Economics

A

Which of the following factors of production is least likely to be fixed in the short run? A) Labor. B) Plant size. C) Technology. Explanation References Labor is typically assumed to be variable in the short run.

B

An economist wanting to determine the sources of an increase in a country's GDP using the production function approach would most likely investigate: A) shifts in the aggregate supply curve. B) growth in productivity, the labor force, and the capital stock. C) increases in industrial production. Explanation References The production function approach relates a country's economic output to its inputs of capital and labor and its levels of productivity.

A

Twenty firms in a region's gravel market have identical supply functions of QS = −2,000 + 25P. The market supply curve (inverse supply function) is: A) P = 0.002QS + 80 B) QS = −40,000 + 500P C) P = 0.04QS + 80 Explanation References The aggregate supply function is: QS = 20(−2,000) + 20(25)P QS = −40,000 + 500P The market supply curve (inverse supply function) is: 500P = QS + 40,000 P = (1 / 500)QS + (40,000 / 500) P = 0.002QS + 80

C

n a market characterized by monopolistic competition, which of the following statements about advertising costs is least accurate? A) Many firms spend a significant portion of their advertising budget on brand name promotion. B) Firms' advertising costs tend to be greater than those for firms in perfect competition. C) The average total cost attributable to advertising will increase as output increases. Explanation References The increase in average total cost attributable to advertising decreases as output increases because a fixed cost is being averaged over a larger quantity. Advertising expenses are relatively high for firms in monopolistic competition. This is not only because firms need to inform consumers about the unique features of their products, but also to create or increase a perception of differences between products that are actually quite similar. Many firms spend a significant portion of their advertising budget on brand name promotion.

C

A central bank follows an inflation targeting monetary policy. If the permissible band is plus-or-minus 2% around the target inflation rate, the central bank is most likely to choose a target inflation rate of: A) 0%. B) 1%. C) 3%. Explanation References Because they consider deflation to be disruptive to an economy, central banks typically choose inflation targets and bands that do not include a negative rate of inflation.

B

A minimum wage is an example of which of the following? A) Rent controls. B) A price floor. C) A price ceiling. Explanation References A minimum wage is an example of a price floor.

A

A perfect competition has all of the following characteristics EXCEPT: A) a differentiated product. B) barriers to entry don't exist. C) a large number of independent firms. Explanation References In a perfectly competitive market all the firms produce a homogeneous product.

A

A price for a good above the equilibrium price will result in a situation of: A) excess supply. B) excess demand. C) underproduction. Explanation References At prices above equilibrium, suppliers are willing to produce a greater quantity than buyers are willing to purchase. This is an excess supply condition. Competition among suppliers leads to downward pressure on prices until the market reaches equilibrium price and quantity.

C

A price index that is calculated using the current weights of the index's basket of goods and services is known as a: A) hedonic price index. B) Laspeyres price index. C) chained price index. Explanation References A chained or chain-weighted price index uses updated weights for each good and service in its market basket. A price index that is not chain-weighted, such as a Laspeyres index, is calculated using weights for each good and service in the market basket as of the index's base period. Hedonic pricing is a technique used to adjust a price index for upward bias from quality changes of goods in its market basket.

A

According to Keynesian school theory, business cycles are caused by: A) excessive optimism or pessimism among business managers. B) inappropriate variations in the growth of the money supply. C) changes in technology over time. Explanation References In Keynesian business cycle theory, business cycles are caused primarily by changes in expectations about economic growth. Business managers overinvest when they are excessively optimistic and underinvest when they are excessively pessimistic.

C

An unstable market equilibrium is best described as one in which: A) the current market price equals the equilibrium price. B) the supply curve is less steeply sloped than the demand curve. C) excess supply or excess demand drives prices away from equilibrium. Explanation References Unstable equilibria are characterized by a downward sloping supply curve that is less steeply sloped than the demand curve, so that excess supply or excess demand tends to drive prices away from equilibrium. The current market price can equal the equilibrium price in either stable or unstable equilibria. For an equilibrium to be unstable the supply curve must be both downward sloping and less steeply sloped than the demand curve.

