ECN 102 FINAL EXAM

The measure of money that best fulfills the medium of exchange function because it is most liquid is: M1. M2. M3. L.

M1

The combination of prolonged high unemployment and slow growth caused by globalization is known as: a. structural stagnation. b. secular stagnation. c. a business cycle. d. a recession.

a. structural stagnation.

If the United States' price level is below the world price level, all of the following would be successful in raising the world price (supply) level except: a. the dollar appreciating. b. the U.S. gaining a comparative advantage. c. wages in the U.S. falling. d. the value of U.S. assets falling.

a. the dollar appreciating.

Given nominal GDP of $4.2 trillion and a GDP deflator which is 40 percent greater than the base year, we can conclude that real GDP is equal to: $3.0 trillion. $3.5 trillion. $4.2 trillion. $5.9 trillion.

$3.0 trillion

If a country of 300 million people has a total income of $12 trillion, its per capita income is: $36,000. $40,000. $360,000. $400,000.

$40,000.

A bank has a reserve requirement of 10 percent. This means that if a customer deposits $10,000, the bank may lend: $1,000. $9,000. $10,000. $11,000.

$9,000

If percent change in nominal GDP is 3 percent and inflation is 4 percent, percent change in real GDP is: -1 percent. 0 percent. 1 percent. 2 percent.

-1 percent Percent change in real GDP = percent change in nominal GDP - inflation.

Suppose the nominal interest rate in Brazil is 40 percent and the expected inflation rate is 150 percent. The real interest rate is: -110 percent. -190 percent. 110 percent. 190 percent.

-110 percent. Real interest rate = Nominal interest rate - expected inflation rate = 40 percent - 150 percent = -110 percent.

Given a production possibility curve for good X (on the x-axis) and good Y (on the y-axis), the opportunity cost of increasing good X is greatest when the slope of the production possibility curve is: -6. -4. 6. 4.

-6

If inflation is 3 percent last year and 2 percent this year and the economist's model predicts 0 inflation for the next year, an individual who follows rational expectations, would expect _____ inflation for the coming year: 0 percent 2 percent 3 percent. 5 percent.

0 percent

Suppose total deposits in the First Bank of Commerce are $200,000 and required reserves are $10,000. Based on this information, the required reserve ratio is: 0.05. 0.10. 0.20. 20.0.

0.05

Suppose total deposits in the First Bank of Commerce are $100,000 and required reserves are $10,000. Based on this information, the required reserve ratio is: 0.10. 0.9. 1.0. 10.0.

0.10

If the price of clothing (which accounts for 5 percent of total expenditures in the CPI basket), rises by 10 percent in one year while the prices of all other goods remain constant, by how much will the CPI rise? 0.5 percent 5 percent 10 percent 50 percent

0.5 percent Multiply the share by the rise in the price (0.05 * 10% = 0.5%).

If the nominal interest rate is 2 percent and the real interest rate is 1 percent, inflation is: -1 percent. 0 percent. 1 percent. 2 percent.

1 percent

Given the basic rule of thumb for the relationship among inflation, productivity and nominal wage increases, if wages rise by 2 percent and productivity increases 1 percent, one would predict inflation to be: 0 percent. 1 percent. 1.5 percent. 3 percent.

1 percent. The rule of thumb is that inflation equals nominal wage increases minus productivity growth. In this case inflation = 2 - 1 = 1.

If the unemployment rate drops, then it necessarily follows that some of the people who were once unemployed are now employed. True False

False

In today's globalized economy a U.S. worker's reservation wage tends to be lower than the reservation wage of many workers in developing countries. True False

False

Who buys and sells in the Fed funds market? a. Only commercial banks and depository institutions b. All large financial institutions c. Financial institutions and large corporations d. Anyone with a computer and an Internet connection can participate

a. Only commercial banks and depository institutions

The wage a person requires before accepting a job is referred to as the _____ wage: a. compensating b. minimum c. reservation d. psychological

reservation

If the reserve requirement is 0.1, the money multiplier will be: 1. 10. 100. 1,000.

10

If nominal GDP is $14 trillion and real GDP is $12 trillion, the GDP deflator is: 86. 117. 112. 114.

117 The GDP deflator is nominal GDP/real GDP times 100. In this case, 14/12 * 100 = 117.

The Great Depression occurred in the early: 1900s. 1930s. 1950s. 1960s.

1930s

If percent change in nominal GDP is 5 percent and inflation is 3 percent, percent change in real GDP is: 0 percent. 2 percent. 8 percent. 15 percent.

2 percent Percent change in real GDP = percent change in nominal GDP - inflation. In this case percent change in real GDP = 5 - 3 = 2.

If the nominal interest rate is 5 percent and inflation is 3 percent, the real interest rate is: 0 percent. 2 percent. 8 percent. 15 percent.

2 percent The real interest rate = nominal interest rate - inflation. In this case real interest rate = 5 - 3 = 2.

The Rule of 72 implies that a country will double its income in about 18 years if its growth rate is: 4 percent. 6 percent. 8 percent. 12 percent.

4 percent

In 2001, the U.S. economy entered a recession and unemployment rose. Which one of the following types of unemployment was most likely affected by the recession? A. Cyclical unemployment B. Full unemployment C. Structural unemployment D. Frictional unemployment

A. Cyclical unemployment

Which of the following Fed policies would help the economy out of a recession? A. Open market purchases of government securities B. Open market sales of government securities C. An increase in the discount rate D. An increase in reserve requirements

A. Open market purchases of government securities

Suppose there are 685,000 discouraged workers. What is one reason the government tries to collect data about discouraged workers? A. Some people argue that the unemployment rate underestimates true unemployment because it does not include discouraged workers. B. Some people argue that the unemployment rate overestimates true unemployment because it includes discouraged workers. C. The number of discouraged workers is a better indicator of unemployment. D. The number of discouraged workers is an indication of labor unrest and potential for riots.

A. Some people argue that the unemployment rate underestimates true unemployment because it does not include discouraged workers.

Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the United States. Through trade negotiations, the United States lifted quotas limiting the import of tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close their farms and let go their workers. Many of the workers could not find new jobs right away. What type of unemployment describes the workers' situation? A. Cyclical unemployment B. Full unemployment C. Structural unemployment D. Target unemployment

C. Structural unemployment

Holding money for the speculative motive is holding cash for unexpected events. True False

False

If the reserve ratio is 0.10, the money multiplier is equal to 5. True False

False The money multiplier is 1/r, in this case 1/0.10 = 10.

A high-risk premium makes default more likely. True False

True

Cyclical unemployment is caused by fluctuations in economic activity. True False

True

Long-term unemployment remained high after expansionary monetary and fiscal policy was used to fix the 2008 recession. True False

True

Money doesn't have to have any inherent value to function as a medium of exchange. True False

True

Other things equal, the higher the reservation wage the more likely one is to be unemployed. True False

True

The housing market boom raised people's perceived wealth. True False

True

Expansionary fiscal policy increases income, which increases imports and hence the size of the trade deficit. True False

True The increase in income produced by an expansionary fiscal policy causes consumers to purchase more imports, and higher imports increase the trade deficit.

Which of the following will decrease the nominal deficit? a. An increase in taxes b. An increase in government expenditures c. An increase in interest rates d. An increase in the debt

a. An increase in taxes

According to Keynes why might deflation create problems for an economy? a. Consumers might expect prices to fall further and cut back consumption now. b. In expectation of increased spending, too many entrepreneurs would begin businesses and most would fail. c. The cost of repricing goods would increase costs, and therefore reduce profits, for businesses and they would cut production. d. People would drop out of unions because unions would become ineffective at keeping wages of members high.

a. Consumers might expect prices to fall further and cut back consumption now.

In Zimbabwe inflation rose from an annual rate of 32 percent in 1998 to 100,000 percent in early 2009. Ignoring the many other problems that face the citizens of Zimbabwe, and considering only the effects of this unexpected inflation, which of the following are helped by the inflation? a. Debtors b. People living on fixed pensions c. Unemployed people d. No one; inflation hurts everyone

a. Debtors

Which of the following statements correctly summarizes a difference between the layperson's and the economist's views of the net benefits of trade? a. Economists often argue that the gains from trade in the form of low consumer prices tend to be widespread and not easily recognizable while the costs in jobs lost tend to be concentrated and readily identifiable. b. Economists often argue that most U.S. jobs are at risk of outsourcing while laypeople intuitively recognize that inherent in comparative advantage is that each country has a comparative advantage in the production of some good. c. Economists focus on trade in manufactured goods while laypeople also focus on trade involving the services of people who manage the trade. d. Economists most often argue that the costs of trade outweigh the benefits while laypeople often argue that the benefits of trade outweigh the costs.

a. Economists often argue that the gains from trade in the form of low consumer prices tend to be widespread and not easily recognizable while the costs in jobs lost tend to be concentrated and readily identifiable.

