPC = ∆𝐶/∆y . C is a variable for consumption and Y is a variable for income. The uppercase Greek letter Delta, ∆, is used to denote change in quantity. Here, ∆C = 41000 − 35000 = 6000 and ∆Y = 48000 − 40000 = 8000. As a result, MPC = 6000/8000 = 075.

17) Use the following diagrams to answer the next question. Doc 1.34 Assume the economy is on aggregate demand AD1. To reach long-run equilibrium, the Fed should ________. A) move from MS1 to MS2 to lower interest rate and increase investment B) move from MS1 to MS2 to lower interest rate and lower investment C) move from MS1 to MS3 to raise interest rate and lower investment D) move from MS1 to MS3 to raise interest rate and raise investment

A) move from MS1 to MS2 to lower interest rate and increase investment The graphs show that the Aggregate Demand curve needs to shift outwards to the right to be able to reach equilibrium. In order to do this the Fed needs to implement expansionary monetary policy. This will occur when the money supply curve is shifted from MS1 to MS2. On the first graph you can see this will lower interest rates. And then looking at the second graph you'll notice that if interest rates decreases, then investment increases.

If the price level decreases, then the aggregate expenditures schedule will shift and this translates into a ________. A) movement down along the aggregate demand curve B) shift in aggregate demand to the right C) shift in aggregate demand to the left D) movement up along the aggregate demand curve

A) movement down along the aggregate demand curve Just as in the discussion of market demand, the aggregate demand curve cannot be shifted by simply a change in price level. A change in prices represent a movement along the curve. Since the prices are decreasing in this instance, this price change is a movement down the aggregate demand curve.

Use the following graph of the total demand for money to answer the next question. Doc 1.42 Assume we begin at point a. An increase in the interest rate can be shown as a move to ________. A) point b B) point c C) point d D) point e

A) point b The key concept is that since vertical axis represents interest rate, the change in interest rate is reflected as movement along the curve. Factors that are not on the axis may shift the curve. In this case, an increase in the interest rate does not shift the curve so points d and e are wrong. By convention, the lower of the axis means lower interest rate; hence, the correct answer is A, point b.

Cash held by a bank in its vault is a part of the bank's A) reserves. B) liabilities. C) money supply. D) net worth.

A) reserves. Reserves refer to money not being lent by the bank to borrowers but saved. B is incorrect because liabilities are what the bank owes, deposits are liabilities, but the question just refers to cash reserves. C is incorrect because money supply refers to the total volume of liquidity circulating in the economy at a specific time. D is incorrect because net worth is the difference between Assets and Liabilities (Assets - Liabilities)

Use the following diagram to answer the next question. Doc 1.19 Assume a nation's current production possibilities are represented by the curve AB in the above diagram. Economic growth would best be indicated by a A) shift in the curve from AB to CD. B) shift in the curve from AB to EF. C) movement from point 1 to point 2. D) movement from point 3 to point 4.

A) shift in the curve from AB to CD. A shift in the curve AB to CD indicates a shift in the production possibilities frontier (PPF), implying an increase in this nation's ability to produce. A movement along or below a PPF does not imply an increase in potential production, just a change in the allocation of resources (the country is producing inefficiently if below PPF).

An increase in the supply of music downloads indicates that more music downloads will be A) supplied, even if prices of music downloads stayed the same. B) supplied, because music download prices have decreased. C) demanded, because sellers are selling more music downloads. D) demanded, because sellers are putting music downloads on sale.

A) supplied, even if prices of music downloads stayed the same. An increase of supply means that the supply curve is shifted downward and to the right. This increase in supply leads to more of a good being supplied, even if the prices of a good stayed the same. That is the case in this example with the music downloads.

When the price level decreases, ________. A) the demand for money falls and the interest rate falls B) holders of financial assets with fixed money values decrease their spending C) holders of financial assets with fixed money values have less purchasing power D) there is a decrease in consumer spending that is sensitive to changes in interest rates

A) the demand for money falls and the interest rate falls People need money to buy things. If the price level is lower, assuming that consumption behavior in an economy is not changed dramatically, then the demand for money is lower (the money needed for consumption is less). Now, an agent can either hold his/her wealth in the form of money or lend the money out. If the price level is lower, then the demand for money is lower, an agent would keep less money and lend out more, which drives the interest rate down. Since if there are more people lending money in the market, it is easier for those who want to borrow to borrow at a lower interest rate.

Which of the following would most likely increase the demand for gasoline? A) the expectation by consumers that gasoline prices will be higher in the future B) the expectation by consumers that gasoline prices will be lower in the future C) a decrease in the price of gasoline D) an increase in the price of gasoline

A) the expectation by consumers that gasoline prices will be higher in the future The answer cannot be C or D because a change in the price of gasoline itself would result in movement along the demand curve, not a shift in the demand curve. This determinant of demand is considered an expectation of future price. Since consumers expect the price of gasoline to be higher in the future, they will buy more now. Their money has a greater purchasing power for gasoline now than it will in the future when the price is expected to be higher.

The most basic premise of the aggregate expenditures model is that the A) total output produced in the economy depends directly on the level of total spending. B) level of employment in the economy depends inversely on the real wage rate. C) total output produced depends mostly on the total capacity of firms to produce. D) unemployment level in the economy is inversely related to the inflation rate.

A) total output produced in the economy depends directly on the level of total spending. The aggregate expenditures model focuses on the spending side of an economy. In this model, the total goods and services in an economy are solely determined by the level of total spending, which has four components: consumption, investment, government spending, and net exports. Both B and D are incorrect since employment, unemployment, real wage rate and inflation rate are not part of the model. C is incorrect because in the expenditures model, the output is determined not by production but spending.

A country produces two goods: cheese and calculators. In year 1, the price of cheese is $2 and the price of a calculator is $10. In year 2, the price of cheese is $3 and the price of a calculator is $10. In year 2, the country produces 10 units of cheese and 1 calculator. What is real GDP in year 2, using year 1 as the base year. A) $40 B) $30 C) $50 D) Not enough information to answer this question

B) $30 Real GDP is found using current year output and base-year income. This way, we can separate the quantity produced in the current year from any price changes that occurred after the base year. GDP is calculated as: $2 X 10 cheese + $ 10 X 1 calculator

The following table shows the cost schedule of producing t-shirts Doc 1.57 What is the marginal cost of producing the 3rd t-shirt? A) $7 B) $8 C) $9 D) $10 E) $11

B) $8

Assume the government imposes a $3 tax on buyers, which results in a shift of the demand curve from D1 to D2. The government's tax revenue is Doc 1.14 A) $600 B) $900 C) $2,100 D) $2,400

B) $900

East Lansing improves city bus service and makes bus service free on weekends Doc 1.13 A) (1) B) (2) C) (3) D) (4)

B) (2)

Answer the next question on the basis of the following information about the hypothetical economy of Asland. All figures are in millions. Doc 1.20 The labor force in Asland is A) 95 million. B) 102 million. C) 105 million. D) 145 million.

B) 102 million. 7+95=102; 7 is from unemployed and 95 is from employed. Total population is not part of the calculation process for labor force. For example, an individual under the age of 16 is part of the population but not part of the labor force. The term discouraged worker is used to describe an individual of working age who is not looking for employment but would prefer to be working. From Question 1, since the discouraged workers are not actively looking for a job, they are not part of the labor force.

Use the following table to answer the question below. Doc 1.2 If they are given 2 days to work how many scarves could Alexandra make if she spent the whole time knitting scarves? A) 12 B) 24 C) 8 D) 16

B) 24 Based on Alexandra's production possibilities schedule, if she knits 0 sweaters per a day, she can knit 12 scarves in one day. Over a 2-day period, this means that Alexandra could knit 24 scarves if she spent the whole day knitting scarves. 12 scarves per a day X 2 days = 24 scarves

In Macroland autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, investment is fixed at 50, government expenditures are fixed at 150, and net exports are fixed at 20. Aggregate expenditure equals A) 320 + 0.75Y. B) 290 + 0.75Y. C) 320 + 0.25Y. D) 290 + 0.25Y.

B) 290 + 0.75Y. We know that (1)Y=AE, (2)AE=C+I+G+NX, and (3)C=A+(Y−T)∗ MPC, where Y is GDP, AE is aggregate expenditure, C is consumption, I is investment, G is government spending, NX is net export, A is autonomous consumption (consumption when income is zero), and MPC is marginal propensity to consumption, and T is tax. By plugging (3) to (2), we have (4) AE = A + (Y − T) ∗ MPC + I + G + NX. Given all the numeric variables from the question, we have A = 100, MPC = 0.75,T=40,I=50,G=150,NX=20. FromEquation (4), AE=100+(Y−40)∗0.75+50+ 150 + 20 = 0.75𝑌 + 320 − 30 = 0.75𝑌 + 290.

Sally is a carpenter who can make chairs and bookshelves. She has constant opportunity costs. Her production schedule is shown below: Doc 1.5 What is her opportunity cost for a bookshelf? A) 12 bookshelves B) 4 chairs C) 12 chairs D) 2 chairs

B) 4 chairs Recall that opportunity cost of option X will always be measured in option Y. Therefore, we can immediately discard answer choice A. Now, it is important to note that Sally's opportunity cost is constant - that is, going from making 2 to 3 bookshelves is the same as going from 351 to 352 bookshelves. Since we are given information on making 2 and 3 bookshelves, we can observe that the opportunity cost of an additional bookshelf is 4 chairs.

Use the following table to answer the question below. Doc 1.2 Which of the following is an acceptable term of trade? A) 6 sweaters for 10 scarves B) 4 sweaters for 10 scarves C) 2 sweaters for 7 scarves D) 8 sweaters for 15 scarves

B) 4 sweaters for 10 scarves 4 sweaters for 10 scarves is an acceptable term of trade because of Alexandra's and Natalia's opportunity costs. Alexandra can knit 1 sweater for every 3 scarves she knits, so her opportunity cost of 1 sweater is 3 scarves (this is found by taking her maximum production of scarves divided by maximum production of sweaters; 12/4 = 3). Natalia can knit 1 sweater for every 2 scarves she knits, so her opportunity cost of 1 sweater is 2 scarves (divide her max production of scarves by max production of sweaters; 8/4 = 2). The acceptable terms of trade is any combination where they trade 1 sweater for a number between or equivalent to 2 and 3 scarves.

Consider a Bank whose assets consist of $200 in reserves and $800 in loans and whose liabilities consist of $600 in deposits. What is the leverage ratio of this bank: A) 2:1 B) 5:2 B) 3:1 C) 4:1

B) 5:2 Leverage ratio is Assets / Equity. The bank has $1000 in assets and the deposit is liability ($600). Assets minus liabilities = $400 is equity. 1,000 : 400 = 5:2

Use the following graph to answer the next question. Doc 1.37 What combination would most likely cause a shift from AD1 to AD2? A) An increase in taxes and an increase in government purchases B) A decrease in taxes and an increase in government purchases C) An increase in taxes and no change in government purchases D) A decrease in taxes and a decrease in government purchases

B) A decrease in taxes and an increase in government purchases First, make sure that you understand that the AD curve shifting outward is an increase of aggregate demand. It remains to find out which option lead to an increase in aggregate demand. Options A and C are wrong. Decreasing taxes increases consumption and investment, increasing real GDP (Y). Option D is wrong. Increasing G also raises real GDP. (Y = C + I + G + Nx).

Which of the following is able to change the long-run equilibrium GDP for the US? A) The fed decides to print loads of money B) A new revolutionary technology emerges C) Workers around the country unionize to demand higher wages and better working conditions D) People in the US decide they want to spend more and save less, increasing MPC.

B) A new revolutionary technology emerges Only a few things are capable of changing the long-run capacity of the US economy. Simple changes in spending habits or wages aren't enough. The long-run capacity of the economy is driven by the resource markets. Notable changes in these markets include shocks to the level of overall technology and level of education in the population. A new revolutionary technology means that producers in the US are able to produce more even with the same number of resources (workers, machines, raw materials, etc.). This pushes LRAS to the right, changing long-run equilibrium.