A

At a recent symposium, "The Great Economic Debate of the Decade" several panelists were asked to state their opinions on aggregate demand and aggregate supply. Panelist 1 stated that he believed shifts in both aggregate demand and aggregate supply were driven primarily by changes in technology over time. Panelist 2 stated that she believed the focus of economic policy should be to directly increase aggregate demand by increasing the money supply or through fiscal policy. The views of Panelist 1 and Panelist 2 would best be described as which economic school of thought? Panelist 1 Panelist 2 A) Neoclassical Keynesian B) New Classical Monetarist C) Keynesian New Keynesian Explanation References The neoclassical economists believe that shifts in both aggregate demand and aggregate supply are primarily driven by changes in technology over time. Keynesian economists believe that aggregate demand can be increased through monetary policy (increasing the money supply) or through fiscal policy (increasing government spending, decreasing taxes, or both). They do not focus on aggregate supply. Monetarists believe that the main factor leading to business cycles and deviations from full-employment equilibrium is monetary policy.

A

Compared to GDP calculated using the sum-of-value-added method, GDP using the value-of-final-output method will be: A) equal to it. B) biased downward. C) biased upward. Explanation References GDP calculated under the two methods is the same.

B

Contractionary monetary policy is least likely to decrease consumption spending by decreasing: A) securities prices. B) the foreign exchange value of the currency. C) expectations for economic growth. Explanation References Contractionary monetary policy is likely to increase the value of the domestic currency in the foreign exchange market, which decreases foreign demand for the country's exports. Contractionary monetary policy should cause both securities prices and expectations for economic growth to decrease, each of which is likely to cause consumers to decrease spending.

C

Currency depreciation is most likely to affect the balance of trade when a country's imports are goods that: A) represent a small proportion of consumer spending. B) have relatively inelastic demand. C) have close substitutes. Explanation References According to the elasticities approach, the more elastic the demand for imports or exports, the greater the effect on the balance of trade from currency depreciation. Demand is more elastic for imports or exports when they are primarily goods with close substitutes, luxury goods, or goods that represent a large proportion of a consumer's spending.

A

Firms in a perfectly competitive industry will increase their output until which of the following conditions is met? A) Marginal cost equals price. B) Marginal revenue equals average total cost. C) Total revenue equals price. Explanation References When a firm operates under conditions of perfect competition, marginal revenue always equals price. Under perfect competition, price is constant (a horizontal line) so marginal revenue is constant. Therefore a firm will increase output until marginal cost equals price.

B

Fiscal policy includes a government's: A) spending, tax, and monetary policies. B) spending and tax policies only. C) tax policies only. Explanation References Fiscal policy refers to a government's use of spending and taxation to meet macroeconomic goals. Monetary policy refers to central bank actions and is not considered part of fiscal policy.

B

For which of the following items would the market be best characterized as a factor market? A) Beer. B) Crude oil. C) Clothing. Explanation References Crude oil is most often purchased as a factor of production for other goods, such as gasoline. Because beer and clothing are primarily purchased by consumers as finished goods, the markets for these goods are best characterized as product markets.

A

Hanover Industrial operates a factory in Paris, which produces goods at a marginal cost above marginal revenue, and a factory in Munich, which produces identical goods at a marginal cost less than marginal revenue. To maximize profits, Hanover should most likely: A) decrease output at the Paris factory and increase output at the Munich factory. B) increase output at the Paris factory and decrease output at the Munich factory. C) decrease output at both factories. Explanation References Since the Munich plant is generating revenues greater than costs and the Paris plant is not, Hanover should increase output at the Munich plant and reduce output at the Paris plant.

B

If quantity demanded increases 15% when the price drops 1%, demand for this good: A) inelastic, but not perfectly inelastic. B) elastic, but not perfectly elastic. C) perfectly elastic. Explanation References Whenever quantity demanded for a good changes by a greater percentage than price, the price elasticity of demand will be greater than 1.0 and demand for the product is considered to be elastic.

B

If the AUD/CAD spot exchange rate is 0.9875 and 60-day forward points are −25, the 60-day AUD/CAD forward rate is closest to: A) 0.9870. B) 0.9850. C) 0.9900. Explanation References For an exchange rate quoted to four decimal places, forward points are expressed in units of 0.0001. The 60-day forward rate is 0.9875 + 0.0001(−25) = 0.9850.

B

If the current spot exchange rate for quotes of JPY/GBP is greater than the no-arbitrage 3-month forward exchange rate, the 3-month GBP interest rate is: A) less than the 3-month JPY interest rate. B) greater than the 3-month JPY interest rate. C) equal to the 3-month JPY interest rate. Explanation References . If the no-arbitrage forward JPY/GBP rate is less than the spot rate, the interest rate for JPY must be less than the interest rate for GBP.