The group that is comprised of five presidents of Fed regional banks and seven Fed governors that gathers around a table to discuss whether to increase interest rates is the: a. Federal Open Market Committee. b. Federal Depository Insurance Corporation. c. Federal Advisory Council. d. National Federal Reserve Bank.

a. Federal Open Market Committee.

Suppose foreign shrimp prices drop by 32 percent and importers gain a 90 percent market share. From this information, what would economists strongly suspect about this industry? a. Foreigners have a comparative advantage in shrimping. b. Americans have a comparative advantage in shrimping. c. Foreign sellers probably are colluding on price to maximize profits. d. The large sales of foreigners indicate that they are better strategic bargainers than Americans are.

a. Foreigners have a comparative advantage in shrimping.

If the market prices of publicly traded stocks and bonds rise, while the productive capacity of those assets has not increased, which of the following has occurred? a. Nominal wealth has increased b. Real wealth has increased c. Nominal wealth has increased, but real wealth has decreased d. Tangible wealth must have declined in value

a. Nominal wealth has increased

Which of the following Fed policies would help the economy out of a recession? a. Open market purchases of government securities b. Open market sales of government securities c. An increase in the discount rate d. An increase in reserve requirements

a. Open market purchases of government securities

What tool of monetary policy will the Fed use to increase the federal funds rate from 1 percent to 1.25 percent? a. Open-market operations b. The discount rate c. A change in reserve requirements d. Margin requirements

a. Open-market operations

n September 2010, the NBER's Business Cycle Dating Committee decided that the recession that began in December of 2007 had ended in July of 2009. The NBER does not use a popular definition of recession—two quarters of falling GDP—but looks at a variety of monthly statistics to date business cycles. Read the paragraph shown. In July 2009 a recession ended. In business cycle terminology, what does July 2009 mark? a. The trough of the cycle b. The peak of the recession c. The depression of the cycle d. The duration of the recession

a. The trough of the cycle

Crowding out is associated with: a. a reduction in business investment resulting from an increase in government borrowing and higher interest rates. b. an increase in business investment resulting from an increase in government borrowing and higher interest rates. c. an increase in private savings caused by higher future tax liabilities when government increases borrowing. d. a decrease in government spending caused by a shortage of available credit.

a. a reduction in business investment resulting from an increase in government borrowing and higher interest rates.

When countries decide they will no longer buy U.S. assets or lend to the United States: a. adjustments will be set in motion to equalize comparative advantages. b. adjustments will be set in motion so that the U.S. has more comparative advantages. c. the United States can begin to run a trade deficit. d. The is no reason foreign countries will not want to buy more U.S. assets than the U.S. buys of foreign assets.

a. adjustments will be set in motion to equalize comparative advantages.

The income tax is: a. an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion. b. an automatic stabilizer because income tax revenues rise as income increases, accelerating an economic expansion. c. an automatic stabilizer because income tax revenues fall as income increases, accelerating an economic expansion. d. not an automatic stabilizer.

a. an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion.

If for a country, the quantity of its currency demanded exceeds the quantity supplied, then there is a: a. balance of payments surplus. b. balance of payments deficit. c. balance of payments equilibrium. d. trade balance.

a. balance of payments surplus.

When a country runs a trade deficit, it does so by: a. borrowing from foreign countries or selling assets to them. b. borrowing from foreign countries or buying assets from them. c. lending to foreign countries or selling assets to them. d. lending to foreign countries or buying assets from them.

a. borrowing from foreign countries or selling assets to them.

If the Fed simultaneously raises the discount rate and the reserve requirement, the money supply will: a. contract. b. remain unchanged. c. expand. d. take on a value that cannot be determined from the information given.

a. contract.

For every financial asset there is a: a. corresponding financial liability. b. corresponding financial liability if the financial asset is financed. c. real liability. d. corresponding real asset.

a. corresponding financial liability.

If foreigners decide that they no longer want to acquire U.S. financial assets, we can expect the value of the dollar to: a. fall and the trade deficit to fall. b. fall and the trade deficit to rise. c. rise and the trade deficit to fall. d. rise and the trade deficit to rise.

a. fall and the trade deficit to fall. A reduced demand for the dollar would cut the price of the dollar. A cheaper dollar would increase exports and reduce imports; the trade deficit would tend to fall, though it might take some time.

As the economy contracts, tax revenues: a. fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers. b. rise and transfer payments rise, causing the economy to contract by more than it would in the absence of automatic stabilizers. c. fall and transfer payments fall, causing the economy to contract by more than it would in the absence of automatic stabilizers. d. rise and transfer payments fall, causing the economy to contract by less than it would in the absence of automatic stabilizers.

a. fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.

In the late 20th century and early 21st century: a. foreign investors have been eager buyers of U.S. government debt. b. foreign investors have sold large amounts of U.S. government debt. c. U.S. citizens have been net exporters of capital. d. there was a net outflow of capital from the United States.

a. foreign investors have been eager buyers of U.S. government debt. The United States has run huge trade deficits, which have been financed by foreigners purchasing U.S. government debt and other U.S. assets.

A concern about long-term economic growth was important in economics: a. from the time of Adam Smith and his The Wealth of Nations. b. from the time of Karl Marx and his Das Kapital. c. from the time of John M. Keynes and his General Theory. d. only since the 1970s.

a. from the time of Adam Smith and his The Wealth of Nations.

Considering only its direct effect on income, an expansionary monetary policy tends to: a. increase a trade deficit and decrease the exchange rate. b. increase a trade deficit and increase the exchange rate. c. decrease a trade deficit and decrease the exchange rate. d. decrease a trade deficit and increase the exchange rate.

a. increase a trade deficit and decrease the exchange rate. Expansionary monetary policy increases the trade deficit by stimulating income and imports; it also weakens the dollar by reducing interest rates and lowering the demand for dollars.

Considering only its direct effect on income, expansionary fiscal policy tends to: a. increase income and imports, shifting the U.S. trade balance in the direction of a deficit. b. increase income and imports, shifting the U.S. trade balance in the direction of a surplus. c. decrease income and imports, shifting the U.S. trade balance in the direction of a deficit. d. decrease income and imports, shifting the U.S. trade balance in the direction of a surplus.

a. increase income and imports, shifting the U.S. trade balance in the direction of a deficit.

To decrease the nation's money supply, the Fed can: a. increase reserve requirements. b. decrease reserve requirements. c. decrease the discount rate. d. buy government securities in the open market.

a. increase reserve requirements.

Suppose the reserve requirement is 20 percent. A $1 billion purchase of government securities by the Fed will: a. increase the potential amount of checkable deposits in the banking system by $5 billion. b. increase the potential amount of checkable deposits in the banking system by $1 billion. c. reduce the potential amount of checkable deposits in the banking system by $1 billion. d. reduce the potential amount of checkable deposits in the banking system by $5 billion.

a. increase the potential amount of checkable deposits in the banking system by $5 billion.

In the early 2000s, the Bush administration passed a series of tax cuts and spending increases. This combination of policies most likely: a. increased the U.S. trade deficit. b. decreased the U.S. trade deficit. c. had no effect on the trade deficit. d. had an unpredictable effect on the trade deficit.

a. increased the U.S. trade deficit.

An import quota: a. increases both domestic production and domestic prices. b. increases domestic production and reduces domestic prices. c. reduces domestic production and increases domestic prices. d. reduces both domestic production and domestic prices.

a. increases both domestic production and domestic prices.

When Classical economists of the 1930s looked at the Great Depression, they: a. lacked a good explanation of why it was happening. b. blamed it on the inherent instability of the market. c. blamed it on activist fiscal and monetary policies. d. thought it was a result of prices adjusting too quickly.

a. lacked a good explanation of why it was happening.

The U.S. dollar bills you sometimes have in your wallet are: a. liabilities of the Federal Reserve. b. assets of the Federal Reserve. c. liabilities of the Federal Reserve until it is spent. d. your liabilities if you hold that note.

a. liabilities of the Federal Reserve.