Suppose a small town called Spartanville can only produce forks and knives. The graph below shows the production possibilities frontier for Spartanville and four combinations of the amounts of forks and knives. Which point is not attainable? Doc 1.51 A) A B) B C) C D) D

B) B

When the Fed's Open Markets Committee states its target federal funds rate, it is referring to the short-term interest rate that: A) Individuals pay to borrow from savings banks B) Banks pay to borrow monev from each other C) Savings banks pay to individuals D) Banks pay to borrow money from the Fed

B) Banks pay to borrow monev from each other

The graph below shows the demand and supply curves for whiskey. Doc 1.59 What are the consumer surplus (CS) and producer surplus (PS) at equilibrium? A) CS=$14; PS=$6 B) CS=$16; PS=$12 C) CS=$8; PS=$6 D) CS=$16; PS=$24

B) CS=$16; PS=$12

2 Blanks The tables below show Cindy's and Dylan's production schedule of producing hats and gloves. Doc 1.53 ________ has the comparative advantage of producing hats and ________ has the comparative advantage or producing gloves. A) Cindy; Cindy B) Cindy: Dylan C)Dylan; Cindy D) Dylan; Dylan E) Neither; neither

B) Cindy: Dylan

Suppose the government engages in expansionary fiscal policy, increasing government spending through borrowing more. What effect does this have on the loanable funds market? A) Movement to the right on the demand curve B) Demand shifts right C) Demand shifts left D) Supply shifts left E) Supply shifts right

B) Demand shifts right

Calculate the GDP using the Expenditures approach. Doc 1.55 A) GDP is $700 billion B) GDP is $900 billion C) GDP is $1020 billion D) GDP is $800 billion E) GDP is $1620 billion

B) GDP is $900 billion

Drug dealing is potentially a very profitable business, largely because the prices of illegal drugs are often very high. Successful drug dealers can become extremely wealthy. The potential for great wealth can lure teenagers into the drug trade. Additionally, if illegal drugs were not so expensive, drug dealers would not find it worthwhile to go to great lengths to smuggle drugs into the United States. Suppose we want to reduce the street price of illegal drugs. What would be the best way to do this? (Hint: Think about how each of the options would shift the supply and/or demand curves for illegal drugs) A) Increase the criminal penalties on individuals caught selling drugs B) Increase the criminal penalties on individuals caught buying drugs

B) Increase the criminal penalties on individuals caught buying drugs

The economy experiences an increase in the price level and a decrease in real domestic output. Which of the following is a likely explanation? A) Productivity has increased. B) Input prices have increased. C) There has been an increase in government spending. D) Government regulations have been reduced.

B) Input prices have increased. An increase in the price level along with a decrease in overall GDP can be modeled by a leftward shift in the AS curve (try to graph it and see). This means we are looking for answer choices that would shift AS to the left. Answer choice B, increasing the input prices, means that every producer in the economy finds it more expensive to produce their good/service at any given price level. Therefore, the AS curve shifts to the left.

Each week Jim buys the same market basket composed of a case of ramen noodles, two bottles of coke, and three bags of tortilla chips. Jim has found that it takes more of his wages to buy this market basket than before. We can say ________. A) Jim's nominal wage has gone down B) Jim's real wage has gone down C) Jim's after-tax wage has gone down D) Jim must be buying higher quality products

B) Jim's real wage has gone down Real income represents the amount of goods and services that one can purchase with one's income. In this question, Jim buys the same products but with higher and higher proportion of his wage, so his real wage has gone down.

Suppose a Bank with $1000 in assets has a 10:1 leverage ratio. It then sees one of its investments (an assets) increase in value by $10. Which of the following do we expect to happen if the bank wants to maintain its 10:1 leverage ratio? A) Liabilities increase by $10 B) Liabilities increase by $90 C) Equity increases by $100 D) Liabilities decrease by $10

B) Liabilities increase by $90 Equity increased from $100 to $110. The Bank wants to loan out $100 more. The balance sheet has to balance. Before the assets went up $10, the bank had equity of $100 (because leverage ratio = Assets / Equity = 10. This means that it had $900 in liabilities (Assets = Liabilities + Equity. Assets=1,000 and equity = 100). After the assets went up $10, equity increased to 110 (assets increased 10, liabilities were unchanged, and A+L=E). If the bank wants to maintain the 10:1 ratio, it needs A=10*E. So, it needs A=1,100. If A = 1,100 and E = 110, L = 990. L increased from 900 to 990.

Use the following graph to answer the next question. Doc 1.43 Which line in the graph above would best illustrate the transactions demand for money curve? A) Line 1 B) Line 2 C) Line 3 D) Line 4

B) Line 2 Again, for the scope of the course, the transaction demand of money is independent of interest rate (see slide p.77 for graphical explanation).

Use the following graph to answer the next question. Doc 1.40 Assume that the economy is in a rapid expansion with a price level of P2 and output level Q2. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output? A) P2 and Q4 B) P1 and Q1 C) P2 and Q2 D) P1 and Q3

B) P1 and Q1 Because the economy is currently experiencing a rapid expansion and is running "hot," it would be appropriate to run contractionary fiscal policy. Thus, the AD curve will shift to the left.

Due to a natural disaster, the price of coffee goes up. Following this price increase, you observe an increase in the number of bagels sold. This suggests that coffee and bagels are A) Normal goods B) Substitutes C) Luxury goods D) Complements E) Inferior goods

B) Substitutes

Use the following diagram to answer the next question. Doc 1.45 Which of the following would cause a move from MS1 to MS3? A) The banking system decides to hold less excess reserves and make more loans. B) The Federal Open Market Committee decides to sell bonds. C) The discount rate is decreased by the regional Federal Reserve banks. D) The reserve requirement is reduced by the Board of Governors.

B) The Federal Open Market Committee decides to sell bonds. Option B is correct, and Option A and C are incorrect (see Question 14).Option D is incorrect, reducing the reserve requirement ratio enhances credit creation by banks as it gives them a greater ability to lend, so the money supply increases.

The college admissions scandal in 2019 exposed the fact that celebrities were paying professional test- takers to take their children's SATs for them. As a result, both the parents who paid for these services and the people who were paid to take the SATs were severely punished. The threat of being exposed and punished is expected to deter parents from paying someone to take their child's SAT and deter people from being willing to take the someone else's SATs for money. As a result, in the market for illicit-professional-SAT-test-taking, the expected effect on price and quantity are: A) Price increases, quantity decreases B) The effect on price is ambiguous, quantity decreases C) Price decreases, the effect on quantity is ambiguous D) Price increases, quantity increases

B) The effect on price is ambiguous, quantity decreases

Which of the following statements best describes what occurs when monetary authorities sell government securities? A) The size of commercial banks' excess reserves decreases, the money supply increases, and interest rates fall, thereby causing a decrease in investment spending and real GDP. B) The size of commercial banks' excess reserves decreases, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP. C) The size of commercial banks' excess reserves decreases, the money supply decreases, and interest rates rise, thereby causing an increase in investment spending and real GDP. D) The size of commercial bank reserves increases, the money supply increases, and interest rates fall, thereby causing an increase in investment spending and real GDP.

B) The size of commercial banks' excess reserves decreases, the money supply decreases, and the interest rates rise, thereby causing a decrease in investment spending and real GDP. By selling government securities, the monetary authorities "collects" money from commercial banks, therefore, the excess reserves decrease. Money supply in the economy decreases as a result leading to a higher interest rate (see lecture slides p.11). A higher interest rate leads to lower investment (lower incentive for firms to borrow since the cost of borrowing is higher).

Wood is a major ingredient in paper. Suppose the price of wood decreases. Regarding the market for paper, this will cause A) a leftward shift of the supply curve B) a rightward shift of the supply curve. C) a movement up along the current supply curve D) a movement down along the current supply curve

B) a rightward shift of the supply curve.

use the figure below to answer the following question. Doc 1.58 The figure above shows three supply curves for wheat. Which of the following would cause the supply of wheat to shift from S1 to S2? A) increase in the price or wheat B) a subsidy for wheat production C) a decrease in the price of wheat D) a tax on wheat production

B) a subsidy for wheat production

The foreign exchange rate is the ________. A) real rate of interest on long-term government bonds in other nations B) amount of one nation's currency that can be purchased with a unit of another nation's currency C) value of imports of the goods and services and the exports of goods and services in an economy D) rate at which money serves as a medium of exchange for goods and services that would typically be bartered

B) amount of one nation's currency that can be purchased with a unit of another nation's currency this is the definition of exchange rates (slides p.8).

If current aggregate expenditure in an economy are $15.000 and the full employment real GDP is $10,000, then this economy has A) no output gap B) an expansionary gap C) a recessionary gap. D) no autonomous expenditures.

B) an expansionary gap

Use the following graph of the demand for salsa to answer the question below. Doc 1.56 Refer to the three demand curves for salsa and assume that salsa is a normal good. Which of the following would shift the demand for salsa from D1 to D2? a decrease in consumer incomes A) a decrease in the price of salsa B) an increase in consumer incomes C) an increase in the price of salsa D) a decrease in consumer incomes

B) an increase in consumer incomes

Use the following graph of the demand for coffee to answer the question below. Doc 1.9 Refer to the three demand curves for coffee and assume that coffee is a normal good. Which of the following would shift the demand for coffee from D1 to D2? A) an increase in the price of coffee B) an increase in consumer incomes C) a decrease in consumer incomes D) a decrease in the price of coffee

B) an increase in consumer incomes A normal good is a good for which there is a direct (positive) relationship between the demand for the good and income. This means that as your income increases, your demand for a normal good increases, and vice versa. A shift from D1 to D2 is a rightward shift, meaning an increase in demand. Since coffee is a normal good, and the curve shifts to the right, the answer has to be B because a decrease in consumer income would shift the curve to the left, as well as a change in the price of the coffee affects movement along the curve not a shift.

A bank's net worth is equal to its A) assets plus its liabilities. B) assets minus its liabilities. C) liabilities minus its assets. D) profits plus its assets.

B) assets minus its liabilities. The bank's net worth is its total assets minus its liabilities. It is worth noting that net worth, by definition, could be negative.

If Matt's disposable income increases from $4,000 to $4,500 and his level of saving increases from $200 to $325, it may be concluded that his marginal propensity to: A) consume is 0.80. B) consume is 0.75. C) save is 0.60. D) save is 0.30.

B) consume is 0.75. Again, by definition, marginal propensity to save is defined as the changes in saving divided by the changes in (disposable) income, MPS = ∆𝑆/∆𝑌 . Here, ∆S = 325 − 200 = 125 and ∆Y = 4500 − 4000 = 500, so MPS = 125/500 = 0.25. Yet, there is no such option available. It is important to note that Y = C + S (because your income is either spent or saved). It follows that MPS + MPC = ∆𝑆/∆𝑌 + ∆C/∆𝑌 = ∆𝑌/∆𝑌 = 1 (please make sure you know what is going on here). MPC=1−0.25=0.75.

Use the following graphs to answer the next question. Doc 1.61 In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. The interest rate and the level of investment spending in the economy are currently at point D on the investment demand curve. To achieve the long-run goal of a noninflationary, full-employment output of Qf in the economy, the Fed should try to _____. A) decrease aggregate demand by decreasing the interest rate B) decrease aggregate demand by increasing the interest rate C) make no change In the interest rate D) increase aggregate demand by increasing the interest rate E) increase aggregate demand by decreasing

B) decrease aggregate demand by increasing the interest rate

Use the following graphs to answer the next question. Doc 1.32 In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point D on the investment demand curve. To achieve the long-run goal of a noninflationary full-employment output of Qf in the economy, the Fed should try to ________. A) decrease aggregate demand by increasing the interest rate from 2% to 4% B) decrease aggregate demand by increasing the interest rate from 4% to 6% C) increase aggregate demand by decreasing the interest rate from 4% to 2% D) increase the level of investment spending from $120 billion to $150 billion

B) decrease aggregate demand by increasing the interest rate from 4% to 6% To achieve the long-run goal of noninflationary full-employment output the Aggregate Demand curve needs to shift to the left (AD1 to AD2). The AD1 curve correlates to Investment = 120, while the AD2 correlates to I = 90. In order to decrease level of investment spending, the Fed needs to increase the interest rate from 4% to 6%. This is found by looking at the first graph and seeing the relation between level of investment and interest rate. When the interest rate increases, the level of investment will decrease from 120 to 90, which shifts the AD curve to the left, therefore achieving the long-run goal.

The intent of contractionary fiscal policy is to A) increase aggregate demand. B) decrease aggregate demand. C) increase aggregate supply. D) decrease aggregate supply.

B) decrease aggregate demand. Like contractionary monetary policy, contractionary fiscal policy is intended to lower aggregate demand (AD curve shifts inward), which will lower real GDP and reduce inflation.

Other things being equal, a decrease in an economy's exports will A) increase domestic aggregate expenditures and the equilibrium level of GDP. B) decrease domestic aggregate expenitures and the equilibrium level of GDP. C) have no effect on domestic GDP because imports will offset the change in exports. D) increase the amount of imports consumed by the private sector.

B) decrease domestic aggregate expenitures and the equilibrium level of GDP. Export decreases, so the net export decreases (net export= export-import). AE=C+I+G+NX and Y=AE. A lower NX leads to a lower AE and a lower GDP.

The table below shows the weekly supply for hamburgers in a market where there are just three sellers. Doc 1.10 Refer to the above table. If the price of a hamburger falls from $5 to $4, then the weekly market quantity of hamburgers supplied will A) increase from 13 to 17. B) decrease from 17 to 13. C) increase from 9 to 17. D) decrease from 17 to 9.