B

If the government is running a budget deficit, which of the following relationships are least likely to occur in the economy at the same time? Exports relative to imports Savings relative to investment A) exports < imports private savings < private investment B) exports > imports private savings < private investment C) exports < imports private savings > private investment Explanation References A government budget deficit, a trade surplus, and an excess of private investment over private savings cannot all occur at the same time. If the government runs a budget deficit, the deficit must be financed by a trade deficit (exports < imports), surplus private savings (private savings > private investment), or both.

C

If the price elasticity of demand for a good is 4.0, then a 10% increase in price would result in a: A) 4% decrease in the quantity demanded. B) 10% decrease in the quantity demanded. C) 40% decrease in the quantity demanded. Explanation References Price elasticity of demand = (% change in Q demanded / % change in price). Given the price elasticity of demand and the percentage change in price, we can solve for the percentage change in Q demanded.

A

If the price of World Cup Soccer tickets increases from $40 a ticket to $50 a ticket and the quantity demanded of tickets stays the same, demand for the tickets is: A) perfectly inelastic. B) inelastic, but not perfectly inelastic. C) elastic, but not perfectly elastic. Explanation References Since the quantity of tickets demanded stayed the same after the price changed, the demand curve would have to be vertical which is a perfectly inelastic demand curve.

A

In a natural monopoly: A) the average total cost of production continually declines with increased output. B) the price charged by a monopolist is determined by the intersection of the demand curve with the marginal cost curve. C) one firm controls all natural resources. Explanation References A monopoly situation in which the average total cost of production continually declines with increased output is called a natural monopoly.

A

When individuals are unemployed because they do not have perfect information concerning available jobs, this is: A) frictional unemployment. B) structural unemployment. C) natural unemployment. Explanation References Frictional unemployment exists because workers and employers do not have perfect information and must expend time and resources on search activities.

B

In a perfectly competitive market, what determines the price of the product? A) The members of the supply chain. B) Market supply and demand. C) The producers of the product. Explanation References Individual firms in perfect competition have no influence over market price. They are price takers who must sell at the prevailing market price. If they set their price higher than the market, they will sell nothing.

A

In the Heckscher-Ohlin model, whether a country has a comparative advantage relative to another country is determined by: A) amounts of labor and capital the countries possess. B) capital productivity differences. C) labor productivity differences. Explanation References In the Heckscher-Ohlin model a country that has relatively more capital will export capital-intensive goods and import labor-intensive goods, while a country that has relatively more labor will export labor-intensive goods and import capital-intensive goods.

C

In the long-run, a firm operating under perfect competition will: A) produce a quantity where marginal revenue is less than marginal cost. B) face a vertical demand curve. C) generate zero economic profit. Explanation References A firm operating under conditions of perfect competition will generate zero economic profit in the long run. Firms may generate economic profits in the short run, but due to the lack of entry barriers, new competitors will enter the market and prices will adjust downward until economic profits become zero.

B

In the short run, if price is below average total cost (ATC) the firm will: A) raise prices. B) keep running as long as it is covering its variable costs. C) produce more. Explanation References In the short run, if the firm is covering its average variable costs and some of its fixed costs it will continue to operate as long as the situation is temporary.

C

Income elasticity is defined as the percentage change in: A) quantity demanded divided by the percentage change in the price of the product. B) income divided by the percentage change in the quantity demanded. C) quantity demanded divided by the percentage change in income. Explanation References Income elasticity is defined as the percentage change in quantity demanded divided by the percentage change in income. Normal goods have positive values for income elasticity, and inferior goods have negative income elasticity.

A

Markets for produced goods that are used in the production of finished goods are best described as: A) intermediate goods markets. B) capital markets. C) service markets. Explanation References Intermediate goods are used in the production of finished goods. Services are finished goods and capital markets refer to markets where firms raise money.

B

Merchandise and services, income receipts, and unilateral transfers are included in which of the balance of payments accounts? A) Capital account. B) Current account. C) Financial account. Explanation References Merchandise and services, income receipts, and unilateral transfers are sub-accounts of the current account.

B

Monopolists will maximize profit by producing at an output level where which of the following conditions exists? A) Price = marginal revenue = marginal cost. B) Marginal revenue = marginal cost < price. C) Price = demand = marginal revenue = marginal cost. Explanation References To maximize profit, monopolists will expand output until marginal revenue equals marginal cost. Price will be greater than marginal revenue because a monopolist faces a downward sloping demand curve.

C

Profit is maximized at the quantity of output for which marginal revenue equals marginal cost under: A) perfect competition, but not under imperfect competition. B) imperfect competition, but not under perfect competition. C) both perfect competition and imperfect competition. Explanation References All firms, regardless of market structure, maximize profit at the output quantity for which marginal revenue equals marginal cost.