The loss of jobs due to international trade is often: a. more visible than the decline in consumer prices due to international trade. b. less visible than the decline in prices due to international trade. c. greater than the benefit of trade in the form of decline in prices. d. spread across all sectors while decline in prices is concentrated in one sector.

a. more visible than the decline in consumer prices due to international trade.

If a fiscal expansion financed by government bond sales does not affect interest rates, then: a. no crowding out will occur. b. crowding out will be relatively small. c. crowding out will be relatively large. d. crowding out will be so great that output will decline.

a. no crowding out will occur.

Suppose both nominal GDP and real GDP increase. It can be concluded that: a. output rose. b. the price level rose. c. both output and the price level rose. d. both output and the price level rose, but output rose at a faster rate.

a. output rose.

A Chinese purchase of Boeing aircraft is recorded in the American balance of payments as a: a. positive entry in the current account. b. positive entry in the financial and capital account. c. negative entry in the current account. d. negative entry in the financial and capital account.

a. positive entry in the current account.

An open market purchase: a. raises bond prices and reduces interest rates. b. raises both bond prices and interest rates. c. reduces bond prices and raises interest rates. d. reduces both bond prices and interest rates.

a. raises bond prices and reduces interest rates.

Expansionary monetary policy tends to: a. reduce both the interest rate and capital inflows. b. reduce the interest rate and increase capital inflows. c. increase the interest rate and reduce capital inflows. d. increase both the interest rate and capital inflows.

a. reduce both the interest rate and capital inflows.

Changes in the institutional structure of the U.S. economy following the Great Depression: a. reduced the length of business cycles. b. increased the length of business cycles. c. eliminated fluctuations in U.S. output. d. had no effect on fluctuations in U.S. output.

a. reduced the length of business cycles.

The supply of euros on the foreign exchange market slopes: a. upward because European consumers buy fewer foreign goods when the value of the euro decreases. b. upward because European consumers buy more foreign goods when the value of the euro decreases. c. downward because European consumers buy fewer foreign goods when the value of the euro decreases. d. downward because European consumers buy more foreign goods when the value of the euro decreases.

a. upward because European consumers buy fewer foreign goods when the value of the euro decreases.

Which of the following factors will shift the long-run aggregate supply curve? a. A change in aggregate demand b. A change in available resources c. A change in the price level d. A change in sales or excise taxes

b. A change in available resources

FOMC stands for: a. Federal Open Money Committee. b. Federal Open Market Committee. c. Fixed Open Market Commitments. d. Federation of Open Monies Committee.

b. Federal Open Market Committee.

What is the primary benefit for the United States of a low price for the dollar in the foreign exchange market? a. It makes foreign goods cheaper, helping consumers. b. It encourages exports, helping producers. c. It helps keep inflation under control. d. There are no benefits to the United States of a low price for the dollar; a higher price is always better.

b. It encourages exports, helping producers.

Which of the following best explains the sudden increase in the target rate of unemployment that was associated with the recent jobless recovery? a. The expansionary macro policy of the government b. The bursting of the financial bubble c. The bursting of the technology bubble d. A reduction of the trade deficit

b. The bursting of the financial bubble

Why are the gains from trade often difficult to recognize? a. The United States does not keep accurate records of employment. b. The gains are spread out over a wide variety of goods and consumers. c. There are no gains from trade. d. The gains are in services, which are difficult to measure.

b. The gains are spread out over a wide variety of goods and consumers.

What is the function of risk premium? a. To make sure that the value of the bond rises with inflation. b. To compensate bondholders for the chance the borrower will not repay the loan. c. To distinguish short from long-term bonds. d. To raise the return to holding government bonds.

b. To compensate bondholders for the chance the borrower will not repay the loan.

If a government has implemented significantly higher trade tariffs, but does not want this action to affect the value of its currency, it will: a. sell foreign currency because the tariffs will tend to make the domestic currency depreciate. b. buy foreign currency because the tariffs will tend to make the domestic currency appreciate. c. sell foreign currency because the tariffs will tend to make the domestic currency appreciate. d. buy foreign currency because the tariffs will tend to make the domestic currency depreciate.

b. buy foreign currency because the tariffs will tend to make the domestic currency appreciate.

Federal Reserve sales of government securities: a. increase bank reserves and increase the money supply. b. decrease bank reserves and decrease the money supply. c. decrease bank reserves and increase the money supply. d. increase bank reserves and decrease the money supply.

b. decrease bank reserves and decrease the money supply.

Other things equal, a rise in interest rates can be expected to: a. increase the quantity of investment. b. decrease the quantity of investment. c. have no effect upon the quantity of investment. d. increase equilibrium income.

b. decrease the quantity of investment.

When you produce cars, it is enormously expensive to produce one car, but then the costs per car decrease as more are produced. This would be an example of: a. increasing marginal opportunity costs. b. decreasing marginal opportunity costs. c. constant marginal opportunity costs. d. increasing returns to scale.

b. decreasing marginal opportunity costs.

When the Fed decreases the reserve requirement, the money supply: a. expands and the money multiplier contracts. b. expands and so does the money multiplier. c. contracts and so does the money multiplier. d. contracts and the money multiplier expands.

b. expands and so does the money multiplier.

Unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one is called: a. structural unemployment. b. frictional unemployment. c. cyclical unemployment. d. are not counted in the unemployment rate.

b. frictional unemployment.

Between 1999 and 2009, the U.S. federal budget deficit moved from a record surplus to a record deficit. Other things being equal, the most likely effect of this shift would be: a. higher interest rates and increased investment. b. higher interest rates and decreased investment. c. lower interest rates and increased investment. d. lower interest rates and decreased investment.

b. higher interest rates and decreased investment.

The large budget deficits experienced between 2002 and 2013 caused the U.S. national debt to: a. increase in terms of dollars but to decrease as a percentage of GDP. b. increase both in terms of dollars and as a percentage of GDP. c. decrease in terms of dollars but to increase as a percentage of GDP. d. decrease both in terms of dollars and as a percentage of GDP.

b. increase both in terms of dollars and as a percentage of GDP.

The quantity theory of money: a. is no longer relevant. b. is relevant in some cases but not others. c. has become increasingly irrelevant. d. is more relevant today than ever before.

b. is relevant in some cases but not others.

The central bank in the United States does all the following except: a. act as a financial adviser to the government. b. loan money to corporations. c. loan money to banks. d. issue coin and currency.

b. loan money to corporations.

Central banks are responsible for: a. both monetary policy and fiscal policy. b. monetary policy but not fiscal policy. c. fiscal policy but not monetary policy. d. neither monetary policy nor fiscal policy.

b. monetary policy but not fiscal policy.

According to the quantity theory of money, persistent inflation can only be caused by: a. a low rate of unemployment. b. money supply growth that exceeds real GDP growth. c. a high rate of unemployment. d. a continually growing government deficit.

b. money supply growth that exceeds real GDP growth.

If interest rates adjust to equate savings and investment, then an expansionary fiscal policy is: a. more likely to increase interest rates and less likely to crowd out investment. b. more likely to increase interest rates and more likely to crowd out investment. c. less likely to increase interest rates and less likely to crowd out investment. d. less likely to increase interest rates and more likely to crowd out investment.

b. more likely to increase interest rates and more likely to crowd out investment.

In 1996, the Boskin Commission Report found that past estimates of inflation overstated actual inflation by about 1.1 percent annually. Assuming that the findings of the Commission are accurate, it follows that: a. both real and nominal GDP were higher than previously thought. b. only real GDP was higher than previously thought. c. only real GDP was lower than previously thought. d. both real and nominal GDP were lower than previously thought.

b. only real GDP was higher than previously thought.

Day laborers who are in the United States illegally and work off the books are: a. part of the non-market transactions that are omitted from GDP. b. part of the underground economy which is not measured in GDP. c. one of the items included in the genuine progress indicator. d. production by non-citizens, which is included in GNP but not in GDP.

b. part of the underground economy which is not measured in GDP.

Frictional unemployment is a result of: a. a general downturn in the economy. b. people quitting a job just long enough to look for and find another one. c. people who are unemployable due to alcohol or drug addictions. d. people losing a job when their skills become obsolete due to technological innovations.

b. people quitting a job just long enough to look for and find another one.

Classical economists believe that in the short-run, in the real world: a. prices and wages were flexible. b. prices and wages weren't flexible enough to bring about equilibrium. c. prices were flexible but wages were not flexible. d. wages were flexible but prices were not flexible.

b. prices and wages weren't flexible enough to bring about equilibrium.