B) decrease from 17 to 13. The weekly market quantity of hamburgers supplied = quantity supplied by Seller 1 + quantity supplied by Seller 2 + quantity supplied by Seller 3 The weekly market supply is determined by the price. So, the weekly supply is not the supply at all prices, but the supply at one price. If the price falls from $5 to $4, then the weekly market supply quantity will decrease from 17 to 13. Weekly market supply at $5: 8 + 5 + 4 = 17 Weekly market supply at $4: 6 + 4 + 3 = 13

Use the following graphs to answer the next question. Doc 1.32 In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve, respectively. All numbers are in billions of dollars. The interest rate and the level of investment spending in the economy are at point B on the investment demand curve. To achieve the long-run goal of a noninflationary, full- employment output of Qf in the economy, the Fed should ________. A) decrease the interest rate from 10% to 8% B) decrease the interest rate from 8% to 6% C) decrease the interest rate from 6% to 4% D) increase investment spending from $30 billion to $60 billion

B) decrease the interest rate from 8% to 6% This is the same logic from the above question. Find the correlated level of investment to the interest rate. Since the economy is at point B on the investment demand graph, the level of investment is 60 and interest rate is 8%. Meaning, the economy has the AD3 curve currently. In order to achieve the long run goal, the AD curve needs to shift to the right from AD3 to AD2. To do this investment needs to increase. The Fed will thus decrease the interest rate from 8% to 6% to increase investment, which will then shift the AD curve to the right.

Suppose a bank has $100 in deposits. How would a change in the reserve ratio from 10% to 20% affect the money supply? A) increases money supply by $10 B) decreases money supply by $500 C) increases money supply by $500 D) decreases money supply by $10

B) decreases money supply by $500

2 Blanks Crowding out may occur because ________ fiscal policy usually involves the government ________ money. A) expansionary; lending B) expansionary; borrowing C) contractionary; lending D) contractionary; borrowing

B) expansionary; borrowing Expansionary fiscal policy often requires the government to take out loans, thus increasing interest rates and "crowding out" private sector investment.

Monetary policy is expected to have its greatest impact on ________. A) exports B) gross investment C) consumption D) government purchases

B) gross investment Monetary policy is expected to have impacts on gross investment (see slides p.82). Government spending (normally) is not affected by monetary policy. Options A and C are not as sensitive as investment to monetary policy.

In the monetarist view A) changes in investment spending are a major source of macroeconomic instability. B) inappropriate monetary policy is a major source of macroeconomic instability. C) adverse aggregate supply shocks are a major source of macroeconomic instability. D) the fact that prices and wages are flexible is a major source of macroeconomic instability.

B) inappropriate monetary policy is a major source of macroeconomic instability. The monetarist emphasizes the importance of monetary policy (buying and selling bonds, federal funds rate, reserve requirement ratio) in determining the level of output in the economy. This therefore means that in the monetarists view, an improper use of these tools would be the source of instability.

2 Blanks Suppose a bank sees the value of its investments go up. As a result, its equity will _______. If the bank wishes to maintain its leverage ratio. it must increase its ______. A) increase; deposits B) increase; debt C) decrease; reserves D) increase; reserves E) decrease; debt

B) increase; debt

In the mainstream view, one major source of instability in the macro economy is the volatility of A) product prices. B) investment spending. C) consumer spending. D) labor wages.

B) investment spending. Investment spending is a constituent of Aggregate Demand and the mainstream view argues that it is investment spending in particular that is responsible for the changes in the business cycle. Options A, C and D are rather "sticky" in the short-run.

The upward slope of the supply curve reflects the A) principle of specialization in production. B) law of supply. C) fact that price and quantity supplied are inversely related. D) law of diminishing marginal utility.

B) law of supply. The Law of Supply is a principle that states that as the price of a good rises, the quantity supplied will increase, all else held constant.

The transactions demand for money will shift to the A) left when nominal GDP increases. B) left when nominal GDP decreases. C) right when the interest rate decreases. D) right when the interest rate increases.

B) left when nominal GDP decreases. In the scope of this course, we assume that the transactions demand for money is independent of interest rates. Hence, C and D are incorrect. B is correct. If GDP decreases, consumers have less income to purchase. The transactions demand for money will shift to the left as a result.

Money functions as a unit of account if it allows you to A) delay purchases until you want goods and services. B) measure the value or goods and services in a rellable way. C) make exchanges in a more efficient manner. D) increase your confidence in money.

B) measure the value or goods and services in a rellable way.

When loans are repaid at commercial banks A) money is created. B) money is destroyed. C) the assets of commercial banks increase. D) the net worth of commercial banks increases.

B) money is destroyed. Remember in the lectures that money supply can be created in the form of loans: when banks make more loans, money supply increases (hence, the money multiplier). Similarly, when loans are repaid, money is destroyed (more like money supply decreases).

The Social Security tax is regressive because A) the Social Security tax rate applied does not rise with the salary level. B) no Social Security tax is collected for incomes in excess of a "cap" income level. C) each individual must pay a set percentage of his or her income in Social Security taxes. D) as income increases, the Social Security tax rate increases at a decreasing rate.

B) no Social Security tax is collected for incomes in excess of a "cap" income level. In 2019, Social Security contributions (taxes) are collected for incomes up to $132,900 (the cap). The tax rate is 12.4% with half of the tax 6.2% being contributed by the employer, and the other half by the employee. Social Security is regressive in that individuals with incomes in excess of $132,900 experience a decline in the share of their total income that Social Security tax constitutes relative to individuals with incomes below the cap.

The purchase and sale of government securities by the Fed is called ________. A) federal funds market B) open market operations C) money market transactions D) term auction facility

B) open market operations By definition: open market operations is the Fed's practice of buying and selling of U.S. Treasury securities to influence money supply.

The purpose of a contractionary monetary policy is to ________. A) alleviate recessions B) raise interest rates and restrict the availability of bank credit C) increase aggregate demand and GDP D) increase investment spending

B) raise interest rates and restrict the availability of bank credit Options A, C, and D all describe impacts and goals of expansionary monetary policy. For contractionary monetary policy, the goal is to "cool down" the economy by raising interest rates and credit expansion of banks.

The required-reserve ratio is equal to a commercial bank's A) checkable-deposit liabilities divided by its required reserves. B) required reserves divided by its checkable-deposit liabilities. C) checkable-deposit liabilities multiplied by its excess reserves. D) excess reserves divided by its required reserves.

B) required reserves divided by its checkable-deposit liabilities. Reserve Ratio = Required Reserves/Checkable Deposits (higher reserve ratio means lower money multiplier).

The real business cycle theory holds that business fluctuations are caused by A) factors affecting aggregate demand. B) significant changes in technology and resource availability. C) incorrectly anticipated government stabilization policies. D) "stop-and-go" monetary policies.

B) significant changes in technology and resource availability. Real business cycle theorists postulate that changes in macroeconomic stability are prompted by changes in "REAL" events like technology and resource availability (oil price changes, negative natural shocks, etc.).

In real business cycle theory, which of the following is the driving force of macroeconomic instability? A) changes in expenditures, which impact AD B) technology changes and innovation C) uncertainty about risky investment returns D) bad monetary policy

B) technology changes and innovation

The income and substitution effects are part of the reason why A) the supply curve is upward-sloping. B) the demand curve is downward-sloping. C) the supply curve is downward-sloping. D) the demand curve is upward-sloping.

B) the demand curve is downward-sloping. The income effect is the effect that a change in the price of a good, service, or resource has on the purchasing power of income. For example, as the price of gas increases, you tend to spend less of your income on gas, and you have a lower purchasing power. The substitution effect is the effect that a change in the price of one good has on the demand for another good. If the price of pizza goes up, you may choose to have a slice of pizza and a bagel instead of two slices of pizza. Remember: Demand slopes Downward

Steve went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived, he discovered that hamburgers were on sale for $1 each, so Steve bought two hamburgers and a soda. Steve's response to the decrease in the price of hamburgers is best explained by A) the substitution effect. B) the income effect. C) the price effect. D) a rightward shift in the demand curve for hamburgers.

B) the income effect. Again, the income effect is the effect that a change in the price of a good, service, or resource has on the purchasing power of income. Since the price of hamburgers was cheaper than usual, Steve's money has a higher purchasing power, so Steve buys more hamburgers.

In the money market graph, the supply of money is a vertical line because: A) bond prices and interest rates are inversely related B) the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes. C) the supply of money is perfectly elastic. D) lower interest rates result in lower opportunity costs of supply money.

B) the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes.

The Self-Correction view believes that in a recession_____. A) the economy could be below full employment for long periods of time B) there are forces in the markets that automatically move the economy back to full employment C) only monetary policy can effectively restore full employment D) the government should encourage business spending on research and development

B) there are forces in the markets that automatically move the economy back to full employment Self-correcting views argues that government intervention in returning an economy to equilibrium is very difficult. For example, it may take a long time, say a quarter, for the government to realize that the economy is in recession. It takes another long time for the government intervention to take effect. On the other hand, the self- correcting view argues that the market forces of demand and supply will revert the economy back to full employment.

The functions of money are to serve as a A) resource allocator, a method for accounting, and a means of income distribution. B) unit of account, a store of value, and a medium of exchange. C) determinant of consumption, investment, and government spending. D) factor of production, exchange, and aggregate supply.

B) unit of account, a store of value, and a medium of exchange. The functions of money can be found in lecture slides. Option A is incorrect, money is not a means of income distribution. Options C and D are just incorrect.

When a banker records how many dollars each of his borrowers owes the bank, money is serving as a A) store of value. B) unit of account. C) medium of exchange. D) legal tender.

B) unit of account. A banker can only do that because money serves as a unit of account.

When a consumer wants to compare the price of one product with another, money is primarily functioning as a A) store of value. B) unit of account. C) checkable deposit. D) medium of exchange.

B) unit of account. The consumer can meaningfully compare the price only because money serves as a (reliable) unit of account.

From the mainstream perspective, instability in the economy is due to A) volatility of the money supply. B) volatility of aggregate demand. C) excessive use of government policies and regulation. D) volatility of the labor supply.

B) volatility of aggregate demand. The mainstream view argues that fluctuations in the economy are a byproduct of instability in expenditures in the economy and in particular changes in investment spending. Referring to the GDP/Aggregate Demand Equation C+I+G+ (X-M) one can see that any of the elements in the equation can have a destabilizing impact on GDP if they increase or decrease, this results in the peaks and troughs of the business cycle which is the instability referred to by the mainstream view.

Before the Industrial Revolution, living standards in the world A) were relatively stagnant for long periods of time. B) were already rising significantly for many decades. C) are not known, for lack of reliable records from that period. D) were declining because of rapid increases in population.

B) were already rising significantly for many decades. Before the industrial revolution, economies relative to population growth (or GDP per capita) were relatively stagnant. GDP per capita is a useful method of evaluating living standards; thus, it is apparent living standards were relatively stagnant before the industrial revolution.

Theoretically, the sum of the current account, the financial account, and the capital account is ________. A) the trade deficit B) zero C) the reserve balance D) 100

B) zero please refer to the graph in p.99 for a graphical explanation. The current account, financial account, and capital account are components of balance of payment. Current account is the balance of trade while the capital and financial accounts document changes in ownership of domestic assets. The key point here is that all money has a source and a destination, so the balance sheet can be balanced (summing up to zero).

The economy is in a recession. The government enacts a policy to increase purchases by $2 billion. The MPC is 0.8. What would be the full increase in real GDP from the change in government purchases at a given price level?A) $6 billion B) $8 billion C) $10 billion D) $16 billion

C) $10 billion Remember the government spending multiplier from slides p.14: ΔY = [1/(1-MPC)] * (ΔExpenditure). In this instance it is{[1/(1-.8)] * (2,000,000)} = {[1/(.2)] * 2,000,000} = 5 * 2,000,000 = $10,000,000.

Assume that there is a 25% reserve requirement and that the Federal Reserve buys $4 billion worth of government securities. This action has the potential to increase the money supply by a maximum of ________. A) $1 billion B) $14 billion C) $16 billion D) $20 billion

C) $16 billion Use the Equation: Change in Money Supply = (1/RR) x Change in Reserves The reserve requirement rate (RR) is 25% and the change in reserves is $4 billion → (1/.25) x $4 billion = $16 billion

If the government introduced a guaranteed price floor of $40 and agreed to purchase the surplus output, then the government's total support payments to producers would be: Doc 1.15 A) $3,000 B) $3,500 C) $4,000 D) $2,500

C) $4,000

Use the following data to answer the next question.The disposable income (DI) and consumption (C) schedules are for a private, closed economy (an economy with no government and no international trade). All figures are in billions of dollars. Doc 1.23 If disposable income is $550, we would expect consumption to be A) $430. B) $450. C) $460. D) $470.