B

Regional trade agreements exist primarily to: A) lower currency volatility for their members. B) improve economic welfare for their members. C) protect their members from unfair trading practices by non-members. Explanation References The primary reason countries join regional trade agreements is to improve economic welfare by reducing or eliminating trade restrictions.

A

Sources of long-run economic growth most likely include increases in: A) labor supply, physical capital, and technology. B) government spending, labor supply, and physical capital. C) human capital, money supply, and natural resources. Explanation References Sources of sustainable long-run economic growth (increases in long-run aggregate supply) include increases in the labor force, human capital (the education and skill level of the labor force), the stock of physical capital, the supply of natural resources, and the level of technology. Increases in the money supply or government spending increase aggregate demand but do not increase long-run aggregate supply.

A

Stagflation refers to an environment of: A) High unemployment and high inflation. B) Low unemployment and high inflation. C) High unemployment and low inflation. Explanation References Stagflation refers to an economic environment where high unemployment and high inflation exist at the same time.

C

Steve Walker, CFA, is attending an economics lecture, during which the lecturer makes the following two statements about consumer price inflation: Statement 1: High-definition televisions are considerably more expensive than traditional models. This means consumers are spending more money per television unit, which represents a form of inflation. Statement 2: Employment contracts with automatic increases based on the Consumer Price Index fail to increase wages in line with the cost of living because of biases in the price index. Should Walker agree or disagree with these statements? Statement 1 Statement 2 A) Agree Agree B) Disagree Agree C) Disagree Disagree Explanation References Walker should disagree with both statements. Price changes resulting from increases in the quality of goods, do not represent inflation. However, the Consumer Price Index is affected by biases from product quality, as well as new goods and substitution, causing it to overstate the rate of inflation. As a result, increases in wages that are based on CPI will more than compensate for actual increases in the cost of living.

A

The market structure in which a firm's optimal pricing strategy depends on the responses of other firms is: A) Oligopoly. B) Perfect competition. C) Monopolistic competition. Explanation References Interdependence of firms is a characteristic of an oligopoly market. Optimal pricing for a firm in an oligopoly market depends on expectations of how its competitors will respond.

B

The LM curve is drawn holding which of the following factors constant? A) Real GDP. B) Real money supply. C) Real interest rate. Explanation References The LM (liquidity-money) curve illustrates the relationship between real income and the real interest rate, for a given level of the real money supply.

C

The actual incidence of a tax imposed on buyers or sellers is most accurately defined as: A) the amount of tax times the equilibrium quantity. B) the party legally responsible for paying the tax. C) the proportion of the tax burden borne by buyers and sellers. Explanation References Tax revenue is the amount of a tax times the equilibrium quantity. Statutory tax incidence refers to who is legally responsible for paying a tax. Actual tax incidence represents the extent to which buyers bear the cost of the tax through a higher price paid and sellers bear the cost through a lower price received.

B

The cross price elasticity of demand for a substitute good and the income elasticity for an inferior good are: Cross elasticity Income elasticity A) < 0 < 0 B) > 0 < 0 C) < 0 > 0 Explanation References The cross price elasticity of substitutes is positive, and the income elasticity of an inferior good is negative.

C

The demand curve for a firm's output is represented by the following table: Quantity 1 2 3 4 5 6 7 8 Price per unit 11 10 9 8 7 6 5 4 At what quantity of output is total revenue maximized? A) 7. B) 8. C) 6. Explanation References Quantity 1 2 3 4 5 6 7 8 Price per unit 11 10 9 8 7 6 5 4 Total revenue = P × Q 11 20 27 32 35 36 35 32 Total revenue is maximized at 6 units of output.

B

The demand for money curve represents the relationship between the quantity of money demanded and: A) the price level. B) short-term interest rates. C) the quantity of money supplied. Explanation References The demand for money curve represents the relationship between short-term interest rates and the quantity of real money that households and firms demand to hold.

B

The difference between Country D's nominal and real exchange rates with Country F is most closely related to: A) Country D's inflation rate. B) the ratio of the two countries' price levels. C) the risk-free interest rates of the two countries. Explanation References The difference between real exchange rates and nominal exchange rates is the relative inflation rates over time between the two countries. Real exchange rate (D/F) = nominal exchange rate (D/F) × (CPIf / CPId) .

C

The difference between personal income and personal disposable income is: A) savings. B) fixed expenses. C) taxes. Explanation References Personal disposable income equals personal income minus taxes.