During a recession, policy makers who use the AS/AD model would probably recommend an open market: a. sale of government securities that reduces interest rates. b. purchase of government securities that reduces interest rates. c. sale of government securities that raises interest rates. d. purchase of government securities that raises interest rates.

b. purchase of government securities that reduces interest rates.

Patents: a. eliminate the positive externalities associated with new technologies. b. reduce the positive externalities associated with new technologies. c. do not affect the positive externalities associated with new technologies. d. increase the positive externalities associated with new technologies.

b. reduce the positive externalities associated with new technologies.

Country A has most-favored-nation (MFN) trade agreements with countries C and D, and it has just lowered its tariff on imports of cars from country C. It has violated its MFN agreement with country D unless it also: a. allows country D to raise tariffs on country C's cars. b. reduces its tariff on country D's cars by the same amount. c. raises its tariff on other goods imported from country C. d. raises its tariff on other goods imported from country D.

b. reduces its tariff on country D's cars by the same amount.

In 2009 Iran was experiencing inflation of about 20 percent per year. Other things equal, the expectations by the people of Iran of worsening inflation in the future would probably: a. shift the AD curve to the left. b. shift the AD curve to the right. c. make the AD curve flatter. d. make the AD curve steeper.

b. shift the AD curve to the right.

If a country wants maximum flexibility to pursue its domestic macroeconomic goals, it: a. does not matter what type of exchange rate system it uses. b. should use a flexible exchange rate. c. should use a fixed exchange rate. d. should use the gold standard.

b. should use a flexible exchange rate.

When a $100 bill is printed by the Fed, the Fed has a financial liability because: a. the Fed is part of the government. b. the Fed issued the bill. c. the Fed has the printing machine. d. no other institution can print money.

b. the Fed issued the bill.

The central bank of the United States is: a. the Treasury. b. the Fed. c. the Bank of the United States. d. Old Lady of Threadneedle Street.

b. the Fed.

Crowding out would most likely occur when: a. workers lose jobs as a result of anti-inflationary fiscal policies. b. the federal government engages in bond sales to finance its budget deficit. c. Congress enacts budget cuts to balance the budget. d. tax receipts rise more slowly than anticipated, resulting in the need to cut government spending.

b. the federal government engages in bond sales to finance its budget deficit.

When a U.S. company purchases a foreign company, the transaction is recorded in the balance of payments as part of: a. the current account. b. the financial and capital account. c. the statistical discrepancy. d. net transfers.

b. the financial and capital account.

The two frameworks conventional economists generally use to analyze macroeconomic issues are: a. the inflation and the unemployment frameworks. b. the short-run and the long-run frameworks. c. the business cycle and the growth cycle frameworks. d. the stagnationist and the Post-Keynesian frameworks.

b. the short-run and the long-run frameworks.

If banks hold excess reserves whereas before they did not, the money multiplier: a. will become larger. b. will become smaller. c. will be unaffected. d. might increase or might decrease.

b. will become smaller.

Suppose the target rate of unemployment is 5 percent but the actual rate of unemployment is 4 percent. Given this information, which of the following policies is most appropriate according to the AS/AD model? a. A tax cut b. An increase in government spending c. A tax increase d. No change in taxes or government spending

c. A tax increase

A widget has an opportunity cost of 4 wadgets in Saudi Arabia and 2 wadgets in the United States. Given these opportunity costs, you would suggest that: a. Saudi Arabia specialize in widgets and the United States in wadgets. b. No trade should take place. c. Saudi Arabia specialize in wadgets and the United States in widgets. d. Both countries should produce an equal amount of each.

c. Saudi Arabia specialize in wadgets and the United States in widgets.

Why do banks package loans into securities? a. Because banking regulations require them to do so b. In order to get around adhering to current banking regulations c. To spread the risk of default and increase liquidity d. To take advantage of tax breaks passed by the federal government as part of stimulus packages

c. To spread the risk of default and increase liquidity

Exchange rate expectations: a. do not affect exchange rates in the short run or the long run. b. affect exchange rates but are not as important as fundamentals in the short run. c. affect exchanges rates and are more important than fundamentals in the short run. d. affect exchange rates, but only in the long run.

c. affect exchanges rates and are more important than fundamentals in the short run.

Increasing marginal opportunity cost means that the production possibility curve is: a. bowed in so that for every additional unit of one good given up, you get fewer and fewer units of the other good. b. bowed in so that for every additional unit of one good given up, you get more and more units of the other good. c. bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good. d. bowed out so that for every additional unit of one good given up, you get more and more units of the other good.

c. bowed out so that for every additional unit of a good given up, you get fewer and fewer units of the other good.

If a country takes advantage of the comparative advantage of some resources over others, its production possibility curve is likely to be: a. flat. b. straight. c. bowed outward. d. bowed inward.

c. bowed outward.

Crowding out will be less likely to occur if: a. interest rates rise when the budget deficit increases. b. interest rates fall when the budget deficit decreases. c. business investment does not depend on interest rates. d. business investment depends on interest rates.

c. business investment does not depend on interest rates.

M1 consists primarily of cash in the hands of the public and: a. savings account balances. b. commercial paper. c. checking account deposits. d. certificates of deposit.

c. checking account deposits.

Domestic goals dominate international goals for all of the following reasons except: a. international goals are ambiguous. b. international goals affect a country's population indirectly. c. countries are becoming more economically integrated. d. in politics, indirect effects take a back seat.

c. countries are becoming more economically integrated. As global economic integration increases, international goals become more important because each country's economy has a greater effect on the economies of other countries.

If the Fed simultaneously reduces the discount rate and the required reserve ratio, the money supply will: a. contract. b. remain unchanged. c. expand. d. take on a value that cannot be determined from the information given.

c. expand.

If per capita output falls by 2 percent and population grows by 3 percent, output: a. falls by 5 percent. b. falls by 1 percent. c. grows by 1 percent. d. grows by 5 percent.

c. grows by 1 percent. Growth in per capita output equals the difference between the growth rate of output and the growth rate of population.

One of the reasons that expansionary monetary policy was not as effective as expected in recent years is that banks: a. returned reserves that the Fed added to banks. b. loaned reserves that the Fed added to banks. c. held onto the reserves that the Fed added to banks. d. purchased Treasures with the reserves that the Fed added to their accounts.

c. held onto the reserves that the Fed added to banks.

As income increases during the recovery from a recession, automatic stabilizers will: a. increase taxes and increase government spending, increasing the overall size of the government. b. reduce taxes and increase government spending, accelerating the recovery. c. increase taxes and decrease government spending, slowing the recovery. d. reduce taxes on high-income individuals and raise taxes on the poor, increasing economic inequality.

c. increase taxes and decrease government spending, slowing the recovery.

When a bank makes a loan, the money supply: a. does not increase. b. decreases. c. increases. d. may increase or decrease depending on how the loan is used.

c. increases. Excess reserves that are loaned out increase the money supply.

If the positive externalities associated with learning by doing are sufficiently great, production will be characterized by: a. decreasing returns to scale. b. constant returns to scale. c. increasing returns to scale. d. diminishing marginal productivity.

c. increasing returns to scale.

If you purchase a good on credit, you are: a. exchanging a financial asset for another financial asset. b. incurring a real liability to acquire a real asset. c. incurring a financial liability to acquire a real asset. d. exchanging a financial liability for a real liability.

c. incurring a financial liability to acquire a real asset.

In order for the U.S. Treasury to avoid refinancing debt at higher interest rates, it will have to: a. default on interest payments. b. allow the Federal Reserve to engage in more quantitative easing. c. issue more long term bonds. d. issue less long terms bonds.

c. issue more long term bonds.

A resource the United States lacked in the 20th century and had to import was: a. minerals. b. land. c. labor. d. technological creativity.

c. labor.

A decrease in the budget deficit will have a: a. more negative effect on income when crowding out is strong. b. more positive effect on income when crowding out is weak. c. less negative effect on income when crowding out is strong. d. less positive effect on income when crowding out is weak.

c. less negative effect on income when crowding out is strong.

Holding the nominal deficit, nominal interest rate, and total debt constant, an increase in the inflation rate will: a. not affect the real deficit. b. raise the real deficit. c. lower the real deficit. d. either raise or lower the real deficit depending on the real interest rate.

c. lower the real deficit.

If the euro rises in price, it becomes: a. cheaper for Americans to buy European products and cheaper for Europeans to buy American products. b. cheaper for Americans to buy European products but more expensive for Europeans to buy American products. c. more expensive for Americans to buy European products but cheaper for Europeans to buy American products. d. more expensive for Americans to buy European products and more expensive for Europeans to buy American products.

c. more expensive for Americans to buy European products but cheaper for Europeans to buy American products.

