Macro Quiz & Exam Q's

Which of the following is a private owner prohibited from doing?

Using the property in a manner that invades or infringes on the property of another.

What is logrolling?

Vote trading among legislators to obtain passage of actions of interest to each legislative member.

Who owns the Fed?

Member banks

Which of the following is the primary tool the Fed uses to control the supply of money?

Open market operations.

When the actual rate of unemployment is less than the natural rate of unemployment, the economy

Operates at an output greater than its long-run potential

When the Fed purchases additional securities and shifts to a more expansionary monetary policy

Several months will typically pass before the shift in policy exerts much impact on output and employment.

The law of comparative advantage explains which of the following?

Specialization and exchange will make it possible for trading partners to expand their combined output.

Which of the following about trade is true?

Specialization and trade leads to mutual gains for countries.

As both the budget and regulatory powers of government grow, public choice analysis indicates that individuals and groups will find it in their interest to do which of the following?

Spend more time rent seeking.

Shannon buys a new CD player for her car for $135. She receives consumer surplus of $25 on her purchase if her willingness to pay is

$160

Harry, a wheat farmer, is deciding whether or not to add fertilizer to his crops. If he adds 1 pound of fertilizer per acre, the value of the resulting crops rises from $80 to $100 per acre. According to marginal analysis, Harry should add fertilizer if it costs less than

$20 per pound

Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's willingness to pay was $100, Kendra's willingness to pay was $95, and Kristen's willingness to pay was $80. What is the combined consumer surplus for the three girls?

$35

Suppose a country had net exports of $8.3 billion and sold $52.4 billion of goods and services abroad. This country had

$52.4 billion of exports and $44.1 billion of imports.

Suppose a country had $2.4 billion of net exports and bought $4.8 billion of goods and services from foreign countries. This country would have

$7.2 billion of exports and $4.8 billion of imports.

Gross National Product (GNP)

- A broad measure of a nation's total economic activity - The value of all finished goods and services produced in a country in one year

Aggregate Supply: Short Run (SRAS)

- Assumes that the level of capital is fixed (ex:. in the short run you can't build a new factory) - Can increase the utilisation of existing factors of production (ex: workers doing overtime) - An increase in the price of goods, encourages firms to take on more workers, pay slightly higher wages & produce more - Affected by costs of production, so if there is an increase in raw material prices (ex: higher oil prices), the SRAS will shift to the left. If there is an increase in wages, the SRAS will also shift to the left

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could

- Buy U.S. securities on the open market. - Decrease the interest rate paid on excess reserves encouraging banks to extend more loans.

Aggregate Supply: Long Run (LRAS)

- Determined by all factors of production (size of workforce, size of capital stock, levels of education, and labour productivity) - If there was an increase in investment, or growth in size of labour force this would shift the LRAS curve to the right

Which of the following explains why pork-barrel spending is often approved, even when the spending is inefficient?

- Each representative has little incentive to oppose pork-barrel spending since the tax savings would accrue to taxpayers throughout the nation. - General opposition to pork-barrel spending by a legislator would make it more difficult for the legislator to arrange for pork-barrel projects that provide concentrated benefits for his district. - Logrolling increases the likelihood that pork-barrel projects will be approved.

Nations will attract investment and its citizens will engage in productive activities when the institutions and policies of that country do which of the following?

- Encourage market exchange - Reward innovation - Protect people & their property

Why do political instability and insecure property rights retard economic growth?

- Fear that private property will be confiscated substantially reduces the incentive to invest and create wealth. - When property rights are insecure, foreign investors will be reluctant to invest in the country. - Savings will tend to flow out of a country if individuals fear their property is insecure.

Which of the following provides the fuel for growth and achievement of high income levels?

- Gains from trade - Entrepreneurial discovery - Capital formation

Which of the following is a key characteristic of economic freedom?

- Institutions and policies supportive of voluntary exchange - Freedom to compete - Protection of people and their property from aggressors

Which of the following is important if a country is going to achieve and sustain high rates of economic growth?

- Investment in physical and human capital - Improvements in technology - Institutional and policy arrangements consistent with economic efficiency

How does an open capital market affect a nation's economic growth?

- It channels capital into productive projects and away from wasteful projects. - It rewards investors who find the most productive projects and invest in them. - It makes the lowest-cost capital available from around the world.