C

The equilibrium bundle of goods for a consumer is the bundle that: A) provides the most utility to the consumer. B) is at the highest point on the consumer's budget line. C) is tangent to the budget line on the highest attainable indifference curve Explanation References The equilibrium bundle of goods is the bundle at which a consumer's highest attainable indifference curve is tangent to the consumer's budget line. This bundle provides more utility to the consumer than any other affordable bundle. Bundles on higher indifference curves would provide more utility to the consumer, but those bundles are unaffordable given the consumer's budget constraint.

B

The most accurate description of the relative roles played by the International Monetary Fund, World Bank, and World Trade Organization is that the only one explicitly focused on: A) providing funding to member nations is the International Monetary Fund. B) reducing poverty is the World Bank. C) expanding international trade is the World Trade Organization. Explanation References The World Bank has the explicit mission of fighting poverty. Both the WTO and IMF work to expand international trade. Both the World Bank and IMF provide funds to member nations, the World Bank for development and the IMF when member nations experience balance of payments difficulties.

B

The government is reducing its spending to balance the budget, while the central bank is lowering its official policy rate. What will most likely be the combined effect on the economy? A) The public sector as a percentage of GDP will increase. B) The private sector as a percentage of GDP will increase. C) The public and private sectors as a percentage of GDP will neither decrease nor increase. Explanation References The private sector will expand as a percentage of GDP because (1) the public sector will decrease as a percentage of GDP due to government spending cuts and (2) lower interest rates should cause the private sector to expand.

C

The kinked demand model assumes that at prices above the current price, the demand curve becomes: A) more elastic because competitors will increase their prices. B) less elastic because competitors will not increase their prices. C) more elastic because competitors will not increase their prices. Explanation References The kinked demand model of oligopoly behavior assumes that a firm's competitors will not match a price increase, but will match the price of a competitor that offers a lower price. The result is a demand curve that is more elastic above the current price, but less elastic below it.

A

The law of diminishing returns states that at some point as: A) more of a resource is devoted to production, holding the quantity of other inputs constant, the output will increase, but at a decreasing rate. B) more of a resource is devoted to production, holding the quantity of other inputs constant, at some point output will begin to decrease. C) less of a resource are devoted to production, holding the quantity of other inputs constant, the output will decrease, but at an increasing rate. Explanation References At low levels of output, increasing marginal returns will exist corresponding to the downward sloping portion of the marginal cost curve. As marginal costs begin to increase diminishing marginal returns will occur.

C

The most likely limitation of the N-firm and Herfindahl-Hirshman concentration measures in assessing market power is that they: A) are insensitive to mergers within the industry. B) are both backward looking. C) do not explicitly include the effects of potential competition. Explanation References Because potential competition from new entrants is not considered in the calculation of industry concentration measures, market power (pricing power) may be low even though the market shares of the top firms in the industry are quite large.

B

The primary goals of the International Monetary Fund (IMF) include: A) reducing global poverty. B) promoting exchange rate stability. C) resolving trade-related disputes among nations. Explanation References The primary goals of the IMF are to promote international monetary cooperation, facilitate growth of international trade, promote exchange rate stability, assist in establishing a multilateral payment system, and provide resources to members with balance of payments difficulties. Reducing global poverty is a role of the World Bank. Resolving trade disputes is a role of the World Trade Organization.

B

The spot CHF/EUR exchange rate is 1.2025. If the 90-day forward quotation is +0.25%, the 90-day forward rate is closest to: A) 1.2055. B) 1.2050. C) 1.2000. Explanation References The 90-day forward CHF/EUR exchange rate is 1.2025 × 1.0025 = 1.20551. The EUR is at a forward premium to the CHF.

A

The spot exchange rate for Canadian dollars (CAD) per Swiss franc (CHF) is 1.1350 CAD/CHF and the 12-month forward exchange rate is 1.1460 CAD/CHF. The forward quote is a: A) premium of 110 points and the CAD is at a forward discount to the CHF. B) discount of 110 points and the CAD is at a forward discount to the CHF. C) premium of 11 points and the CAD is at a forward premium to the CHF. Explanation References Because the forward CAD/CHF exchange rate is higher than the spot rate, the quote is a forward premium. Forward points represent 0.0001 for an exchange rate quoted to four decimal places. Here, the forward discount is 1460 − 1350 = 110 points. The base currency, the CHF, is at a forward premium to the CAD, therefore the CAD is at a forward discount to the CHF.

A

The sustainable growth rate of an economy is best viewed as the sum of the growth rates of: A) the labor force and productivity. B) private and government spending. C) consumption and investment. Explanation References The sustainable rate of economic growth can be estimated as the sum of the growth rate of the labor force and the growth rate of labor productivity.