Laissez-faire economists believe: a. government policies do not affect economic activity. b. government can implement policy proposals that can positively impact the economy. c. most government policies would probably make things worse. d. government intervention in the market is necessary for a smoothly operating economy.

c. most government policies would probably make things worse.

On the short-run Phillips curve, the expectations of inflation: a. are rising. b. are falling. c. remain constant. d. are rising or falling depending on how the economy is performing.

c. remain constant.

During an inflationary period, policy makers who use the AS/AD model would probably recommend an open market: a. sale of government securities that reduces interest rates. b. purchase of government securities that reduces interest rates. c. sale of government securities that raises interest rates. d. purchase of government securities that raises interest rates.

c. sale of government securities that raises interest rates.

Automatic stabilizers cause: a. deeper recessions and more rapid expansions. b. deeper recessions and slower expansions. c. shallower recessions and slower expansions. d. shallower recessions and more rapid expansions.

c. shallower recessions and slower expansions.

A bank has a reserve requirement of 0.10. If it has demand deposits of $100,000 and is holding $12,000 in reserves: a. all the bank's reserves are excess reserves. b. the bank is not meeting its reserve requirement. c. the bank is holding $2,000 in excess reserves. d. all reserves are required reserves.

c. the bank is holding $2,000 in excess reserves.

The Rule of 72 implies that a country with a growth rate of 2 percent: a. will never double its income. b. will double its income in about 7 years. c. will double its income in about 36 years. d. will double its income in about 50 years.

c. will double its income in about 36 years.

Because you can get more of one good only by giving up some of another good, the shape of a production possibility curve is: a. upward-sloping. b. perfectly vertical. c. perfectly horizontal. d. downward-sloping.

d. downward-sloping.

Considering its direct effect on income, which of the following policies is most likely to reduce a country's trade deficit? a. An increase in the money supply. b. A cut in taxes. c. An increase in government spending. d. An increase in taxes.

d. An increase in taxes. Contractionary fiscal policy decreases income and imports, causing the U.S. trade deficit to decline.

Which of the following is not a function of money? a. Medium of exchange. b. Unit of account. c. Store of wealth. d. Equity instrument.

d. Equity instrument.

Which is not a function of the Fed? a. Conducting monetary policy b. Serving as a lender of last resort c. Providing financial services such as check clearing to commercial banks d. Financing U.S. budget deficits

d. Financing U.S. budget deficits

Which of the following statements about the financial and real sectors is true? a. For every financial asset there is a real asset. b. For every real asset there is a financial asset. c. For every financial transaction there is a real transaction. d. For every real transaction there is a financial transaction.

d. For every real transaction there is a financial transaction.

Which of the following is not something the Fed can change directly? a. The reserve requirement b. The discount rate c. Open market operations d. The prime rate

d. The prime rate The prime rate is controlled by commercial banks, and while it can be influenced by monetary policy, it is not a tool of monetary policy.

If a firm sold $700 worth of goods that cost $800 to produce: a. aggregate income would no longer equal GDP. b. aggregate income would be negative. c. the firm's loss would not be added to aggregate income. d. aggregate income would still equal GDP.

d. aggregate income would still equal GDP.

As the reserve ratio goes up, less money will be created because: a. people will hold less cash. b. people will hold more cash. c. banks will extend more loans. d. banks will extend fewer loans.

d. banks will extend fewer loans.

Fluctuations around the long-term growth rate are called: a. recessions. b. depressions. c. expansions. d. business cycles.

d. business cycles.

The country with a comparative advantage in the production of good X is the one that: a. has the greatest technical efficiency in producing good X. b. has the greatest supply of the natural resources used in producing good X. c. can produce good X with the least labor. d. can produce good X at the lowest opportunity cost.

d. can produce good X at the lowest opportunity cost.

The federal funds rate increased from 2.5 percent in February 2005 to 5.26 in February 2007. This change in the federal funds rate clearly indicates that during this period the Fed followed a(n): a. expansionary fiscal policy. b. contractionary fiscal policy. c. expansionary monetary policy. d. contractionary monetary policy.

d. contractionary monetary policy

Crowding out: a. increases the multiplier effect, so that an increase in government spending raises income by more. b. increases the multiplier effect, so that an increase in government spending raises income by less. c. decreases the multiplier effect, so that an increase in government spending raises income by more. d. decreases the multiplier effect, so that an increase in government spending raises income by less.

d. decreases the multiplier effect, so that an increase in government spending raises income by less.

The crowding out effect: a. increases the multiplier effect, so that an increase in taxes reduces income by more. b. increases the multiplier effect, so that an increase in taxes reduces income by less. c. decreases the multiplier effect, so that an increase in taxes reduces income by more. d. decreases the multiplier effect, so that an increase in taxes reduces income by less.

d. decreases the multiplier effect, so that an increase in taxes reduces income by less.

The structural deficit: a. rises as the economy expands and falls when it contracts. b. falls as the economy expands and rises when it contracts. c. changes as actual income changes regardless of potential income. d. does not change when income changes, but changes only when potential income changes.

d. does not change when income changes, but changes only when potential income changes.

You are holding $200 in cash with the objective to buy in the near future a video game that is about to be offered in the market, until you buy the game this type of savings is: a. transformed into investment. b. going back into the loanable funds market. c. channeled by the financial market. d. escaping the circular flow of the economy.

d. escaping the circular flow of the economy. Savings in the form of cash do not enter the banking sector, and do not go back to the loanable funds market to become investments. These savings escape the circular flow.

All of the following are important sources of growth except: a. institutions with incentives compatible with growth. b. technological development. c. entrepreneurship. d. government planning.

d. government planning.

During 2007, the United States and Japan announced possible limits on Chinese imports through higher tariff rates on Chinese products. To avoid these limits, China would have had to: a. decrease the value of the yuan and increase its trade surplus. b. decrease the value of the yuan and decrease its trade surplus. c. increase the value of the yuan and increase its trade surplus. d. increase the value of the yuan and decrease its trade surplus.

d. increase the value of the yuan and decrease its trade surplus. The United States and Japan threatened to limit Chinese imports because of the large size of the Chinese trade surplus with the United States and Japan. This threat caused China to increase the value of the yuan from 8.1 yuan per dollar in January 2006 to 7.69 yuan per dollar in May 2007.

According to the quantity theory of money, velocity: a. varies substantially with changes in the rate of interest and the expected rate of inflation. b. varies with changes in the growth rate of the money supply. c. is fairly constant, responding only to changes in the expected rate of inflation. d. is virtually constant, responding only to changes in the underlying institutional structure.

d. is virtually constant, responding only to changes in the underlying institutional structure.

For most countries, international goals are generally: a. much more important than domestic goals. b. slightly more important than domestic goals. c. equally important as domestic goals. d. less important than domestic goals.

d. less important than domestic goals. Domestic goals such as unemployment and inflation swing elections. Exchange rates and trade balances do not.

An increase in the budget deficit will have a: a. more negative effect on income when crowding out is weak. b. more positive effect on income when crowding out is strong. c. less negative effect on income when crowding out is weak. d. less positive effect on income when crowding out is strong.

d. less positive effect on income when crowding out is strong.

Considering its effects through income, the price level, and interest rates only, expansionary fiscal policy causes the value of a country's currency to: a. fall. b. rise. c. remain unchanged. d. move unpredictably.

d. move unpredictably.

The primary tool of monetary policy is: a. the discount rate. b. the reserve requirement. c. the prime rate. d. open market operations.

d. open market operations.

When the euro appreciated significantly against the U.S. dollar, European policymakers were concerned. To stop the appreciation of the euro, the European Central Bank could have adopted a macroeconomic policy that: a. reduced both the supply and demand for euros. b. reduced the supply of euros but increased the demand. c. increased both the supply and the demand for euros. d. reduced the demand for euros but increased the supply.

d. reduced the demand for euros but increased the supply.

As the economy expands, tax revenues: a. fall and transfer payments rise, causing the economy to expand by less than it would in the absence of automatic stabilizers. b. rise and transfer payments rise, causing the economy to expand by more than it would in the absence of automatic stabilizers. c. fall and transfer payments fall, causing the economy to expand by more than it would in the absence of automatic stabilizers. d. rise and transfer payments fall, causing the economy to expand by less than it would in the absence of automatic stabilizers.

d. rise and transfer payments fall, causing the economy to expand by less than it would in the absence of automatic stabilizers.