C) $460. From the income/consumption schedule, we know that MPC=0.6. We are interested in knowing the consumption level when the disposable income is $550. From MPC = ∆C/∆𝑌, we have ∆C = MPC ∗ ∆𝑌 = 0.6∗50=30 (make sure you know why this is true). ∆C=(expected consumption level if income is $550) − (consumption level if income is $500) = 30. So (expected consumption level if income is $550) = 430+30 = 460.

A newly formed nation experiences a $1 billion budget deficit its first year and a $4 billion budget deficit in its second year. What is the national debt? A) $0 B) $4 billion C) $5 billion D) $3 billion

C) $5 billion

Answer the next question based on the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Doc 1.18 If year 2 is the base year, then real GDP in year 5 is ________. A) $120 B) $90 C) $60 D) $30

C) $60 When calculating real GDP you multiply output in the year you are trying to find by the price per unit from the base year. This keeps prices constant across calculations. Real GDP in year 5 : 20 x 3 = 60 "20" is the units of output in year 5 while "3" is the price per unit from the base year 2.

Answer the next question based on the following price and output data over a five-year period for an economy that produces only one good. Assume that year 3 is the base year. Doc 1.52 If year 3 Is the base year, then real GDP in year 5 is _____. A) $120 B) $100 C) $80 D) $60

C) $80

New regulations on taxi companies lead to lots of taxi drivers losing their jobs and looking for other sources of income. Doc 1.13 A) (1) B) (2) C) (3) D) (4)

C) (3)

Use the following data to answer the next question.The disposable income (DI) and consumption (C) schedules are for a private, closed economy (an economy with no government and no international trade). All figures are in billions of dollars. Doc 1.23 The marginal propensity to consume is A) 0.80. B) 0.75. C) 0.60. D) 0.40.

C) 0.60. Similarly, MPC = ∆C/∆𝑌 = 30/50 = 0.6 (see Question 2 and 3 for more details if you don't understand this one). Here ∆C = 340-310 = 30, and ∆Y = 350 - 300 = 50.

The table below shows the weekly supply for hamburgers in a market where there are just three sellers. Doc 1. 10 If seller 3 exits the market (goes out of business), then the weekly market quantity of hamburgers supplied at a price of $4 will be A) 6 B) 9 C) 10 D) 13

C) 10 The weekly market quantity of hamburgers supplied without Seller 3 = quantity supplied by Seller 1 + quantity supplied by Seller 2 Again, the weekly market supply is determined by the price. So, the weekly supply is not the supply at all prices, but the supply at one price. The weekly market quantity of hamburgers supplied at $4 without seller 3 will be: 6 + 4 = 10

If a price ceiling of $50 were put in place, what would the equilibrium quantity be? Doc 1.15 A) 140 B) 340 C) 220 D) None of the above

C) 220

Use the following table to answer the question below. Doc 1.2 Which of the following is an acceptable term of trade? A) 2 scarves for 2 sweaters B) 6 scarves for 1 sweater C) 4 scarves for 2 sweaters D) 10 scarves for 3 sweaters

C) 4 scarves for 2 sweaters 4 scarves for 2 sweaters is an acceptable term of trade because of Alexandra's and Natalia's opportunity costs. Alexandra can knit 1 scarf for every 1/3 sweater she knits, so her opportunity cost of 1 scarf is 1/3 sweaters (divide her max production of sweaters by max production of scarves; 4/12 = 1/3). Natalia can knit 1 scarf for every 1⁄2 sweater she knits, so her opportunity cost of 1 sweater is 1⁄2 scarf (divide her max production of sweaters by max production of scarves; 4/8 = 1⁄2). The acceptable terms of trade is any combination where they trade 1 scarf for a number of sweaters between or equivalent to 1/3 and 1⁄2.

To answer the next question, use the information in the table below which illustrates the multiplier process resulting from an autonomous increase in investment by $5. Doc 1.27 The multiplier in this economy is A) 2. B) 3. C) 4. D) 5.

C) 4. Since income is either spent or saved and $1.25 of the increase in income is saved, change in consumption is therefore $3.75. MPC = ∆𝐶/∆𝑌 = 3.75/5.00 = 0.75. We have MultiplierE = 1/1-MPC = 1/0.25 = 4; that is, an increase in initial investment of $5 leads to an increase of $20 in GDP (∆Y = MultiplierE * ∆Expenditure = 4 ∗ 5 = 20).

Use the following balance sheet for the First Federal Bank to answer the next question. Doc 1.41 If First Federal Bank can make no additional loans, then the monetary multiplier is A) 3.00. B) 4.00. C) 5.00. D) 6.67.

C) 5.00. The key phrase is "can make no additional loans", which would imply that the bank's reserves are exactly required reserves (see Question 5). Reserve Ratio = Required Reserves/Checkable Deposits=60,000/300,000=1/5=20%. From slide p.46, the money multiplier=1/reserve ratio=1/0.2=5.

Answer the question below based on the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Doc 1.22 If year 2 is the base year, the Consumer Price Index for year 1 is A) 150. B) 100. C) 67. D) 50.

C) 67. There is no pre-specified basket of goods here. But since there is only one good produced, we can normalize the basket to one unit of the good. In year 2, the market value of the goods per unit is $3. And in year 1, the market value of the goods per unit is $2. CPI using year 2 as the base year=2/3*100=66.66. The closet option is C.

Use the following balance sheet data for First National Bank to answer the next question. Doc 1.60 If First Federal Bank can make no additional loans, then the money multiplier is A) 0.125 B) 2 C) 8 D) 1

C) 8

Julio is deciding how big of a TV to buy. He can buy any size between 50 inches and 90 inches. The marginal benefit (per inch) and marginal cost (per inch) of various TV sizes are shown below. How big of a TV will Julio buy? Doc 1.4 A) 50 inches B) 81 inches C) 85 inches D) 90 inches

C) 85 inches A rational individual will consume so long as the marginal benefit outweighs marginal costs. Ideally, Julio will purchase a TV with precisely the same marginal benefit and marginal cost. But stores don't offer a size where marginal benefit and marginal cost are the same.As a result, Julio will want his marginal benefit to be as close to marginal cost as possible, before marginal cost grows larger than marginal benefits. So, we can determine he will pick a TV in the 81-85 inch range ($42-$40=$2, the smallest positive value of MB-MC in the table). Naturally, he will pick the largest TV available to him in that price range (more is better), so the answer is 85 inches.

When calculating the balance of payments, which of the following would be credit in the Financial Account of the United States? A) Profits earned by General Motors Chinese operations B) American investors purchasing European treasuries C) A Chinese investor purchasing a hotel in the United States D) Money a Mexican immigrant to the U.S. sends home to her family

C) A Chinese investor purchasing a hotel in the United States Financial account reflects payments to world/US for asset purchases. Specifically, a credit (payment from foreigners) in financial account would be net change in foreign ownership of domestic assets, and a debit (payment to foreigners) would be net change in domestic ownership of foreign assets. Option C, payment from foreigners, is a credit (net change in foreign ownership of domestic asset). Options A, B and D are wrong. Option A, payments from foreigners, is a credit in current account. Option B, payments to foreigners, is a debit in financial account. Option D, payments to foreigners, is a debit in current account.

Which of the following meets the economics definition of a shortage? A) High property taxes in Washington D.C. make it unaffordable to live there B) A hurricane destroyed most of the beachfront property in North Carolina, leading to increased prices and fewer vacationer C) A price cap on bourbon leads to long lines outside of the stores that sell bourbon D) The only Super Bowl tickets available are on reseller web sites, and they cost much more than face value

C) A price cap on bourbon leads to long lines outside of the stores that sell bourbon

Which of the following meets the economics definition of a shortage? A) Delta Airlines has to cancel its plans to add new flights because it did not get any qualified applicants to its recent job posting looking for airplane pilots. B) Minimum wage laws cause warehouses to replace workers with robots. C) A price ceiling on insulin leads to long lines outside of stores that sell insulin. D) A hurricane destroyed most of the beachfront property in North Carolina, leading to increased prices on rental houses and fewer vacationers.

C) A price ceiling on insulin leads to long lines outside of stores that sell insulin.

The growing concern over the spread of infectious disease leads to fewer fans wanting to attend basketball games. Regarding demand for basketball tickets this is a A) A shift to the right of the demand curve B) Movement down and to the right along the demand Curve C) A shift to the left of the demand curve D) Movement up and to the left along the demand curve

C) A shift to the left of the demand curve

Use the following graph for a market to answer the question below. Doc 1.12 Which of the following would best explain why the shift in demand from D1 to D2 would cause price to rise from P1 to P2? A) After the shift in the demand, there would be a surplus at price P2 B) After the shift in the demand, there would be a shortage at price P2. C) After the shift in the demand, there would be a shortage at price P1. D) After the shift in the demand, there would be a surplus at price P1.

C) After the shift in the demand, there would be a shortage at price P1.

Use the following graph to answer the next question. Doc 1.62 Which of the following factors will shift AD1 to AD2? A) An increase in the real interest rate B) A decrease in expected returns on investment C) An increase in consumer wealth D) A decrease in productivity

C) An increase in consumer wealth

Brian is also a carpenter who can make chairs and bookshelves. He has constant opportunity costs. His production schedule is shown below: Doc 1.6 Which of the following is true: A) Sally has a comparative advantage at making both goods B) Brian has a comparative advantage at making both goods C) Brian has a comparative advantage at making bookshelves D) Brian has a comparative advantage at making chairs

C) Brian has a comparative advantage at making bookshelves Remember that an individual cannot have comparative advantage in both activities (unless they have the same production schedules, in which case no one will have a comparative advantage). Consequently, we can disregard the first two answer choices. Now we look at Sally and Brian's opportunity costs and compare. Recall from earlier that Sally's opportunity cost of an additional bookshelf is 4 chairs. When Brian goes from making 0 bookshelves to 1 bookshelf, his opportunity cost is 2 chairs. When he goes from 1 to 2 bookshelves, his opportunity cost is again 2 chairs. Thus, Brian has a comparative advantage at making bookshelves, since his opportunity cost of an additional bookshelf (2 chairs) is lower than that of Sally (4 chairs.) Note that this implies Sally has a comparative advantage in making chairs.

Belize maintains a fixed exchange rate and pegs its currency to the U.S. dollar. tourism leads to many more Americans traveling to Belize on vacation. Which of the following represents an activity that the Belize government would likely undertake to maintain a fixed exchange rate? A) Sell U.S. savings bonds for Belize currency and take the Belize currency out of circulation B) Pursue contractionary monetary policy C) Buy U.S. dollars using Belize currency D) Increase taxes

C) Buy U.S. dollars using Belize currency As more Americans travel to Belize, the demand for Belize currency increases, a outward shift of the demand curve. If the supply for Belize money is not changed, the price of Belize money is higher. To maintain a fixed exchange rate (with respect to U.S. dollar), the government of Belize has to manipulate Belize money supply to lower the price. That is the government has to increase Belize money supply. Only Option C increases Belize money supply, buying U.S. dollars using Belize currency will increase the amount of Belize money circulating in the market.

Use the following excerpts from a January 20, 2020 Wall Street Journal article to answer the following question: Subaru Corp.'s chief executive said he didn't see much evidence Americans want electric vehicles or plug-in hybrids and expressed frustration at navigating between environmental regulations and consumer demand. Tokyo-based Subaru relies on the U.S. for two-thirds of its global sales, and has already had a tough experience trying to sell a vehicle that can be charged at home. In 2018, [Subaru] introduced a plug-in hybrid version of the Crosstrek. It said just 300 units of the model were selling each month on average. In this area, Mr. Nakamura said, "We think the U.S. market is really difficult." Based on this information, what do we expect to happen to the plug-in hybrid Crosstrek: A) There will be a persistent (long-lasting) surplus B) There will be a persistent (long-lasting) shortage C) Equilibrium price will decrease D) Equilibrium price will increase

C) Equilibrium price will decrease

Use the following diagrams for the U.S. economy to answer the next question. Doc 1.31 Which of the diagrams best portrays the effects of an increase in foreign spending on U.S. products and an expansion? A) Graph (1) B) Graph (2) C) Graph (3) D) Graph (4)

C) Graph (3) Increasing foreign demand for US products means that our exports will likely increase. So, the NX portion of the aggregate expenditures model will increase, leading to a rightward shift in the aggregate demand curve. This is demonstrated in graph (3).