C

The upward sloping segment of a long-run average total cost curve represents the existence of: A) economies of scale. B) efficiencies of scale. C) diseconomies of scale. Explanation References Diseconomies of scale occur along the upward sloping segment of the long-run average total cost curve where costs rise as output increases. The flat portion at the bottom of the long-run average total costs curve represents constant returns to scale.

B

Total investment is one of the components of a country's GDP. Which of the following is least likely to be considered a source of funds for investment? A) National savings. B) Household expenditures. C) Foreign borrowing. Explanation References Total investment is one of the major components of GDP (the others are consumption, government spending, and net exports). Investment is defined as expenditures allocated to fixed assets and inventory. The sources of funds for investment are national savings, foreign borrowing, and government savings.

A

Under perfect competition, a firm will be inclined to increase output as long as which of the following conditions exists? A) Marginal revenue is greater than marginal cost. B) Marginal revenue is greater than the average cost. C) Marginal cost is less than average cost. Explanation References A firm will continue to expand output as long as it is possible to earn an economic profit. In other words, a firm will expand output as long as marginal revenue is greater than marginal cost.

B

When household incomes go down and the quantity of a product demanded goes up, the product is: A) a normal good. B) an inferior good. C) a necessity. Explanation References When household incomes go down and the quantity demanded of a product goes up, the product is an inferior good. Inferior goods include things like bus travel and margarine.

B

Which method of calculating gross domestic product requires data from each stage of production of goods? A) Income method. B) Sum of value added method. C) Value of final output method. Explanation References The sum-of-value-added method of calculating GDP requires data on the value added to goods at each stage of production and distribution. The value-of-final-output method only requires data on the final values of goods and services. The income approach to calculating GDP measures the total income of households and companies, rather than the value of goods and services.

B

Which of the following arguments in favor of trade restrictions is least likely to be supported by economists? A) Infant industries should be protected. B) Trade with low-wage countries depresses wage rates in high-wage countries. C) National defense industries should be protected. Explanation References Trade with low-wage countries does not in itself depress wage rates since productivity must be considered. The other arguments have some support among economists.

C

Which of the following factors is most likely to increase aggregate demand? A) Increasing real interest rates. B) An expected decrease in future prices. C) An increase in real wealth. Explanation References While an increase in real wealth will shift the AD curve to the right, an increase in the real rate of interest will shift the AD curve to the left as consumers and businesses reduce their borrowing and spending. An expected decrease in prices will shift the AD curve to the left as households and businesses postpone their consumption in anticipation of lower prices in the future.

C

Which of the following factors would least likely result in demand-pull inflation? An increase in: A) exports. B) the quantity of money. C) energy prices. Explanation References Demand-pull inflation can result from any factor that increases aggregate demand, including increases in the money supply, increases in exports, and increases in government purchases. Increases in the prices of productive inputs would result in cost-push inflation as aggregate supply decreases.

C

Which of the following groups in the country of Minidonia would least likely be helped by the imposition of tariffs on Minidonian imports of transportation equipment? A) Minidonia's government. B) Automotive manufacturers. C) Trucking companies. Explanation References Tariffs on transportation equipment benefit the government in the form of tariff revenue, and benefit domestic producers and industry workers in the form of higher prices for transportation equipment. The users of transportation equipment, such as trucking companies, suffer from higher costs due to the higher prices of transportation equipment.

B

Which of the following is a characteristic of perfect competition? A) The products of different firms are sold at different prices. B) There are no barriers to entry into the market. C) There are a few sellers. Explanation References The only true statement listed in the question is that, under perfect competition there are no barriers to entry into the market. Each of the other possible answers is not a characteristic of perfect competition. While the competitors can earn positive economic profits in the short-run, they cannot earn long term economic profits due to ease of entry and exit.

A

Which of the following is least accurate regarding the allocative efficiency associated with price discrimination? Price discrimination: A) leads to a decrease in allocative efficiency. B) leads to production where the sum of consumer surplus and producer surplus is greater than it would be otherwise. C) results in gains to the discriminating firm by selling to consumers with relatively inelastic demand. Explanation References Allocative efficiency occurs when the quantity produced maximizes the sum of consumer and producer surplus. That is, where marginal benefit equals marginal cost. Price discrimination reduces the allocative inefficiency that exists when prices are greater than marginal cost by increasing output toward the quantity where price equals marginal cost. Firms gain by selling to customers with inelastic demand while still providing goods to customers with more elastic demand. This may even cause production to take place at a level where it would not take place otherwise.