The U.S. textile industry is relatively small because the United States imports most of its clothing. A clear result of the importation of clothing is that: a. there is less variety available than there would be without imports. b. the quality of clothing is lower than it would be without imports. c. the price of clothing is higher than it would be without imports. d. the price of clothing is lower than it would be without imports.

d. the price of clothing is lower than it would be without imports.

Checking account deposits are classified as money because: a. they earn interest income for the depositor. b. they are ultimately obligations of the Treasury. c. banks hold currency equal to their outstanding deposits. d. they can be readily used in the making of purchases and the payment of debts.

d. they can be readily used in the making of purchases and the payment of debts.

The unemployment rate is the number of people: a. without a job divided by the population. b. without a job and looking divided by the population. c. without a job divided by the labor force. d. without a job and looking for work divided by the labor force.

d. without a job and looking for work divided by the labor force.

Keynesian economics focuses on: the long run. the short run. both the long run and the short run. neither the long run nor the short run.

the short run.

Which of the following factors will shift the long-run aggregate supply curve? A change in aggregate demand A change in available resources A change in the price level A change in sales or excise taxes

A change in available resources

Which of the following people would be considered unemployed? a. A 55-year-old steel worker who was laid off 18 months ago and has given up trying to find a job b. A woman who has quit college to move to New York where she is looking for a modeling job c. A young man who has recently received his Ph.D. but who is driving a taxi because of an inability to find a teaching job d. A student who plans to look for a job after graduation

b. A woman who has quit college to move to New York where she is looking for a modeling job

Which of the following statements best characterizes the Classical view of business cycles? a. Fluctuations in business activity occur in regular and predictable patterns. b. Fluctuations in business activity are to be expected and should be accepted just as changes in the seasons are accepted. c. Expansions and recessions are symptoms of underlying problems and should be addressed by macroeconomic policy. d. The appropriate macroeconomic policy can eliminate fluctuations in business activity.

b. Fluctuations in business activity are to be expected and should be accepted just as changes in the seasons are accepted.

If U.S. net exports are positive, then U.S.: a. GDP is less than the sum of consumption, investment, and government purchases. b. GDP exceeds the sum of consumption, investment, and government purchases. c. imports must exceed U.S. exports. d. GDP equals the sum of consumption, investment, and government purchases.

b. GDP exceeds the sum of consumption, investment, and government purchases.

Which of the following was not a solution to the Great Depression favored by Classical economists? a. Break up labor unions b. Hire unemployed workers for public works programs c. Let market forces operate d. Stop government measures that held up wages and prices

b. Hire unemployed workers for public works programs

If the price level rises, the interest rate effect will cause investment: a. and the quantity of aggregate demand to increase. b. and the quantity of aggregate demand to decrease. b. to increase and the quantity of aggregate demand to decrease. d. to decrease and the quantity of aggregate demand to increase.

b. and the quantity of aggregate demand to decrease.

The lowest sustainable rate of unemployment that policy makers believe is achievable under existing conditions is: a. zero. b. called the target rate of unemployment. c. called the optimal rate of unemployment. d. called cyclical unemployment.

b. called the target rate of unemployment.

A reservation wage that is higher than the equilibrium wage creates: a. structural unemployment. b. cyclical unemployment. c. target unemployment. d. potential unemployment.

b. cyclical unemployment.

According to the Classical growth model, population growth: a. eventually reduces output. b. eventually reduces output per worker. c. does not affect output. d. does not affect output per worker.

b. eventually reduces output per worker.

In 2008, gross investment was $2,593 billion and net investment was $873 billion; therefore depreciation was: $873 billion. $1,720 billion. $2,593 billion. $3,466 billion.

$1,720 billion. Depreciation is gross investment minus net investment ($2,593 - 873).

Suppose nominal GDP is $14 trillion and the GDP deflator is 122.5. Given this information, what is real GDP? $9.8 trillion $11.4 trillion $13.8 trillion $15.2 trillion

$11.4 trillion Real GDP is nominal GDP divided by the price index: (14/122.5) * 100 = 11.4.

Suppose the required reserve ratio is 0.15. Total bank deposits are $100 million and the bank holds $20 million in reserves. How much more money can the bank create if it does not hold excess reserves? $33 million $66 million $100 million $667 million

$33 million Multiply the money multiplier (1/r) by excess reserves [(1/0.15) * 5 = 33 million].

Suppose a friend offered to loan you money at an interest rate of 5% and you knew that the inflation rate was 6%. The real return on the money that you repay to him would be 11% -1% 1% 30%

-1%

If nominal GDP is $14 trillion and real GDP is $12 trillion, the GDP deflator is: 86. 117. 112. 114.

117 The GDP deflator is nominal GDP/real GDP times 100. In this case, 14/12 * 100 = 117.

If the price of housing (which accounts for 40 percent of total expenditures in the CPI basket), rises by 5 percent in one year while the prices of all other goods remain constant, by how much will the CPI rise? 2 percent 5 percent 10 percent 40 percent

2 percent Multiply the share by the rise in the price (0.4 * 5% = 2%).

Unemployment will be at its target rate when actual inflation is: 3 percent and expected inflation is 3 percent. 3 percent and expected inflation is 0 percent. 0 percent and expected inflation is 3 percent. 6 percent and expected inflation is 3 percent.

3 percent and expected inflation is 3 percent. Unemployment is at its target rate when inflation and expected inflation are equal.

If percent change in nominal GDP is 6 percent and percent change in real GDP is 2 percent, inflation is: 0 percent. 2 percent. 4 percent. 6 percent.

4 percent Percent change in real GDP = percent change in nominal GDP - inflation. Rearranging terms, inflation = percent change in nominal GDP less percent change in real GDP = 6 - 2 = 4.

If the U.S. money supply increases from $7.6 trillion to $8.3 trillion. If there is zero real economic growth, and velocity stays constant, then according to the quantity theory of money, the U.S. inflation rate during this period would be: 3 percent. 6 percent. 9 percent. 12 percent.

9 percent

Which of the following would best explain a decrease in the supply of squash? A. An increase in the price of other vegetables B. An increase in the price of squash C. A decrease in the price of squash D. A decrease in the cost of growing squash

A. An increase in the price of other vegetables

Which of the following is not an example of government's role as an actor? A. Equal opportunity and labor laws that restrict businesses' freedom to hire and fire whomever they want B. Tax cuts C. Increases in social security spending D. Laws that require states and the federal government to balance their budgets

A. Equal opportunity and labor laws that restrict businesses' freedom to hire and fire whomever they want

If a nation has a comparative advantage in the production of good X then: A. It can produce good X at the lowest opportunity cost. B. It will import good X. C. It can produce more of good X than any other nation. D. The opportunity cost of producing an additional unit of good X is greater than for any other nation.

A. It can produce good X at the lowest opportunity cost.

Which of the following situations best demonstrates the law of demand? A. Movie-goers react to an increase in the price of a theater ticket by seeing fewer movies per year. B. Movie-goers see fewer movies per year due to an overall decrease in the quality of newly released motion pictures. C. A drought causes a decrease in the availability of pumpkins, resulting in fewer jack-o-lanterns displayed on Halloween. D. An increase in the number of people writing Economics textbooks results in a decrease in average textbook prices.

A. Movie-goers react to an increase in the price of a theater ticket by seeing fewer movies per year.

Which of the following would cause quantity demanded to change without changing the demand curve? A. A change in income B. A change in the price of the good C. A change in tastes and preferences D. A change in the price of a substitute good

B. A change in the price of the good

Microsoft Word is the most widely used word processing program. Which of the following explanations of its popularity uses the lock-in hypothesis? A. Build a better mousetrap and the world beats a path to your door. MS Word is the better mousetrap. B. Because MS Word is the standard in business, it is difficult to use other word processing programs and share documents. C. MS Word is priced below other competing programs; Microsoft can afford to price it low because it sells so many copies. D. Although MS Word is not the cheapest word processor, its ratio of features to price is better than the competitors

B. Because MS Word is the standard in business, it is difficult to use other word processing programs and share documents. The lock-in effect says that popularity creates more popularity. It is very difficult to replace a standard, something the Microsoft understood well before other software companies.

The invention of a machine that increases milk production is discovered. If farmers were to decry the effect of this new technology on the price of milk and lobby government to set the price of milk at the price before the invention, what would be the result? A. Excess demand for milk B. Excess supply of milk C. Neither a shortage nor a surplus of milk D. A decline in the price of milk

B. Excess supply of milk

According to the law of demand an increase in the price of gasoline will: A. increase the quantity demanded of gasoline, other things constant. B. decrease the quantity demanded of gasoline, other things constant. C. increase the demand for gasoline. D. decrease the demand for gasoline.