The United States and Canada can both produce either cowboy hats or maple syrup. The United States can produce either 100 cowboy hats or 100 jars of syrup. Canada can produce either 100 jars of syrup or 50 cowboy hats. Which of the following statements is not true: A) The United States will only produce cowboy hats B) In equilibrium, the United States trading 1 cowboy hat to Canada in exchange for 1.5 jars of syrup would be acceptable to both parties. C) In equilibrium, the United States trading 2 cowboy hats to Canada in exchange for 1 jars of syrup would be acceptable to both parties. D) In equilibrium, the United States trading 3 cowboy hats to Canada in exchange for 1 jars of syrup would be acceptable only to Canada

C) In equilibrium, the United States trading 2 cowboy hats to Canada in exchange for 1 For the United States, the opportunity cost (OC) of producing a cowboy hat is 1 jar of syrup, and the OC of producing a jar of syrup is 1 cowboy hat. For Canada, the OC of producing a cowboy hat is 2 jars of syrup (give up 100 jars of syrup to get 50 hats) and the OC of producing a jar of syrup is 1⁄2 cowboy hat. So, the U.S. has the lower OC for producing hats and will only produce hats. This means Canada will only produce syrup. The U.S. is willing to pay up to 1 cowboy hat to buy a jar of syrup (if the price is any higher, it will just produce syrup itself). This also means it will sell a cowboy hat if it is paid at least 1 jar of syrup. Canada is willing to pay up to 2 jars of syrup to get a hat. So, if the price of hat is between 1 jar of syrup and 2 jars of syrup, both parties will accept the deal. The United States will not be willing to pay 2 hats to Canada in exchange for 1 jar of syrup, because the U.S. can produce its own syrup at an opportunity cost of only 1 hat

How would a decrease in price of Blu-Ray movies affect the demand for Blu-Ray players? A) Increase in supply B) Increase in quantity demanded C) Increase the demand D) Decrease the demand

C) Increase the demand Blu-Ray movies and Blu-Ray players are considered compliments. Compliments are goods that are used with one another. So if the price of Blu-Ray movies decreases, then the demand for Blu- Ray players will increase. If the price of one complimentary good decreases, then the demand for the other good will increase. If the price of one complimentary good increases, then the demand for the other good will decrease.

Assume the economy experiences a decrease in the price level and an increase in real gross domestic output. Which of the following is a likely explanation? A)Government regulations have been increased. B) Input prices have decreases. C) Input prices have decreases. D) There has been a decrease in government spending.

C) Input prices have decreases.

Suppose a shock in the economy leads to an increase in the demand for loanable funds. (So, demand for loanable funds shifts to the right). How does this impact the investment demanded? Remember, the "price" on the investment demand curve is the interest rate. (Hint: it may help to graph the loanable funds market first, and then draw a new graph for the investment demand curve) A) Investment demand curve shifts left B) Investment demand curve shifts right C) Movement up and to the left along the investment demand curve D) Movement down and to the right along the investment demand curve

C) Movement up and to the left along the investment demand curve

Over 50% of federal discretionary spending goes towards A) Social security B) Highways C) National defense D) Medicare

C) National defense

Use the following graph to answer the next question. Doc 1.39 Assume that the economy is in a recession with a price level of P1 and output level Q1. The government then adopts an appropriate discretionary fiscal policy. What will be the most likely new equilibrium price level and output? A) P2 and Q4 B) P1 and Q1 C) P2 and Q2 D) P1 and Q3

C) P2 and Q2 Given that the economy is in a recession, we can assume the country will pursue expansionary fiscal policy over contractionary fiscal policy. Thus, the fiscal policy will shift the AD curve to the right.

Use the following graph of the demand for electric cars to answer the question below. Doc 1.9 Which of the following would occur if electric cars became less expensive? A) D3 to D1 B) D2 to D1 C) Point a to point b D) Point b to point A

C) Point a to point b Since the demand curve is the demand for electric cars, a change in the price of electric cars would be a movement along the demand curve, not a shift of the demand curve. As electric cars become less expensive, then there would be a movement down and to the right on the demand curve (from point a to point b).

What would we expect to happen to equilibrium price and quantity in the flower market after genetically modified flower seed increases flower crop productivity? A) Price increases and quantity decreases B) Equilibrium price and quantity are unchanged C) Price decreases and quantity increases D) Price increases and quantity stays the same E) Price decreases and quantity decreases

C) Price decreases and quantity increases

American Airlines based their fleet of Boeing 737 Max airplanes at Miami International Airport. In March of 2019, the United States government banned the use of these airplanes due to safety concerns. How would we expect this to affect the price and quantity of airline travel out of Miami International Airport? A) Price increases and quantity increases B) Price increases and the effect on quantity is ambiguous C) Price increases and quantity decreases D) Price decreases and the effect on quantity is ambiguous

C) Price increases and quantity decreases

Where is labor exchanged in the circular flow model? A) Product Market B) Households C) Resource Market D) Firms

C) Resource Market

Which of the following should be included as part of the GDP of the United States? A) You buy an American-made used bed on Craiglist B) You mow your own lawn instead of paying $40 for someone else to do it C) Sally buys American-grown lumber to use to build shelves in her garage D) LeBron James films a commercial in Canada

C) Sally buys American-grown lumber to use to build shelves in her garage

Belize maintains a fixed exchange rate and pegs its currency to the U.S. dollars. A sudden decrease in tourism leads to a decline in Americans traveling to Belize on vacation. Which of the following represents an activity that the Belize government would likely undertake to maintain a fixed exchange rate? A) Lower the reserve ratio of commercial banks in Belize B) Buy U.S. savings bonds with Belize currency C) Sell U.S. dollars for Belize currency D) Buy more Belize government issued bonds with Belize money

C) Sell U.S. dollars for Belize currency

Use this information for the next two questions: the state of California has implemented a law that requires Uber drivers to be classified as employees of Uber. This resulted in Uber being required to provide its drivers with various benefits, such as guaranteed wages, paid sick days, and health care. We would expect this law to result in a: A) Shortage of Uber drivers B) Market-clearing amount of Uber drivers C) Surplus of Uber drivers

C) Surplus of Uber drivers

Which of the following is a good explanation of one reason why aggregate demand slopes down? A) Higher prices increase firm revenues. B) When prices decrease, domestically-made goods become expensive, so imports increase. C) The buying power of your cash goes up when prices decrease. D) When the price of one good goes up, you will substitute to another good.

C) The buying power of your cash goes up when prices decrease.

Which of the following would not cause the demand for hamburgers to increase. Assume hamburgers are an inferior good and that hamburgers and French Fries are compliments: A) An ad campaign successfully convinces people that hamburgers taste great B) The price of French Fries goes down C) The cost of beef (an input to hamburgers) goes down D) People's incomes decrease

C) The cost of beef (an input to hamburgers) goes down

In the market for grills, supply decreases and demand increases. What effect do these supply and demand changes have on the equilibrium price and quantity of a grill? A) The equilibrium quantity would decrease, but the effect on price is uncertain B) both the equilibrium price and quantity would increase C) The equilibrium price would increase, but the effect on the equilibrium quantity is uncertain. D) The equilibrium price would fall, and the equilibrium increase

C) The equilibrium price would increase, but the effect on the equilibrium quantity is uncertain.

During the Great Recession, the government borrowed large sums of money to spend on expansionary fiscal policy, including tax cuts and increases in government spending. Some economists were concerned about the etfects of crowding out. Which of the following statements would most closely reflect their viewpoint: A) Government borrowing will "crowd out" individuals who would have been saving their money. B) The increase in borrowing will increase money supply, leading to a recession. C) The increase in borrowing will cause interest rates to increase, which will reduce private investment. D) The tax cuts will not spur additional spending because the Marginal Propensity to Consume is low.

C) The increase in borrowing will cause interest rates to increase, which will reduce private investment.

Use the figure below to answer the following question. Doc 1.11 The figure shows three supply curves for apples. If you observe the supply of apples shift from S1 to S3, which of the following could be responsible for this shift? A) Apple producers are willing to sell more at every price. B) The producers of apples now receive a subsidy. C) The producers of apples now must pay a tax. D) Apple production has increased.

C) The producers of apples now must pay a tax. A shift in supply from S1 to S3 is a decrease in supply because the curve shifts leftward and upward. Changes in the supply curve include: -Taxes and Subsidies -Change in resource costs -Change in technology -Seller expectations -Number of sellers Of choices A, B, C, and D, C is the only choice that involves a decrease in supply. A tax is a payment made to the government as a result of economic activity. A tax on producers leads to a decrease in supply because this is an additional cost for the supplier.

Suppose there is an increase in exports of U.S.-made farm equipment. There are no changes in imports, factor income, or transfers. What must be the case: A) There is an increase in the Financial Account Balance of the United States B) There is a decrease in the Current Account Balance of the United States C) There is a decrease in the Financial Account Balance of the United States D) The Current Account Balance of the United States is unchanged

C) There is a decrease in the Financial Account Balance of the United States An increase in US export means an increase in credit in current account. As a result, there is an increase in the balance of current account, ruling out option B. Since the balance of payments implies that financial account and current account sum up to zero (Question 11), there is a decrease of financial account balance.

Which of the following is an example of a reason why the supply curve for vape pens slopes up? A) When the price of vape pens increases, teenagers cannot afford to buy them. B) Suppliers know that vaping is addictive and therefore adults who vape are willing to pay a lot of money for vape pens. C) When the price of vape pens increases, more companies are able to profit off of selling them and decide to enter the market. D) Vape pens are heavily taxed E) Vape pens are an inferior good with few substitute.

C) When the price of vape pens increases, more companies are able to profit off of selling them and decide to enter the market.

For exercising, you have decreasing marginal benefits (in terms of how much you enjoy feeling healthy) and increasing marginal costs (in terms of how much you dislike exercising. After exercising one day, you note that, for the last hour you spent exercising, the marginal benefit of exercising was greater than the marginal cost. Which of the following is true: A) You exercised the right amount B) You exercised too much C) You should have exercised more

C) You should have exercised more If your marginal benefit outweighs your marginal cost of a certain activity, you should do more of that activity (in an optimal world, you want MB=MC). So, because your marginal benefit was greater than your marginal cost for the hour of exercise, you should have exercised more.

Use the following graph of the demand for electric cars to answer the question below. Doc 1.9 Refer to the three demand curves for electric cars. Which of the following would shift the demand for electric cars from D1 to D3? A) an increase in the price of gasoline B) an increase in the price of electric cars C) a decrease in the price of gasoline D) a decrease in the price of electric cars

C) a decrease in the price of gasoline A shift in demand from D1 to D3 is a decrease in demand because it is a downward and leftward shift of the demand curve. The answer cannot be B or D, because a change in the price of the electric car itself is a movement along the demand curve. Gasoline and electric cars are considered substitutes because gasoline is used for non-electric cars. So, if the price of gasoline decreases, more people will want to drive non-electric cars instead of electric cars because it will be cheaper, so the demand for electric cars decreases. Substitutes are defined as goods that are replacements for one another.

If aggregate expenditure in an economy equals 2,000 + 0.8Y and full employment real GDP equals 11,000, then this economy has A) no autonomous expenditure. B) an expansionary gap. C) a recessionary gap. D) no output gap.

C) a recessionary gap. AE=2000+0.8Y,Y𝐹𝐹 =11000. Y at full employment level = AEf = 10800 < Yf. The subscript F denotes full employment level. The economy is operating at a level below full- employment real GDP, so it's a recessionary gap.

The Federal Reserve System regulates the money supply primarily by ________. A) altering the discount rate and thereby the ability of the banks to make loans B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans C) altering the reserves of commercial banks, largely through sales and purchases of government bonds D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply

C) altering the reserves of commercial banks, largely through sales and purchases of government bonds The primary way the Fed manages the money supply is through altering reserves by buying and selling bonds (see lecture slides p.32). This is also known as expansionary and or contractionary monetary policy. Options A, B, C are in the toolbox of the Fed, but the question asks for the primary tool. Option D is false as most of the money supply changes do not involve actually printing money.

Adding up the market value of all final and intermediate goods and services in an economy in a given year would result in ________. A) the calculation of GDP for that year B) an amount less than GDP for that year C) an amount greater than GDP for that year

C) an amount greater than GDP for that year When calculating GDP you only include final goods and services. Intermediate goods are used in making final goods, so these would be counted twice if you had to include them into GDP. Thus, adding the value of both would result in an amount greater than the GDP for that year.

Suppose that investment is increasing and that MPC is 0.75. Most of the increase in real GDP that results is due to ________. A) additional increases in investment B) an increase in net exports C) an increase in consumption D) an increase in government purchases

C) an increase in consumption Due to the expenditures multiplier, a small change in investment leads to a large change in consumption.

Use the figure below to answer the following question. Doc 1.11 The figure above shows three supply curves for wheat. Which of the following would cause the quantity of wheat supplied to increase from point a to point b? A) a tax on wheat production B) a subsidy for wheat production C) an increase in the price of wheat D) a decrease in the price of wheat

C) an increase in the price of wheat Movement along the supply curve from point a to point b, is an increase in the quantity supplied. Movement along the supply curve is caused by changes in the price of a good, which in this case is wheat. For the quantity supplied of wheat to increase, that means the price of wheat would also have to increase, according to the Law of Supply. Law of Supply states that as the price of a good rises, the quantity supplied will increase, all else held constant.