Compared to those in low-income countries, the residents of countries with high per person incomes nearly always

- Live longer - Have a lower illiteracy rate - Have a lower infant mortality rate

Critics of the Keynesian view argue that increases in government spending financed by borrowing will hamper the recovery from a recession and slow long term growth because

- More political spending will lead to more wasteful rent-seeking activities and less production of goods and services that people value - Government spending is directed by political forces, rather than efficient cost-revenue comparisons - More spending and debt will lead to higher future taxes to cover the cost of government and the interest on the debt

Which of the following represents why private production tends to be more efficient then government production?

- Politicians have a strong incentive to support projects that have immediate and easily recognized benefits and distant and unidentifiable costs, even if the total costs outweigh the total benefits. - Private companies face a profit motive that keeps them operating efficiently, government bureaucracies use taxpayer money and, therefore, do not face this profit motive. - Politicians have a strong incentive to support programs where the benefits are highly concentrated on special interest groups and the costs are widely dispersed among voters, even if the total costs outweigh the benefits.

In order to achieve a high economic freedom rating, a country must

- Provide secure protection of privately owned property and evenhanded enforcement of contracts. - Refrain from creating barriers that limit domestic and international trade. - Rely more fully on markets rather than governments to allocate goods and resources.

Which of the following contributed to the financial crisis of 2008?

- The housing price boom (2002-2005), followed by a housing price bust (2007-2008) - A sharp reduction in stock prices in 2008 - A sharp increase in the price of crude oil from January 2007 to mid-year 2008

Suppose people anticipate inflation will be 3 percent during the next several years. If this is true, when the real interest rate is 4 percent, what will be the nominal (money) interest rate?

7%

Suppose people expect inflation to be 3 percent during the next several years. When the real interest rate is 5 percent, what will be the nominal (money) interest rate?

8%

Gross Domestic Product (GDP)

= C + I + G + (X - M) - Consumption (household): durable goods, non-durable goods, and services. - Investment (private): fixed investment and changes in business inventories. - Government spending: such as office supplies and gasoline; and also capital goods, such as highways, missiles, and dams. - Net Exports: subtract imports (M) from exports (X) - GDP is the total dollar value of all goods and services produced over a specific time period

Which of the following will cause the U.S. money supply to expand?

A commercial bank uses excess reserves to extend a loan to a customer.

If the government owes $10.0 trillion and then borrows $700 billion more this year, this leads to

A debt of $10.7 trillion and a deficit of $700 billion.

Which of the following is the best example of a supply shock?

A decline in agricultural output due to a summer drought.

An unanticipated increase in the money supply will lead to

A decline in interest rates, an increase in investment, and an increase in aggregate demand.

Which of the following will most likely occur in the short run if long-run equilibrium is disturbed by an unanticipated decrease in aggregate demand?

A decrease in output and a lower price level

A decrease in supply will cause

A decrease in quantity demanded.

A decrease in demand will cause

A decrease in quantity supplied.

For an oil-importing country such as the United States, the immediate effect of a supply shock caused by an increase in the price of imported oil would tend to be

A decrease in real output and an increase in the general level of prices.

According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?

A decrease in tax rates

If the Federal Reserve sells bonds, the short-run effects will be

A decrease in the money supply and higher real interest rates.

If the Fed unexpectedly shifts to a more expansionary monetary policy, which of the following will most likely occur in the short run?

A decrease in the real interest rate.

Which of the following will be most likely to cause the production possibilities curve for a country to shift inward?

A decrease in the stock of physical capital.

Which of the following would explain an increase in the price of a good and a decrease in the amount of the good bought and sold?

A decrease in the supply of the good.

Which one of the following would count as investment in the national income accounts?

A freight-hauling firm buying a new domestically produced truck.

The term market always refers to

A group of buyers and sellers of a particular good or service.

Which of the following is most likely to help the residents of a nation produce more goods and services and achieve higher income levels?

A higher rate of investment.

Which of the following would be officially classified as unemployed?

A laid-off construction worker waiting to return to a previous job.

If you have a checking account at a local bank, your bank account there is

A liability of the bank and an asset to you.

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

A reduction in tax rates.

According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?

A planned increase in the budget deficit.