C

Which of the following is least accurate with regard to advertising for firms operating under monopolistic competition? A) The increase to average total costs associated with advertising increases as output increases. B) Advertising expenses are high relative to perfect competition and monopoly. C) Advertising may decrease average total cost. Explanation References Advertising expenses are high for firms in monopolistic competition. Not only because firms need to inform consumers about the unique features of a firm's products, but also to create or increase a perception of differences between products that are actually quite similar. Advertising costs increase average total costs, but the increase to average total cost attributable to advertising decreases as output increases because more fixed advertising dollars are being averaged over a larger quantity. If advertising increases output (sales) significantly, it can actually decrease a firm's average total cost if there are economies of scale.

B

Which of the following is least likely to be a function of the central bank? A) Control money supply. B) Tax collection. C) Issue currency. Explanation References The three functions of a central bank are to issue a country's currency, regulate its banking system, and to manage the money supply. Tax collection is typically conducted by a government agency created specifically to carry out that function.

C

Which of the following is least likely to be considered a necessary condition for a monopolist to realize profits from price discrimination? A) The ability to prevent trading between customers in different price groups. B) A product for which the demand curve is downward sloping. C) Two different costs of production. Explanation References Price discrimination works when the seller (discriminator) faces a downward-sloping demand curve and has at least two customer groups each having different price elasticities for the product. It is also necessary that trading does not occur between customer groups so that the customers paying a lower price cannot resell the product to the customers paying a higher price.

A

Which of the following is least likely to be the long-run effect of a price ceiling that is set below the equilibrium price? A) Sellers improve quality. B) Consumers have to wait to make purchases. C) Sellers take bribes. Explanation References Under price ceilings, sellers may reduce the quality of goods to a level that reflects the imposed ceiling price.

A

Which of the following is most likely to cause a decrease in the consumption of a good in response to a decline in the price of the good? A) Income effect. B) Law of demand. C) Substitution effect. Explanation References The income effect can be negative if the good is an inferior good. The substitution effect is always positive and will cause consumption of a good to increase if the price declines. The law of demand assumes that a decrease in the price of a good will cause an increase in the quantity demanded.

B

Which of the following is most likely to cause an increase in aggregate demand? A) An increase in the general price level. B) High capacity utilization rates. C) Relative appreciation in the country's currency. Explanation References As capacity utilization rates increase to high levels (typically 80% to 85%), business investment in plant and equipment increases, shifting the AD curve to the right. A change in the price level represents a movement along the demand curve, not a shift in it. Appreciation of the country's currency increases the cost of exports and reduces the cost of imports, which shifts the aggregate demand curve to the left (net exports decrease).

A

Which of the following is the most likely effect of a subsidy in the market for corn? A) The supply curve for corn will shift to the right. B) Marginal costs will be less than marginal benefit. C) The equilibrium quantity of corn will decrease. Explanation References A subsidy causes a shift rightward in the supply curve (increase in supply at a given price level) by the amount of the subsidy. The equilibrium quantity will increase and the price paid by buyers will decrease. Marginal cost will exceed marginal benefit and a deadweight loss will result from overproduction.

B

Which of the following least accurately describes a component of gross domestic product? A) Consumption. B) Net imports. C) Investment. Explanation References The components of GDP are consumption, investment, government spending, and net exports, which is exports minus imports.

C

Which of the following most accurately describes a market structure that has one seller of a specific, well-defined product that has no good substitutes? A) Oligopoly. B) Perfect competition. C) Monopoly. Explanation References A monopoly is characterized by one seller, a specific and well-defined product for which there is no good substitutes, and high barriers to entry.

C

Which of the following most accurately describes economies of scale? Economies of scale: A) are dependent on short-run average costs. B) increase at a decreasing rate. C) occur when long-run unit costs fall as output increases. Explanation References Economies of scale occur when the percentage increase in output is greater than the percentage increase in the cost of all inputs. Economies of scale occur over the range where the long-run average cost curve slopes downward.

A

Which of the following most accurately describes society's allocation of resources to the production of goods with external costs or external benefits, respectively? A) Over-allocation; under allocation. B) Under-allocation; over-allocation. C) Over-allocation; over-allocation. Explanation References External costs are costs associated with the production of goods which are not entirely borne by producers. The industrial pollution of fishing waters decreases the yield to the fishing industry. However, the lost revenue to the fishing industry is not considered a cost to the firms generating the pollution. The result is an over-allocation of resources to the production of goods made by the firms generating the pollution. External benefits refer to benefits received by those other than the buyers of a good. Scenic gardens and fountains built by private enterprises for their own interests are examples of goods with external benefits. Since the marginal benefit to society is greater than that of the marginal cost to the producer, less than the efficient quantity is produced.