Use the following graph to answer the next question. Doc 1.64 All else held constant, a rightward shift of the supply curve would _____. A) appreciate the euro B) depreciate the dollar C) appreciate the dollar D) reduce the equilibrium quantity of euros

C) appreciate the dollar

A bank is in the position to make loans when required reserves A) equal actual reserves. B) equal excess reserves. C) are less than actual reserves. D) are greater than actual reserves.

C) are less than actual reserves. Banks can only lend out money when they have reserves that meets the required reserves threshold set by the Fed (central bank). A is incorrect since banks are not allowed to do that by definition. D is also incorrect because it effectively means that the bank is violating the regulation rules set by the Fed. B is not an entirely correct statement. The excess reserves means the reserves that is higher than the required reserves. Option B is incorrect in a sense that if the excess reserves are positive, banks are allowed to make loans.

One advantage of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers A) make the actual budget a better reflection of the condition of the economy than the standardized budget. B) do not produce a cyclical deficit as discretionary fiscal policy does. C) are not subject to the timing problems of discretionary fiscal policy. D) have a greater multiplier effect than discretionary fiscal policy.

C) are not subject to the timing problems of discretionary fiscal policy. Automatic stabilizers are automatic. Thus, they are immediate. Fiscal policy takes time to plan (a long time) and implement. After the implementation, the time it takes to generate effects may be even longer.

If an economy maintains a small rate of growth for a long period of time, then the size of the economy A) can only increase by a small amount. B) can never double. C) can increase by a large amount. D) will stay nearly constant.

C) can increase by a large amount. Both A, B and D in this question are mathematically incorrect: let x be an arbitrary positive number and t is a long period of time. If t goes to infinity, then x*(1.0001)^t goes to infinity. Even if the growth is small, in a long time, the growth could be significant (remember the 72 rule).

The cost of a higher living standard in the future is giving up A) current investment. B) future investment. C) current consumption. D) future consumption.

C) current consumption. When there is an increase in living standards, there is often purchases in capital goods (or Investment); thus, providing less money towards consumption. Therefore, to increase living standards a decrease in consumption is often necessary.

If the Fed wants to prevent inflation, It should the money supply. This will cause GDP to A) decrease; increase B) increase; increase C) decrease; decrease D) increase; decrease

C) decrease; decrease

Getting a college degree is an example of investing in A) physical capital. B) technology. C) human capital. D) research and development.

C) human capital. A college degree is an example of human capital because education is a method of acquiring skills.

Consider the currency market for British pounds and U.S. dollars. An increase in the supply of British pounds ________. A) results in an appreciation of the pound and a depreciation of the dollar B) results in a depreciation of the pound and a depreciation of the dollar C) is equivalent to an increase in the demand for the U.S. dollar D) is equivalent to a decrease in the demand for the U.S. dollar

C) is equivalent to an increase in the demand for the U.S. dollar his is because an increase in the supply of pounds assuming no corresponding increase in demand would result in a depreciation of the GBP (British Pound) and an appreciation of the USD. This is equivalent to an increase in the demand for the USD which would also result in an appreciation of the dollar and depreciation of the pounds, assuming unchanged supply.

The best example of a "frictionally unemployed" worker is one who A) reduces productivity by causing friction in a business. B) is laid off during a recessionary period in the economy. C) is in the process of voluntarily switching jobs. D) is discouraged and not actively seeking work.

C) is in the process of voluntarily switching jobs. Frictional unemployment is a type of unemployment that essentially means a worker is unemployed and is in the process of searching/waiting for jobs. The option A is incorrect because the term friction mainly comes from the fact that there are frictions in the job matching process. Option B describes cyclical unemployment. Option D is describing discouraged worker.

A nation's nominal gross domestic product (GDP) ________. A) can be found by summing C + I + S + NX B) is always some amount less than C + I + G + NX C) is the dollar value of all final output produced within the borders of the nation during a specific period of time D) is the dollar value of all final output produced by its citizens, regardless of where they are living

C) is the dollar value of all final output produced within the borders of the nation during a specific period of time Definition of GDP

If the Federal Reserve System buys government securities from commercial banks and the public, then ________. A) commercial bank reserves will decline B) commercial bank reserves will be unaffected C) it will be easier to obtain loans at commercial banks D) the money supply will contract

C) it will be easier to obtain loans at commercial banks Since the Fed is buying bonds, they are inserting money into the economy. With more money in the economy the reserves of commercial banks will increase. This will allow banks to provide loans to individuals and businesses much easier.

The largest expenditure of the U.S. Federal government is for A) education. B) national defense. C) mandatory spending. D) interest on public debt.

C) mandatory spending. The federal government spends approximately 38% for pensions (social security) and 16% on income security for a grand total of 54% of its total $2,739 billion in total mandatory expenditure (Refer to Slide 9 in Public Finance).

Which of the following functions of money enables society to gain the benefits of geographic and labor specialization? A) unit of account B) store of value C) medium of exchange D) medium of deferred payment

C) medium of exchange Without money as a medium of exchange, then it is a barter economy, one would directly exchange goods or services for other goods of services without a medium of exchange, which significantly limit the development of geographic and labor specialization.

A bank's required reserves can be calculated by A) dividing its excess reserves by its required reserves. B) dividing its required reserves by its excess reserves. C) multiplying its checkable-deposit liabilities by the reserve ratio. D) multiplying its checkable-deposit liabilities by its excess reserves.

C) multiplying its checkable-deposit liabilities by the reserve ratio. This can be directly derived from the formula is Question 2. From Reserve Ratio = Required Reserves/Checkable Deposits, multiply both sides of the equation with Checkable Deposits, then Required Reserves=Reserve Ratio* Checkable Deposits.

Use the aggregate expenditures model and the following values to answer the next question. Doc 1.28 Determine the change in the equilibrium real GDP (find ΔY) following a decrease in government spending from 400 to 300 (ΔG = -$100). A) negative $500 B) positive $500 C) negative $400 D) positive $400

C) negative $400 Since MPC = 0.75, Multiplier = 1/1-MPC = 1/0.25 = 4, so the decrease of government spending of $100 leads to a decrease of $400 in GDP (∆Y = MultiplierE * ∆Expenditure = 4 ∗ −100 = −400).

Doc 1.3 Use the above figure to answer this question. The combination of sixty-five pounds of corn and sixty-five pounds of green beans is A) attainable. B) efficient. C) not attainable. D) not efficient.

C) not attainable. The combination of sixty-five pounds of corn and sixty-five pounds of green beans is not attainable because you are only able to produce a maximum combined amount of 80 pounds between corn and green beans. Sixty-five pounds of corn plus sixty-five pounds of green beans is equal to 130 pounds, which is greater than 80 pounds. This combination is outside of the production possibilities frontier.

The aggregate supply curve (short run) is upward-sloping because ________. A) wages and other resource prices match changes in the price level B) the price level is flexible upward but inflexible downward C) per-unit production costs rise more slowly D) wages and other resource prices are flexible upward but inflexible downward

C) per-unit production costs rise more slowly In the short run, at least some of the production input costs are fixed (John Keynes's "sticky wage"). When there is an increase in (real output) price level, a firm will increase its production if the cost of production is relatively fixed. If each firm increases its production, then the aggregate supply increases.

Use the figure below to answer the following question. Doc 1.8 Refer to the three demand curves. An "increase in quantity demanded" caused by a change in price would be illustrated by a change from A) point 4 to point 6. B) point 5 to point 1. C) point 4 to point 1. D) point 2 to point 5.

C) point 4 to point 1. Since it is an increase in QUANTITY DEMANDED, that means the change is a MOVEMENT ALONG the demand curve, not a shift of the demand curve. This is because of The Law of Demand (principle in economics which states that as the price of a good increases, the quantity demanded will decrease, all else held constant.) So, you can rule out any answers that involve moving from one demand curve to another. This include answers A and B We know that it is answer C instead of D because an increase in quantity demanded leads to movement downward and to the right, on the curve.

Use the following consumption schedule to answer the next question. Doc 1.25 Disposable income equals consumption at A) point A. B) point C. C) point D. D) point G.

C) point D. Since the 45-degree line is "Consumption = Disposable Income", the intersection between 45-degree line and the consumption/income schedule is the point at which the individual's consumption equals income.

2 Blanks When crowding out occurs, it ________ the effectiveness of ________ fiscal policy. A) reduces; contractionary B) increases; contractionary C) reduces; expansionary D) increases; expansionary

C) reduces; expansionary "Crowding out" reduces I, thus reducing AD, therefore decreasing the effectiveness of the expansionary fiscal policy.

With a tax of $2,000 on $30,000 of income, and $2,000 on $70,000 of income, we can describe the structure of this tax as A) progressive. B) proportional. C) regressive. D) marginal.

C) regressive. C is correct because a regressive tax is a uniformly applied tax which takes a large percentage of the total income of a low-income earner and a low percentage of the total income of a high- income earner.IllustrationTax Amount - $2000Person 1 Income - $30,000Percentage of income taxed - 2,000/30,000 * 100 = 6.7% Tax Amount - $2,000Person 2 Income - $70,000Percentage of income taxed - $2,000/$70,000 * 100 = 2.85% Ergo, the tax is regressive because it accounts for 6.7% of total income of the low-income earner vis-à-vis 2.85% of the high-income earners total income.

Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a ________. A) rightward shift of the aggregate demand curve along a fixed aggregate supply curve B) rightward shift of the aggregate supply curve along a fixed aggregate demand curve C) rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve D) leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve

C) rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve In order to have low levels of inflation and rapid growth, the aggregate supply and aggregate demand curves must both shift to the right. A rightward shifting aggregate demand curve with a stationary AS curve represents a growing economy, but prices would continue to rise along with the increases in GDP. If the aggregate supply curve were shifting to the right with a stationary AD curve, the economy would grow but prices would actually decrease. Hence, the AD and AS curves must both shift to the right in order to have sustained growth and low levels of inflation. If this description doesn't make too much sense to you, try to graph the curves and see what happens during each of these answer choices.

An improvement in production technology will A) increase equilibrium price. B) shift the supply curve to the left. C) shift the supply curve to the right. D) shift the demand curve to the left.

C) shift the supply curve to the right. An improvement in production technology allows suppliers to produce and supply more of a good. This leads to an increase in supply, which is a rightward shift of the supply curve.

2 Blanks GDP decreases, and the price level increases. This suggests that the economy is experiencing an contraction caused by _______ shifting to the ______. A) aggregate demand; right B) aggregate demand; left C) short-run aggregate supply; left D) short-run aggregate supply; right

C) short-run aggregate supply; left

In a graph showing the market supply and demand for British pounds in terms of U.S. dollars, the supply-of-pounds curve is upward-sloping because ________. A) fewer British pounds can be purchased per dollar if U.S. dollars become more expensive B) fewer U.S. dollars can be purchased per pound if British pounds become less expensive C) the British will purchase more U.S. goods or services when the dollar price of pounds rises D) the British will purchase more U.S. goods or services when the dollar price of pounds falls

C) the British will purchase more U.S. goods or services when the dollar price of pounds rises The curve is upward sloping because as the price of GBP increases, US goods become cheaper for GBP holders. As a result, more GBP holders are willing to provide GBP (in exchange for USD to buy US goods).

This question regards the currency market for British pounds and U.S. dollars. After the Brexit referendum, individuals and banks decided they wanted to hold fewer pounds. As a result, A) the price of the British pound (in dollars) went up. B) the exchange rate is unchanged because the demand for pounds is not affected by the Brexit referendum. C) the price of the British pound (in dollars) went down. D) the exchange rate is unchanged due to the flexible exchange rates of the two countries.

C) the price of the British pound (in dollars) went down.

Using the situation described in question 15, what will likely happen in the long run? A) prices will eventually decrease B) LRAS will adjust to meet the new equilibrium GDP level C) wages will rise D) AD will continue to rise

C) wages will rise The increase in overall prices caused by the shift in AD in question 15 will eventually lead to higher wages. This is the mechanism in which the market will return to long-run equilibrium, because the higher wages shift AS to the left.

Use the following graph to answer the next question. Doc 1.44 If the equilibrium interest rate is 4%, the supply of money must be A) $250 billion. B) $200 billion. C) $150 billion. D) $100 billion.

D) $100 billion. Equilibrium occurs where demand and supply interact and, at 4% interest rate, money supply would be $100 billion.

9. Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = .6, how much will the change in investment increase aggregate demand? A) $12 billion B) $20 billion C) $33.3 billion D) $50 billion

D) $50 billion Remember to use the expenditures multiplier here. 1/1-MPC = 1/1-0.6 = 1/4 = 2.5. Now that we know the multiplier, we can calculate the change in overall GDP. $20 billion x 2.5 = $50 billion.