B. decrease the quantity demanded of gasoline, other things constant.

The study of inflation is a topic in: A. microeconomics. B. macroeconomics. C. classical economics. D. normative economics.

B. macroeconomics.

If the price of movies on DVD rises while the price of movies purchased on demand through the Internet remains the same, the law of demand predicts that consumers will: A. substitute movies on DVD for movies on the Internet. B. substitute movies on the Internet for movies on DVD. C. buy only movies on DVD. D. buy only movies on the Internet.

B. substitute movies on the Internet for movies on DVD.

In a feudalist society, in comparison with mercantilism: A. merchants play a more important political role than serfs. B. tradition plays a more important role than the government. C. government plays a large role in determining the what, how, and for whom decisions. D. markets make the central economic decisions.

B. tradition plays a more important role than the government.

An economic policy is: A. a generalization about the workings of an abstract economy. B. a physical or mental structure that significantly influences economic decisions. C. an action taken to influence the course of economic events. D. a standard people use when they determine whether a particular activity or behavior is acceptable.

C. an action taken to influence the course of economic events.

Quantity restrictions become more valuable to those holding the rights to sell the good when: A. supply increases. B. supply decreases. C. demand increases. D. demand decreases.

C. demand increases.

f government were to issue a fixed number of licenses to produce a good or provide a service, this would likely: A. lower the price of the good or service to consumers. B. lower the wage received by those who have licenses. C. increase the wage received by those who have licenses. D. increase the demand for goods.

C. increase the wage received by those who have licenses.

The Soviet socialist economy fell apart primarily because: A. it was based on barter rather than monetary exchange. B. individuals are not motivated by self interest. C. workers lacked incentives to work and production was inefficient. D. markets failed to develop.

C. workers lacked incentives to work and production was inefficient.

From 2001 to 2010, which geographic area or country had the highest per capita growth rate? China. Western Europe. North America. Latin America.

China

If the money stock grows by 13 percent, and during that same time nominal GDP grows by 3.3 percent, what can we deduce happens to velocity during this period? A. We cannot tell without knowing what happened to prices. B. It remained constant. C. It rose. D. It fell.

D. It fell.

Which of the following is not an example of government's role as a referee? A. Equal opportunity and labor laws that restrict businesses' freedom to hire and fire whomever they want. B. Regulations governing safety in the workplace, wages, overtime, and hours of work C. Laws prohibiting businesses from meeting to fix prices D. Laws that require states and the federal government to balance their budgets

D. Laws that require states and the federal government to balance their budgets

The country with a comparative advantage in the production of good X is the one that: A. has the greatest technical efficiency in producing good X. B. has the greatest supply of the natural resources used in producing good X. C. can produce good X with the least labor. D. can produce good X at the lowest opportunity cost.

D. can produce good X at the lowest opportunity cost.

To keep the price of gas from rising quickly after Katrina, the government instituted price ceilings on the price of gasoline in some states. These price ceilings caused ______ in the gasoline market. A. surpluses B. movement of the demand curve C. movement along the demand curve D. shortages

D. shortages

An improvement in the technology for producing a good will shift the supply curve for that good to the left. True False

False

If the Bureau of Labor Statistics considers Mary to be a discouraged worker, then she is counted as unemployed for purposes of computing the official unemployment rate. True False

False

New growth theory emphasizes the contribution of technology to growth more than Classical growth theory. True False

True

Only marginal costs, not sunk costs, affect economic decisions if individuals are rational. True False

True

For the purposes of calculating GDP using the expenditure approach, which of the following is not included in the government purchases account? Government purchases of pencils The payroll of the federal government Welfare payments to the poor The government's purchase of a computer

Welfare payments to the poor

Growth compatible institutions: a. have incentives built into them that lead people to put forth effort. b. encourage people to pursue activities that inhibit growth in others. c. allow people to gain income for themselves by creating impediments for others. d. encourage people to spend a lot of time in leisure pursuits.

a. have incentives built into them that lead people to put forth effort.

Which of the following would shift the aggregate demand curve to the right? a. An increase in foreign income b. An appreciation of the value of a country's currency c. A lower future expected price level d. An increase in imports

a. An increase in foreign income

For the purposes of calculating GDP using the expenditure approach, which of the following payments is not included in the government purchases component? a. Social security payments b. The wages paid by a local government to its road crew c. The wages paid by a state government to the workers in its welfare department d. The federal government's purchase of a submarine from a shipbuilder

a. Social security payments

Suppose there are 685,000 discouraged workers. What is one reason the government tries to collect data about discouraged workers? a. Some people argue that the unemployment rate underestimates true unemployment because it does not include discouraged workers. b. Some people argue that the unemployment rate overestimates true unemployment because it includes discouraged workers. c. The number of discouraged workers is a better indicator of unemployment. d. The number of discouraged workers is an indication of labor unrest and potential for riots.

a. Some people argue that the unemployment rate underestimates true unemployment because it does not include discouraged workers.

According to the structural stagnation theory, a. U.S. economic growth will return to the world average growth rate, but by that time the U.S. share of world output will have declined. b. U.S. economic growth will return to the world average growth rate and its current share of world output. c. U.S. economic growth will never return to the world average growth rate because foreign economies have so far to catch up. d. After a period of slower growth U.S. economic growth will exceed world growth.

a. U.S. economic growth will return to the world average growth rate, but by that time the U.S. share of world output will have declined.

One of the three functions of money is to serve as: a. a financial asset. b. a financial liability. c. a real asset. d. a real liability.

a. a financial asset.

Per capita real output is a: a. better measure of personal material consumption than output. b. worse measure of personal material consumption than output. c. better measure of the physical environment than output. d. worse measure of the physical environment than output.

a. better measure of personal material consumption than output.

If interest rates fall, a. bond prices rise. b. bond prices fall. c. bond prices do not change. d. bond prices could either rise or fall.

a. bond prices rise. Bond prices move inversely with interest rates.

In 2009, the personal savings rate rose. If the additional savings were not translated into investment, Keynes would predict that aggregate income would: a. decline and remain there. b. rise indefinitely. c. decline, but rise in the future. d. would rise and remain there.

a. decline and remain there.

Globalization has tended to: a. lower people's reservation wage. b. raise people's reservation wage. c. lower people's expectational wage. d. raise people's expectational wage.

a. lower people's reservation wage.

The unemployment rate would be lower if: a. members of the armed services were included in the labor force. b. discouraged workers were classified as unemployed. c. underemployed workers were considered unemployed. d. workers who are voluntarily unemployed were considered as part of the labor force.

a. members of the armed services were included in the labor force.

The fact that more women have entered the labor force has: a. raised the target rate of unemployment. b. lowered the target rate of unemployment. c. raised cyclical unemployment. d. lowered cyclical unemployment.

a. raised the target rate of unemployment.

Suppose prices in the United States are expected to decline in the future. The effect today is likely to: a. shift the AD curve to the left. b. shift the AD curve to the right. c. make the AD curve flatter. d. make the AD curve steeper.

a. shift the AD curve to the left.

In 1968, the government instituted a 26 percent income tax surcharge. In terms of the AS/AD model, this change should have: a. shifted the AD curve to the left. b. shifted the AD curve to the right. c. made the AD curve flatter. d. made the AD curve steeper.

a. shifted the AD curve to the left.

Technological change can result in: a. structural unemployment. b. frictional unemployment. c. cyclical unemployment. d. seasonal unemployment.

a. structural unemployment.

Double counting in the national income accounts will occur if GDP is computed by summing up: final output sales. value added. all sales. the income earned by a country's residents.

all sales

Classical growth theory: a. correctly predicted that growth rates would slow as countries became richer. b. incorrectly predicted that per capita income levels would converge across countries. c. correctly predicted that growth rates would accelerate as countries became richer. d. incorrectly predicted that per capita income levels would diverge even further across countries.

b. incorrectly predicted that per capita income levels would converge across countries.

Velocity can be calculated as the ratio of: a. nominal GDP to real GNP. b. nominal GDP to the money supply. c. real GDP to the price level. d. the money supply to the price level.

b. nominal GDP to the money supply.

The relationship between real GDP and nominal GDP can be expressed by: a. real GDP = nominal GDP + inflation. b. percent change in real GDP = percent change in nominal GDP - inflation. c. real GDP = nominal GDP - inflation. d. Real GDP = nominal GDP + inflation.

b. percent change in real GDP = percent change in nominal GDP - inflation.