A

Which of the following relationships most accurately describes the inefficiency resulting from government imposed production quotas? A) Marginal benefit exceeds marginal cost leading to underproduction. B) Marginal cost exceeds marginal benefit leading to underproduction. C) Marginal benefit exceeds marginal cost leading to overproduction. Explanation References Government imposed quotas restrict production to a level below that which would occur if marginal benefit equals marginal cost. This restricted output quantity is less than the equilibrium quantity, so marginal benefit exceeds marginal cost.

C

Which of the following statements about achieving proper timing in fiscal policy is least accurate? A) There is usually a time lag between when a change in policy is needed and when the need is recognized by policy makers. B) Policy errors are inevitable due to unpredictable events. C) Improvements in quantitative methods have made the occurrence of recessions or expansions quite predictable. Explanation References One problem in achieving proper timing in fiscal policy is the inability to accurately predict a recession or expansion.

B

Which of the following statements about biases that affect the consumer price index (CPI) is least accurate? A) The basket of goods on which the CPI is based becomes a less accurate measure of household costs as new goods appear on the market. B) The net effect of built-in biases in the CPI is to underestimate inflation. C) Price increases that result from quality improvements are reflected as increases in the CPI. Explanation References The CPI is generally believed to overestimate inflation by about 1% per year. Upward biases include quality improvements (price increases due to improving quality do not represent inflation but are reflected in the CPI), new and more expensive goods replacing older and less expensive goods, and commodity substitution (consumers substitute less expensive goods for more expensive ones, rather than continuing to consume a fixed basket of goods).

A

Which of the following statements about the relationship between interest rates and the demand for and supply of money is most accurate? Interest rates affect: A) the demand for money only. B) the supply of money only. C) both the demand for and supply of money. Explanation References Interest rates only affect the demand for money. With higher interest rates, the opportunity cost of holding money increases, and people hold less money and more interest-earning assets. Monetary authorities determine the supply of money. Therefore, the supply of money is independent of the interest rate.

C

Which of the following statements concerning aggregate demand is most accurate? A) When price levels rise, real wealth increases, and individuals will spend more. B) When price levels fall, real wealth increases, and individuals will spend less. C) When price levels rise, real wealth decreases, and individuals will spend less. Explanation References When price levels rise, real wealth decreases, and we would expect individuals to spend less. If the converse were also true-if price levels were to fall-real wealth should increase, and we would expect individuals to spend more, all else being equal.

B

Which of the following statements is least accurate with regard to the efficiency of monopolistic competition? A) The expense of advertising and promotion may not be justified by their benefit to consumers. B) Monopolistic competition is at least as efficient as perfect competition. C) Consumers benefit from brand name promotion and advertising. Explanation References The efficiency of monopolistic competition is unclear. Consumers may make better purchasing decisions due to the information content of brand name promotion and advertising. However, there are those that argue that the increased cost of advertising and sales is not justified by the benefits of these activities and represent inefficient use of resources.

B

Which of the following statements regarding monopolies is least accurate? A) Monopolists are price searchers and must experiment with different prices to find the one that maximizes profit. B) If a monopolist produces the quantity of output for which marginal cost equals marginal revenue, it will earn an economic profit. C) For price discrimination to increase economic profit, the seller must identify at least two groups of customers, each with a different price elasticity of demand. Explanation References Monopolists expand output until marginal revenue equals marginal cost. However, to realize an economic profit, the demand curve must lie above the firm's average total cost curve at that quantity. Basically, no guarantee that MC=MR will give a positive profit, just maximum profit. The max profit can be negative.

B

Which of the following would least likely be a participant in the forward market? A) Arbitrageurs. B) Long-term investors. C) Traders. Explanation References Forward contracts are for 30, 90, 180, and 360-day periods and would, therefore, be considered short-term investment choices. Other participants in the forward market are hedgers who use forward contracts to protect the home currency value of foreign currency denominated assets on their balance sheets over the life of the contracts involved.

B

Which of the items below is NOT a valid reason why nations adopt trade restrictions? To: A) protect industries that are highly sensitive to national security. B) protect industries in which they have a comparative advantage. C) prohibit foreign firms from increasing market share by selling products below cost. Explanation References If a particular country enjoys a comparative advantage in a particular industry, no protection is needed.