When economists speak of changes in GDP measured in constant dollars, they mean that

A price index has been used to adjust money GDP for the effects of inflation.

An abnormally large grain crop due to highly favorable weather conditions in the Midwest is an example of

A supply shock that will increase short-run aggregate supply.

According to the Keynesian view, if policy makers thought the economy was about to enter an expansionary period, which of the following would be most appropriate?

A tax increase.

What is the effect when a customer deposits $100 into a checking account?

Both the bank's liabilities and its assets will increase.

An unanticipated shift to a more restrictive monetary policy by the Fed will result in which of the following?

An increase in interest rates and, thereby, reduced investment, current consumption, and aggregate demand.

If a surplus exists in a market we know that the actual price is

Above equilibrium price and quantity supplied is greater than quantity demanded.

The recent growth records of Japan and Hong Kong during the last fifty years indicate that a nation can grow rapidly without which of the following?

Abundant domestic natural resources.

Which of the following best describes the crowding-out effect?

An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.

When the economy is operating at an output rate below its full-employment level, the

Actual level of unemployment will exceed the natural rate of unemployment.

Modern economics as a field of study is usually thought to have begun with which of the following?

Adam Smith and the writing of The Wealth of Nations.

When the U.S. dollar appreciates,

Aggregate demand shifts leftward.

If there is an unanticipated increase in aggregate demand, which of the following is most likely to occur?

An increase in employment.

Which of the following provides the most reasonable explanation for why agricultural interests lobby for higher farm subsidies and price supports?

Agricultural interests seek a redistribution of income favoring themselves.

In the short run, which of the following is the most likely effect of an unanticipated move to a more expansionary monetary policy?

An increase in employment.

Who among the following is most likely to favor an appreciation of the U.S. dollar?

An American professor on a tour of Austrian universities.

What is meant by the expression, "There is too much money chasing too few goods"?

An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.

In the short run, which of the following is the most likely effect of an unanticipated move to expansionary monetary policy?

An increase in real output.

Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?

An increase in the general level of prices.

Two goods are considered substitutes only if

An increase in the price of one leads to an increase in the demand for the other.

Other things being equal, the effect of a decrease in the price of orange juice would be illustrated by which of the following?

An increase in the quantity demanded for orange juice.

Other things constant, which of the following would you expect to increase the output growth rate of a country?

An increase in the rate of investment as a share of total output

Which of the following will most likely increase long-run aggregate supply?

An increase in the rate of investment.

Which of the following would reduce the price of DVD players and increase the quantity sold?

An increase in the supply of DVD players

There is no such thing as a "free lunch." This statement best reflects which of the following?

An opportunity cost is always present when scarce resources are used to produce an item.

Supply Shock

An unexpected event that changes the supply of a product or commodity, resulting in a sudden change in its price.

When full employment is present in the United States, which of the following is true?

Approximately 95 percent of the labor force will be employed.

If changes in monetary policy are going to help stabilize the economy, they must

Be properly timed.

If Harry Bartolini's Ford dealership sells Rosa Brown a new automobile for $30,000, economic analysis indicates that

Both parties to the transaction will gain.

According to the invisible hand principle, competitive markets generally

Bring the self-interest of individuals into harmony with the efficient allocation of resources, even though centralized planning of economic activities is absent.

Which one of the following is an area of continued disagreement among modern macroeconomists with regard to the use of fiscal policy?

Budget deficits are a highly effective tool with which to combat a severe recession.

Which of the following best characterizes the circular flow of income?

Businesses buy resources from households, and households use their income to buy goods and services from businesses.

If the Federal Reserve wanted to expand the money supply in order to increase output, it should

Buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise.

Why do long lags make discretionary policy less effective?

By the time the impact of a policy is felt, the problem may have been led by market forces.

Criteria for rationing goods and resources must be established due to which of the following?

Scarcity imposed by nature.

A form of economic organization that relies primarily on private ownership of productive assets, freedom of exchange, and market prices to allocate goods and resources is often called

Capitalism.

The multiplier effect refers to the fact that a change in spending (aggregate demand) will

Cause nominal output to rise by some multiple of the initial increase in spending.

Within the framework of the Keynesian model,

Changes in output rather than changes in prices direct the economy to equilibrium.