As the economy moves to the right of the long-run Phillips curve inflationary: a. pressures build. b. pressures subside. c. pressures remain constant. d. expectations rise.

b. pressures subside.

Globalization has: a. lowered the target rate of unemployment. b. raised the target rate of unemployment. c. lowered cyclical unemployment. d. raised cyclical unemployment.

b. raised the target rate of unemployment.

An increase in real money balances resulting from a lower price level will: a. reduce both interest rates and investment. b. reduce interest rates and increase investment. c. increase interest rates and reduce investment. d. increase both interest rates and investment.

b. reduce interest rates and increase investment.

The new government of Pakistan transfers money from the rich to the poor. This will likely: a. shift the Pakistani AD curve to the left. b. shift the Pakistani AD curve to the right. c. make the Pakistani AD curve flatter. d. make the Pakistani AD curve steeper.

b. shift the Pakistani AD curve to the right.

If total income in Sweden remains the same but the wage share of income rises, the Swedish AD curve will most likely: a. shift to the left. b. shift to the right. c. become flatter. d. become steeper.

b. shift to the right.

An increase in the aggregate demand curve will, in the long run, change: a. output but not price level. b. the price level but not output. c. both output and the price level. d. neither output nor the price level.

b. the price level but not output.

Keynesian economists focus their analysis on: a. the long run. b. the short run. c. aggregate supply. d. economic growth.

b. the short run.

Inflationary pressures increase when the economy moves: a. to the right of the long-run Phillips curve. b. to the left of the long-run Phillips curve. c. down the short-run Phillips curve. d. down the long-run Phillips curve.

b. to the left of the long-run Phillips curve.

Opportunity cost: a. includes only monetary outlays. b.is the net benefit forgone by not undertaking the next best alternative. c.is nonexistent for some choices. d.is the same as sunk cost.

b.is the net benefit forgone by not undertaking the next best alternative.

Okun's rule of thumb states that a: a. 2 percentage point rise in the unemployment rate will tend to be associated with a 1 percent fall in output from its trend and vice versa. b. 2 percentage point rise in the unemployment rate will tend to be associated with a 1 percent rise in output from its trend and vice versa. c. 1 percentage point rise in the unemployment rate will tend to be associated with a 2 percent fall in output from its trend and vice versa. d. 1 percentage point rise in the unemployment rate will tend to be associated with a 2 percent rise in output from its trend and vice versa.

c. 1 percentage point rise in the unemployment rate will tend to be associated with a 2 percent fall in output from its trend and vice versa.

Which of the following factors will not shift the long-run aggregate supply curve? a. An increase in capital accumulation b. An increase in available resources c. An increase in the price level d. An improvement in production technology

c. An increase in the price level

The income approach to measuring GDP: a. focuses on how income is spent. b.. uses the factors payments made by businesses to households to estimate GDP. c. adds up all household expenditures to calculate aggregate income and GDP. d. ignores how income is earned and focuses instead on how it is used.

c. adds up all household expenditures to calculate aggregate income and GDP.

The labor force participation rate equals the number of people: a. in the labor force. b. in the labor force as a percentage of the total population. c. in the labor force as a percentage of the total population at least sixteen years old. d. who are working as a percentage of the labor force.

c. in the labor force as a percentage of the total population at least sixteen years old.

If per capita output increases by 3 percent and output grows by 4 percent, the population must be: a. falling at a rate of 7 percent. b. falling at a rate of 1 percent. c. increasing at a rate of 1 percent. d. increasing at a rate of 7 percent.

c. increasing at a rate of 1 percent. Growth in per capita output equals the difference between the growth rate of output and the growth rate of population.

The problem portrayed by the short-run Phillips curve is that: a. unemployment tends to increase when prices are rising. b. changes in the composition of the labor force tend to increase the natural rate of unemployment. c. inflation tends to increase when unemployment falls. d. stagflation is unavoidable.

c. inflation tends to increase when unemployment falls.

If the money supply is 500 and velocity is 6, then nominal GDP: a. is 83.33. b. is 500. c. is 3000. d. cannot be determined.

c. is 3000. Nominal GDP, PQ = MV = 500 * 6 = 3,000.

The growth produced by markets: a. makes everyone better off and improves the distribution of income as well. b. makes the rich better off at the expense of the poor. c. makes the average person better off but may worsen the distribution of income. d. affects the level of income but not its distribution.

c. makes the average person better off but may worsen the distribution of income.

Transfers of assets, such as stock sales are: a. included in GDP because they raise domestic production. b. included in GDP because they increase domestic wealth. c. not included in GDP because they do not increase domestic production. d. not included in GDP because they do not increase domestic wealth.

c. not included in GDP because they do not increase domestic production.

The relationship between real and nominal interest rates can be expressed by: a. real interest rate = nominal interest rate + inflation. b. real interest rate = inflation - nominal interest rate. c. real interest rate = nominal interest rate - inflation. d. The real interest rate cannot be calculated.

c. real interest rate = nominal interest rate - inflation.

The rapid development of Internet technologies during the 1990s allowed businesses to produce goods and services cheaper than before and also gave rise to completely new services. We would show this change in the AD/AS model by moving the aggregate: a. demand curve right with little change in aggregate supply. b. demand curve left with little change in aggregate supply. c. supply curve down (to the right) with little change in aggregate demand. d. supply curve up with little change in aggregate demand.

c. supply curve down (to the right) with little change in aggregate demand. Improvements in technology increase potential output and reduce costs, moving the short aggregate supply curve down and the long-run aggregate supply curve to the right.

If the labor force participation rate rises, it follows that: a. the number of people in the population who are at least 16 years old must be rising. b. the number of employed workers must be rising. c. the labor force must be increasing faster than the number of people in the population who are at least sixteen years old. d. the number of people in the population who are at least sixteen years old and are working or looking for work must be rising.

c. the labor force must be increasing faster than the number of people in the population who are at least sixteen years old.

According to Okun's rule of thumb, if trend growth is 2 percent and the economy is producing at an annual rate of $5 trillion, a decrease in the rate of unemployment from 7 percent to 6 percent would be expected to be associated with which of the following changes in income? a. Fall by $100 billion b. Rise by $100 billion c. Fall by $200 billion d. Rise by $200 billion

d. Rise by $200 billion 1 percentage point rise in the unemployment rate will tend to be associated with a 2 percent fall in output from its trend and vice versa. Output will rise by 4 percent (2 + 2 × 1) = 4. Income will rise by 200 billion (5 trillion × .04).

When considering policy, measures of access to credit can often be: a. measures of individual assets. b. unimportant to the economy. c. included in the measures of money. d. as important as measure of money.

d. as important as measure of money.

A fall in the price level: a. reduces the value of money in peoples' pockets, so people buy less goods. b. reduces the value of money in peoples' pockets, so people buy more goods. c. increases the value of money in peoples' pockets, so people buy less goods. d. increases the value of money in peoples' pockets, so people buy more goods.

d. increases the value of money in peoples' pockets, so people buy more goods.

The short-run aggregate supply curve is most likely to shift down (to the right) if: a. productivity falls. b. wages rise. c. sales taxes increase. d. input prices fall.

d. input prices fall.

According to institutionally focused economists, a. the direction of causation goes from MV to PQ. b. asset inflation is a phenomenon that cannot occur. c. inflation is double the rise in money supply. d. price-setting conventions by institutions are the source of inflation.

d. price-setting conventions by institutions are the source of inflation.

If output increases by 2 percent and population growth is 3 percent, per capita output: falls by 5 percent. falls by 1 percent. grows by 1 percent. grows by 5 percent.

falls by 1 percent. Growth in per capita output equals the difference between the growth rate of output and the growth rate of population.

If output increases by 5 percent and population growth is 3 percent, per capita output: grows by 2 percent. grows by 3 percent. grows by 5 percent. grows by 8 percent.

grows by 2 percent. Growth in per capita output equals the difference between the growth rate of output and the growth rate of population.

Classical economists are generally associated with: laissez faire. QWERTY. an activist policy. their support of low unemployment.

laissez faire.

If the velocity of money is about 1.8 and money stock is about $8 trillion, what is real GDP? $0.8 trillion $4.4 trillion $14.2 trillion we cannot compute real GDP from the data; we can only compute nominal GDP

we cannot compute real GDP from the data; we can only compute nominal GDP To compute real GDP we need nominal GDP and the price index. Money and velocity will only give us nominal GDP.