Uber drivers are required to pay a registration fee and pay a special driver's tax every month Doc 1.13 A) (1) B) (2) C) (3) D) (4)

D) (4)

Assume that an increase in a household's disposable income from $50.000 to $60.000 leads to an increase in consumption from $40.000 to $46.000. What is this household's marginal propensity to consume? A) 0.2 B) 0.8 C) 0.4 D) 0.6

D) 0.6

Consumers in an economy buy only three general types of products, A, B, and C. Changes in the prices of these items over a period are shown below. Doc 1.21 Using year 1 as the base year, the country's Consumer Price Index in year 2 is A) 100.00. B) 103.75. C) 105.25. D) 106.25.

D) 106.25. Buying these products with specified quantity in year 1 costs $800 (10*10+15*20+8*50). In year 2, the cost of buying the same goods is $850 (10*8+15*22+8*55). CPI=850/800*100=1.0625*100=106.25 (make sure you know what is the definition of CPI).

Use the following graph to answer the next question. Doc 1.29 Which of the following factors will shift AD1 to AD3? A) An increase in expected returns on investment B) An increase in productivity C) A decrease in real interest rates D) A decrease in consumer wealth

D) A decrease in consumer wealth A shift from AD(1) to AD(3) is a decrease in aggregate demand. Answer choice D, a decrease in consumer wealth, decreases the purchasing power of consumers overall. This means that at any given price level, consumers are capable of purchasing fewer goods than they were before. Therefore, the AD curve will shift to the left. Answer choices A and C are likely to shift AD to the right through increasing investment (I), and answer choice B is a supply shifter and not a demand shifter.

2 Blanks Use the following graph to answer the next question. Doc 1.63 Consider an economy that is in the long-run equilibrium pictured above. Suppose there is a significant decrease in the demand for exports in this economy. As a result, _____. To correct this, the government could use _____ fiscal policy. A) AD shifts right; contractionary B) AS shifts right; contractionary C) AS shifts right; expansionary D) AD shifts left; expansionary E) AS shifts left; expansionary

D) AD shifts left; expansionary

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion, (2) investment = $40 billion, (3) government purchases = $90 billion, and (4) net exports = $25 billion. If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with closing the GDP-gap here? A) An increase in government purchases and taxes B) A decrease in government purchases and taxes C) A decrease in government purchases and an increase in taxes D) An increase in government purchases and a decrease in taxes

D) An increase in government purchases and a decrease in taxes You are given that AD = $550 billion. To increase AD to 600 billion, you must increase (aggregate demand) C, I and G by expansionary fiscal policy. This includes decreasing taxes and increasing government purchases.

Suppose the Fed wishes to increase the money supply by $500 billion without changing the reserve requirement of 10%. How could it do this? A) Sell $5,000 billion worth of bonds B) Sell $50 billion worth of bonds C) Buy $5,000 billion worth of bonds D) Buy $50 billion worth of bonds

D) Buy $50 billion worth of bonds

Use the following graph to answer the next question. Doc 1.30 A shift from AD2 shifts to AD1 would be consistent with what economic event in U.S. history? A) Increase in government spending due to World War II in the 1940s B) cost-push inflation in the mid-1970s C) demand-pull inflation in the late 1960s D) Decrease in consumption and investment during the Great Recession of 2007-2009

D) Decrease in consumption and investment during the Great Recession of 2007-2009 Notice that a shift from AD(2) to AD(1) is a leftward shift in the aggregate demand curve, leading to a decrease in the price level and a decrease in overall GDP. When looking for a situation that matches, a decrease in overall price level means that any solution describing "inflation" is incorrect, so we can rule out B and C. Next, since overall GDP decreases, we can rule out A. Increases in government spending would increase overall GDP. We are left with answer choice D. Remember that both consumption and investment are part of the AE model, which impact aggregate demand.

2 Blanks Suppose we are graphing marginal benefits and marginal costs. Usually, marginal benefit slopes ______ and marginal cost slopes _____ A) Up; Down B) Down; Down C) Straight up (vertical line); Up D) Down; Up

D) Down; Up Recall the principle of diminishing marginal returns. As you consume more and more of something, you usually gain less and less utility while paying a higher and higher cost. Think of your favorite candy. The first one is great! By the time you get to the thirtieth piece, you probably aren't enjoying it as much and maybe your stomach is upset. Therefore, we can determine that the marginal benefit decreases as quantity increases, and marginal cost increases as quantity increases. Thus, marginal benefit slopes down and marginal cost slopes up.

Which of the following would shift long-run aggregate supply to the right? A) An increase in inflation. B) Unemployment falls below the natural rate of unemployment. C) The Fed increases the target interest rate. D) Employees become more productive

D) Employees become more productive

Suppose a non-binding price floor is introduced. Which of the following to we expect to happen? A) Quantity supplied increases B) Quantity demanded decreases C) Price increases D) Equilibrium quantity is unchanged

D) Equilibrium quantity is unchanged

The lending ability of commercial banks increases when the ________. A) reserve requirement is raised B) Treasury collects tax revenues C) discount rate is raised D) Fed buys securities in the open market

D) Fed buys securities in the open market Option A is incorrect: if the reserve requirement increases then the bank has less money to loan out. Option B is incorrect: it does not affect lending ability in the context of the course, or it lowers the excess reserves lowering lending ability. Option C is incorrect: if the discount rate is increased then the bank loans out less as the cost of not having sufficient reserves is higher now.Finally, Option D is correct. When the Fed buys securities in the open market, money is being inserted into the economy which increases money supply. This encourages borrowing therefore the lending ability of banks increases.

Use the following consumption schedule to answer the next question. Doc 1.24 At income level 3, the amount of consumption is represented by the line segment A) FG. B) FH. C) FD. D) GH.

D) GH. On the 45-degree line, it is true that "Consumption = Disposable Income". For the individual, the line in which point A, D and G lie on is the individual's consumption/income schedule. The consumption at income level 3 is therefore segment GH. Since income is larger than consumption, the individual is saving.

Use the following graphs to answer the next question. Correction for the top left graph, it should be money market instead of investment market. The horizontal axis for the top left graph should be quantity of money. Doc 1.33 In the graphs, the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point Y on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary, full-employment level of real GDP? A) Increase aggregate demand from AD3 to AD2. B) Decrease the money supply from $225 billion to $150 billion. C) Increase interest rates from 4% to 8%. D) Make no change in monetary policy.

D) Make no change in monetary policy. The economy is at point Y on the investment demand curve, this point correlates to investment being equal to 100. If we look now at the different AD curves, the one that correlates to I=100 is AD2. This is the curve that connects to the Qf, meaning the economy has already achieved a noninflationary, full-employment level of real GDP. Therefore, the Fed should make no change in monetary policy.

Suppose the price of roses increases. Assume that roses and chocolates are substitutes. Which of the following responses is likely? (Note: that we are looking for what happens after the price changes, not for what caused the price change) A) Quantity of chocolates decreases B) Quantity of roses sold increases C) Price of chocolates decreases D) Quantity of chocolates increases

D) Quantity of chocolates increases

When calculating GDP you only include final goods and services. Intermediate goods are used in making final goods, so these would be counted twice if you had to include them into GDP. Thus, adding the value of both would result in an amount greater than the GDP for that year. Which of the following is not an example of a final good or service A) New lawn mowers sold to consumers by Cut-Rite Lawn Equipment & Supplies in their retail store B) Flowers and pots purchased by homeowner Joe Smith for his garden C) A new string trimmer purchased by Green Grass Lawn Care Services, which employees will use to maintain customer's yards D) Seedlings and saplings purchased for resale by Wendy's Garden Center

D) Seedlings and saplings purchased for resale by Wendy's Garden Center Final goods and services do not need any further processing before consumption. A) Is a final good since the lawn mower goes directly to the costumer B) These are final goods since Joe Smith can take them home and directly place them into his garden. C) The string trimmer is a final good since no other action needs to be taken before its usage. D) Seedlings and saplings are NOT final goods since they are being bought from a supplier only to be resold.

In the mainstream view, monetary policy is not very effective during a severe recession. Why? A) Monetary policy only impacts the interest rate, and consumption must increase in order to get out of a recession B) Recessions are caused by permanent shifts to supply or demand. C) Crowding out causes government spending to have no real impact on the economy. D) The liquidity trap prevents monetary policy from causing additional investment spending. E) Monetary policy is separated from the political sphere, and the officials in charge do not have the best interest of the people in mind.

D) The liquidity trap prevents monetary policy from causing additional investment spending.

When tariffs are imposed. a deadweight loss exists because: A) Producer surplus is low due to low-cost imports B) The optimal outcome is one which there is no international trade C) The government does not spend tariff revenue the same way that individuals and businesses would have spent it D) There are instances where consumers are willing to pay the world price for a good but do not buy the good because they are unwilling to pay the higher price caused by a tariff

D) There are instances where consumers are willing to pay the world price for a good but do not buy the good because they are unwilling to pay the higher price caused by a tariff

If product prices were stated in terms of tobacco leaves, then tobacco leaves would be functioning primarily as A) fiat money. B) legal tender. C) a store of value. D) a unit of account.

D) a unit of account. Tobacco leaves would be a unit of account: the price of a certain goods or services will be x tobacco leaves.

Because of the significant snow fall in the plains this year, the supply of fertilizer to Washington State's apple farmers substantially decreased. As a result, the price of fertilizer has increased in Washington State. This statement indicates the A) supply for apples will necessarily increase. B) price of apples will decrease. C) demand for apples will necessarily decrease. D) amount of apples that will be available at various prices will decline.

D) amount of apples that will be available at various prices will decline. An increase in the price of fertilizer is considered an increase in resource costs for the supply. This means that the supply of apples, since they need fertilizer to grow, will decrease. A decrease in the supply of apples means that the amount of apples that will be available at various prices will decline.

2 Blanks If currency speculators believe South Korea will have much lower inflation in the future than the United States, this will most likely cause the South Korean won to ________ and the U.S. dollar to ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; appreciate D) appreciate; depreciate

D) appreciate; depreciate Consumers and investors prefer to hold a currency that holds its value. Inflation decreases the value of currency. Since prices are increasing at a faster rate in the US relative to South Korea which has a lower expected inflation rate, consumers will prefer to hold South Korean won compared to USD. In the market for foreign currency graph, the demand for South Korean won increases and the supply decreases, leading to an appreciation of South Korean won and a depreciation of USD.

11) The sale of government bonds by the Federal Reserve Banks to commercial banks will ________. A) increase aggregate supply B) decrease aggregate supply C) increase aggregate demand D) decrease aggregate demand

D) decrease aggregate demand When the Fed sells bonds and collects money from the banks, it reduces the amount of money supply. As a result, (again, see slides p.11 and p.82 for graphical explanation), the interest rate is higher leading to a lower investment spending. Finally, the aggregated demand is lower.

French and German farmers wanting to buy equipment from an American manufacturer based in the U.S. will be ________. A) supplying dollars and also supplying euros in the foreign exchange market B) demanding dollars and also demanding euros in the foreign exchange market C) supplying dollars and demanding euros in the foreign exchange market D) demanding dollars and supplying euros in the foreign exchange market

D) demanding dollars and supplying euros in the foreign exchange market So the French and German farmers need USD to trade with manufacturers in the U.S, so they demand USD. They are supplying Euro since that is the currency they used.

The demand curve for British pounds (in terms of U.S. dollars) is ________. A) downward-sloping because a higher dollar price of pounds means British goods are cheaper to Americans B) downward-sloping because a lower dollar price of pounds means British goods are more expensive to Americans C) upward-sloping because a lower dollar price of pounds means British goods are cheaper to Americans D) downward-sloping because a lower dollar price of pounds means British goods are cheaper to Americans

D) downward-sloping because a lower dollar price of pounds means British goods are cheaper to Americans The demand curve is downward sloping. The "price" of a unit of British pound in terms of U.S. dollars and the quantity of British pounds demanded are negatively correlated. As the British pounds depreciates, the British goods becomes less expensive for people holding U.S. dollars to purchase. That is, the lower the price (of British pounds), the higher the demand (for British pounds). The reason is that when the price of British pounds is lower, all British tradeable goods in terms of dollar values are lower. So the demand for British tradeable goods increases, leading to an increase in quantity demanded for British pounds for the transaction/trade.

2 Blanks Suppose the Fed decreases the discount rate. This is _____ monetary policy and will cause GDP to ______. A) expansionary; decrease B) contractionary; Increase C) contractionary; decrease D) expansionary; Increase

D) expansionary; Increase

The interest rate that commercial banks charge each other for very short-term loans is called the ________. A) prime rate B) commercial paper rate C) Federal Reserve discount rate D) federal funds rate

D) federal funds rate The federal funds rate is the interest rate that banks charge one another for borrowing excess reserves from each other. The discount rate is the interest rate banks pay when they borrow directly from the Fed.

Assume that the full-employment level of output is $500, and the price level associated with full-employment output is 100. Also assume that the economy's current level of output is $450 and, at the price level of 100, current aggregate demand is $400. If the government wants to move the economy back to the full-employment level of output and the MPC is 0.75, then it should A) reduce government purchases by $100. B) increase government purchases by $100. C) reduce government purchases by $25. D) increase government purchases by $25.