When the Fed lowers the discount rate, it makes it

Cheaper for banks to obtain additional reserves by borrowing from the Fed.

Special-interest legislation is characterized by which of the following?

Concentrated benefits and widespread costs.

When private ownership rights are well-defined and enforced, owners of physical assets and resources will have an incentive to do which of the following?

Consider the wishes of others before using their resources.

Democracy tends to best promote freedom when there is

Constitutional protection of private property rights.

Fiscal stimulus is most likely to direct resources into productive projects when spending decisions are left in the hands of

Consumers.

The number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference?

Cows can be privately owned while in many countries elephants can not.

A decrease in aggregate demand and the subsequent cutbacks in production lead to

Cyclical unemployment

The natural rate of unemployment occurs if there is no

Cyclical unemployment

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should

Decrease government spending and/or raise taxes.

Dallas buys strawberries, and is willing to pay more than he now pays. Suppose that Dallas has a change in his tastes such that he values strawberries more than before. If the market price is the same as before, then

Dallas's consumer surplus would increase.

If the Fed unexpectedly decreases the money supply, real GDP

Decreases because the resulting increase in the interest rate leads to a decrease in investment.

Which of the following best expresses the central idea of countercyclical fiscal policy?

Deficits are planned during economic recessions, and surpluses are utilized to restrain expansionary periods.

Which of the following best describes the economic conditions of the 1930s?

Depressed economic conditions and prolonged high rates of unemployment.

Supply-side economics stresses that high marginal tax rates

Discourage people from working harder and using their resources productively.

Changes in government spending and/or taxes as the result of legislation, is called

Discretionary fiscal policy.

If you deposit $100 of cash into a checking account at a bank, this action by itself

Does not change the money supply.

Compared to the no-trade situation, when a country imports a good, which of the following will occur?

Domestic consumers gain, domestic producers lose, and the gains outweigh the losses.

If nominal GDP rises from one year to the next, then

Either output, or the general level of prices, or both must be rising.

The political incentive structure tends to

Encourage budget deficits during both recessions and expansions.

Suppose demand increases and supply decreases. Which of the following will happen?

Equilibrium quantity will rise, fall, or stay the same and equilibrium price will increase.

Which of the following would generate a supply of euros in exchange for dollars?

European demand for U.S. government bonds.

When an economy is temporarily operating at an output that is beyond its full-employment rate, which of the following is true?

Excess demand in resource markets will lead to higher resource prices, which will increase costs and direct the economy toward full employment.

In order to increase the money supply, the banking system must have which of the following?

Excess reserves.

Which of the following most accurately states the economic significance of exchange?

Exchange creates value by moving goods from parties who value them less to parties who value them more.

Compared to a permanent reduction in tax rates, a temporary tax cut will generally

Exert a smaller impact on output and employment because the temporary cut will not exert much impact on long-term income or the incentive to earn.

Economic growth will have which of the following effects?

Expand the production possibilities of an economy.

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would

Fall by 50 percent.

Why is the expected price level important?

Firms and resource owners make long-term agreements based on the expected price level.

Jacqueline, a brilliant new Ph.D. in economics, has turned down many job offers because she hopes eventually to teach at one of the top ten universities in her field. What type of unemployment is she experiencing?

Frictional

Sharon was being treated unfairly by her boss, so she stormed off the job and two days later found another position. For two days, Sharon experienced

Frictional unemployment.

Differences between the GDP and CPI

GDP is a measure of the prices of all goods and services while CPI is a measure of only goods bought by consumers (including foreign goods)

Public choice analysis suggests that the primary motivating factor for politicians will be finding the policies that are most likely to

Get them reelected.

Which of the following is true when the federal government is running a budget deficit?

Government expenditures exceed government revenues.

Which one of the following statements is correct?

Government programs can be implemented with good intentions, BUT can lead to undesirable outcomes because of unintended consequences.

During a recession, the actual rate of unemployment will be

Greater than the natural rate of unemployment.

If a nation is going to achieve and sustain a high rate of economic growth, it must

Have a mechanism capable of attracting savings and channeling them into wealth-creating projects.

The theory of comparative advantage suggests that nations should produce a good if they

Have the lowest opportunity cost.