D) increase government purchases by $25. In a situation where we want to increase AD to reach the full employment level, we should pursue expansionary fiscal policy. Thus, we should increase government purchases (G)—eliminating options A and C. Then we use the formula,ΔY = [1/(1-MPC)] * (ΔG). Thus, ΔY = [1/(1-MPC)] * (ΔG). {[1/(1-.75)] * (ΔG)} = 4 * (ΔG)=100. Solving for the unknown gives ΔG = $25.

All else held constant, if the supply of money is increased ________. A) the demand for money will increase B) the interest rates will rise C) bond prices will fall D) investment spending will increase

D) investment spending will increase Using a simple supply and demand graph for money market, an increase in the supply of money (vertical S shifts to the right) leads to lower interest rate and higher quantity of money (see lecture slides p.11). Options A, B, and C are all incorrect. Specifically, bond prices fall (normally a bond pays its face value at mature date) would mean an increase in interest rates. D is correct since a lower interest rate leads to higher investment spending. The relationship between interest rate and investment for the scope of this course can be thought of as a lower interest rate encourages firms to borrow to make investment.

Suppose people become so convinced that interest rates cannot fall further that they hold money rather than bonds. This situation is A) known as crowding out B) shown as a leftward shift in the investment demand C) shown by making the aggregate demand curve steeper D) known as a liquidity trap

D) known as a liquidity trap The liquidity trap which is defined in the answer above would explain why someone would hold only money. Since they are convinced interest rates cannot fall further, the Fed's monetary policy is ineffective. The lack of interest earned on other (risky) assets does not justify holding them, therefore this person will only hold money rather than making investments. This motivates some central banks around the world to experiment with negative interest rates.

Use the following figures to answer the next question. Doc 1.26 Refer to the above figures with consumption schedules in figure (A) and saving schedules in figure (B), which correspond to each other across different levels of disposable income. If in figure (A), consumption increases along line A2, then in figure (B) there would be a A) shift from line B2 to B3. B) shift from line B2 to B1. C) movement down along line B2. D) movement up along line B2.

D) movement up along line B2. The movement along A2 means that there is an increase in disposable income. Since the line does not shift, the increase in consumption (due to an increase in income) leads to an increase in saving. Hence, there would be a movement up along line B2. There is no shift because there is a movement along the line, so A and B are wrong. C is wrong because there is an increase in saving.

Use the following figure to answer the next question. Doc 1.16 If box E represents government, box C businesses, and box A households, then flows (11) and (12) would represent A) goods and services. B) government expenditures. C) resources. D) net taxes.

D) net taxes. Net taxes are the difference between the transfer payments and subsidies made by the government to households and firms respectively, and the amount of tax collected by the government from households and firms. These are represented by arrows 11 and 12.Net Taxes = Taxes - (Transfer Payments + Subsidies) Answer A is incorrect because goods and services flow from the Product Market to households (2), and from the Product market to the Government (8).Answer B is incorrect because Government expenditure in the diagram is represented by (5) and (7). Answer C is incorrect because the Resource market and Resources are portrayed by (D) and (6).

Full-time homemakers and retirees are classified in the BLS data as A) employed. B) unemployed. C) part of the labor force. D) not in the labor force.

D) not in the labor force. It's important to note that the labor force does not include individuals who have not actively sought employment for the past four weeks. Full-time homemakers and retirees are, therefore, not in the labor force.

An example of an intermediate good would be ________. A) bricks bought by a homeowner who plans to build a patio in his backyard B) groceries bought by a dentist for his family C) cars bought by a car-rental company D) paper and ink bought by a publishing company

D) paper and ink bought by a publishing company Intermediate goods are used in making final goods. Therefore, the only intermediate goods listed are paper and ink because they will be used the publishing company to publish books. Then the books that are produced are final goods.

According to real business cycle theory, A) monetary factors affecting aggregate demand cause macroeconomic instability. B) when real wages fall during recessions, "real" unemployment rates rise. C) the net long-run costs of business fluctuations are severe. D) recessions result from declines in long-run aggregate supply, rather than decreases in aggregate demand.

D) recessions result from declines in long-run aggregate supply, rather than decreases in aggregate demand. This is because technology and resource availability are supply side factors that impact the producers. The demand side is not affected, i.e., the demand curve is not shifted. For example, the depletion of a natural resource will shift the LRAS curve to the left which results in changing output and price levels.

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system A) increases crowding out in the economy. B) decreases real interest rates in the economy. C) offsets the timing problem for fiscal policy. D) serves as an automatic stabilizer for the economy.

D) serves as an automatic stabilizer for the economy. During a recession, incomes go down, so taxes automatically go down on those incomes. Thus, limiting the dip in aggregate spending and stabilizing the economy.

The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily responsible for A) maintaining cash reserves that can be used to settle international transactions. B) supervising banks to make sure that markets are open to all and remain competitive. C) issuing currency and acting as the fiscal agent for the federal government. D) setting the Fed's monetary policy and directing the purchase and sale of government securities.

D) setting the Fed's monetary policy and directing the purchase and sale of government securities. FOMC oversees the government's buying and selling of United States Treasury securities.

When economists say that the supply for a product has decreased, they mean that the A) supply curve has shifted to the right. B) product has become particularly abundant for some reason. C) product has become more expensive and thus consumers are buying less of it. D) supply curve has shifted to the left.

D) supply curve has shifted to the left. A decrease in supply means that there has been an upward and leftward shift of the supply curve. A change in price is movement along the supply curve.

The long expansions during the 1990s and 2000s were the result of mass business adoption of computers and smart phones. This argument would be made by ________. A) the Monetarists B) Mainstream economists C) the Self-Correction View of macroeconomics D) the Real Business Cycle theory

D) the Real Business Cycle theory Smartphones and computers represent new technology that made businesses more productive than they were years before since workers could do more. The RBC theory argues that the fluctuations we experience in the economy come from series of real shocks.

The value of the multiplier is likely to fall if there is a decrease in A) consumption. B) income C) total spending. D) the marginal propensity to consume.

D) the marginal propensity to consume. Since MultiplierE = 1/1-MPC, a decrease in MPC leads to a decrease in MultiplierE.

Ahmed bought the same goods and services this year as last year. But he has experienced inflation. This means ________. A) the prices of all his goods and services has increased B) he can afford to buy more of everything C) he has more income to spend on goods and services D) the prices of goods and services has increased in general

D) the prices of goods and services has increased in general By definition, inflation is "a general increase in prices of goods and services". A is not correct because of the qualifier all (which is too strong in a sense). B and C are incorrect because these options contradict the definition of inflation.

All else held constant, the international value of foreign currencies will increase against the U.S. dollar if ________ A) U.S. citizens reduce spending on imports B) the U.S. Federal Reserve raises real interest rates C) there is an increase in the number of foreign tourists in the United States D) there are withdrawals of funds by foreigners from U.S. money markets

D) there are withdrawals of funds by foreigners from U.S. money markets You should try drawing a graph of market for foreign currency as in slide p.19 and analyze how each option changes the demand/supply curve. Say you are a foreigner withdrawing funds from the U.S., you will have to convert the USD to the currency you use at your home country. This will result in an increase in demand of foreigner currency, shifting the demand curve to the right. This would result in an appreciation of foreigner currency. Option A is incorrect because this would result in a depreciation of the foreign currency as US consumers demand less foreign goods (imports) causing demand curve to shift inward. Foreign currency is depreciating. Option B is incorrect because the Fed increases interest rates will lead to an increase in supply and a decrease in demand (foreign currency holders are attracted by a higher interest rate in the U.S). Together, this leads to a depreciation of foreign currency. See lecture slide p.42. Option C is incorrect because more tourists in the US would lower the demand for foreign currency, shifting the demand curve inward. The supply of foreign currency also increases, as more tourists need USD to visit the U.S. Together, this leads to an appreciation of foreign currency.

In the aggregate demand-aggregate supply model, the economy's price level is assumed to be ________. A) constant, just like in the aggregate expenditures model B) variable, just like in the aggregate expenditures model C) constant, unlike in the aggregate expenditures model D) variable, unlike in the aggregate expenditures model

D) variable, unlike in the aggregate expenditures model In the aggregate demand - aggregate supply model, the economy's price level is no longer fixed as in aggregate expenditures model. In this model, the Y-axis is price level and the X-axis is real GDP. In addition, the aggregate supply curve slopes up and the aggregate demand curve slopes down. Together, the AD and AS curves jointly determine the equilibrium (both price level and real GDP) of an economy.

I am deciding how large of a house to build. I am willing to pay $200 per square foot for the first 1,000 square feet, $150 per square foot for the next 1,000 square feet, and $100 per square foot for all additional square footage. The Bluth company has been contracted to build my home. They charge $100 per square foot for the first 1,000 square feet, $175 per square foot for the next 1000 square feet, then all remaining square footage is priced at $125 per square foot. How large of a house will I choose to build? A) 1,500 sq. ft. B) 500 sq. ft. C) 2,000 sq. ft. D) Over 2,000 sq. ft. E) 1,000 sq. ft.

E) 1,000 sq. ft.

The newly formed nation of Schrute Farms has a nominal GDP of $5,000 and a real GDP of $4,500 in year 1. In year 2, nominal GDP is $6.000, while real GDP is $5,000. What was the growth rate of nominal GDP of Schrute Farms? A) 120% B) 83% C) 0% D) 111% E) 20%

E) 20%

Which statement best illustrates the concept of diminishina marginal utility? A) Some consumers will receive less satisfaction from consuming pizza than from consuming hamburgers. B) As one consumes more slices of pizza for lunch, one would be willing to pay a higher price for additional slices C) A decrease in the price of slices of pizza will cause consumers to buy more slices for lunch. because they can afford to buy more. D) A decrease in the price of soda will cause consumers to buy more pizza for lunch, because of the income effect. E) A typical consumer will receive less satisfaction from consuming the third slice of pizza for lunch than from the second slice

E) A typical consumer will receive less satisfaction from consuming the third slice of pizza for lunch than from the second slice

This problem concerns the market for tickets to a Detroit Lions football game. At a price of $75 per ticket, there are 16,000 people wanting to buy tickets to the game and 12,000 people wanting to sell tickets to the game. According to what we learned in class, what do we expect to happen? A) 12,000 tickets will be sold at a price of $75 per ticket B) The price will increase until 12,000 people are willing to buy tickets C) Some sellers will offer to sell for less than $75 per ticket D) The price will decrease until 16,000 people are willing to sell tickets E) Some buyers will offer to pay more than $75 per ticket

E) Some buyers will offer to pay more than $75 per ticket

Samsung makes televisions in China, sells them to the U.S. for $1.000. and uses that income to buy U.S. savines bonds ($600) and hire an American engineer to work temporarily in Japan ($400). How does that affect the U.S. balance of pavments? A) The current account increases by $1,000 and the financial account increases by $1.000. B) The current account decreases by $400 and the financial account decreases by $400. C) The current account decreases by $1,000 and the financial account increases by $600 D) The current account increases by $600 and the financial account increases by $400. E) The current account decreases by $600 and the financial account increases b $600.

E) The current account decreases by $600 and the financial account increases b $600.

You are willing to pay $3 for a bowl of ice cream with one scoop. You are willing to pay $5 for a bowl of ice cream with two scoops. What is the marginal benefit of the second scoop of ice cream? a. $2 b. $3 c. $5 d. $8

a. $2 Recall that the marginal benefit of a good/service is the additional benefit associated with one more unit of activity. Then, since you are willing to pay $3 for one scoop of ice cream and $5 for two scoops of ice cream, the marginal benefit of the second scoop is $5-$3=$2.

You can buy a four-day pass to Disney World for $300, a five-day pass to Disney World for $350, or a six-day pass to Disney World for $390. What is the marginal cost of the sixth day? a. $40 b. $50 c. $90 d. $390

a. $40 Recall the definition of marginal cost: the additional cost associated with one more unit of an activity. In this case, we are interested in the marginal cost of a sixth day at Disney. Given that a five-day pass costs $350 and a six-day pass costs $390, the marginal cost of the sixth day is $390-$350=$40.

You have decided to buy a pizza with one topping. A cheese pizza costs $10 and the topping costs $1. You're deciding between pepperoni and mushrooms - you think both sound good and are worth paying $1 for. You decide to buy the pepperoni pizza. What was the opportunity cost? a. A pizza with mushrooms b. $10 c. $11 d. A cheese pizza

a. A pizza with mushrooms Since both pepperoni and mushrooms are worth at least $1 to us, we aren't even considering the cheese pizza. Our choice comes down to pepperoni vs mushrooms. Recall that in economics, opportunity cost is what you are missing out on by selecting something else. What's the second- best option, which I forgo when I pick the best option? Therefore, we are missing out on a mushroom pizza - which is our opportunity cost.