A local restaurant offers an "all you can eat" Sunday brunch for $12. Susan eats four servings but leaves half of a fifth helping uneaten. Why?

Her marginal value of food has fallen to zero.

According to the crowding-out effect, expansionary fiscal policy will lead to

Higher interest rates, an appreciated dollar, and reduced net exports.

Which of the following will most likely be an unanticipated economic change?

Higher oil prices resulting from a revolution in an oil-exporting country.

In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in the money supply will be

Higher real interest rates and a reduction in aggregate demand.

Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?

Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.

During 1960-1980, those with the highest incomes confronted federal marginal tax rates between 70 and 90 percent. Since 1986, the highest federal income tax rate has been less than 40 percent. Since 1986, the share of the personal income tax collected from the top one-half of one percent of earners has been

Higher than during the 1960s and 1970s.

A positive nominal interest rate indicates

How fast the number of dollars in your savings account is rising over time.

Which of the following transactions would be included in this year's GDP?

If Johnson rents a five-year-old house from Smith.

Which of the following best describes the distinguishing characteristics of business cycles?

Periods of growth in real output followed by periods of decline.

The fallacy of composition is the incorrect view that

If something is true for an individual, then it must also be true for the group.

Anna, a U.S. citizen, works only in Germany. Where is the value she adds to production in Germany included?

In German GDP, but it is not included in U.S. GDP

Which of the following about international trade is true?

In recent decades, the volume of U.S. international trade has been increasing as a share of the economy.

Which one of the following is a major difference between market and collective action through government?

In the market sector, there is generally a one-to-one link between payment and consumption; this link is often absent in the government sector.

Which of the following will limit the money creation process to an amount less than the potential amount?

Increase in currency holdings by the public.

Other things constant, an increase in resource prices will do which of the following?

Increase the cost of producing goods and services, which will lead to a higher price level.

A decrease in the price of a good would

Increase the quantity demanded for the good.

The government is pursuing an expansionary fiscal policy if it

Increases government spending and/or reduces taxes.

Tom loses his job and immediately begins looking for another. Other things the same, the unemployment rate

Increases, and the labor-force participation rate is unaffected.

The expansionary phase of the business cycle is characterized by

Increasing real output and declining unemployment.

Which of the following about inflation is true?

Inflation will tend to increase the nominal values of both prices and wages.

In the long run, the primary effect of rapid monetary growth is

Inflation.

With time, which one of the following strategies would most likely result in an outward shift in the production possibilities curve of an economy?

Instituting a tax policy encouraging investment at the expense of consumption.

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

Insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.

Which of the following about inventory changes and GDP is true?

Inventory investment adds to GDP because it represents goods produced during the current period.

Which of the following would be most likely to cause the per capita income of less-developed countries to rise?

Investment expenditures that enhance the human capital of labor force participants

The law of comparative advantage implies that a nation, individual, or region should trade for those economic goods for which it

Is a high opportunity cost producer.

According to the Economic Freedom of the World measure, between 2000 and 2009 what happened to the economic freedom of the United States?

It declined and its rank fell from third to tenth during this period.

Which of the following is true regarding the methodology of public choice analysis?

It develops a logically consistent theory based on how individual actors (such as voters, politicians, and bureaucrats) respond to incentives.

If price rises, what happens to the demand for a product?

It does not change.

Which of the following is one of the widely-acknowledged problems with the consumer price index (CPI) as a measure of the cost of living?

It fails to account for the introduction of new goods.

Measured as a share of GDP, what happened to the net federal debt between 1990 and 2011?

It fell during most of the 1990s, but rose sharply during 2001-2011.

Since the mid-1980s, what has happened to the debt-to-income ratio of American households?

It has rapidly increased.

What has income per person done during the past 200 years?

It increased far more rapidly in both developed and less developed countries than during the centuries prior to 1800.

According to Adam Smith, what role does individual self-interest play in directing human activity?

It is a powerful force for economic progress when it is directed by competitive markets.

Which one of the following is an area of agreement among modern macroeconomists with regard to the use of fiscal policy?

It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability.

Greg, a U.S. citizen, works only in Canada. Where is the value that his labor contributes to national income accounted?

It is included in U.S. GNP, but it is not included in U.S. GDP.

Which of the following is true regarding the concept of full employment?

It reflects the "shopping" of employees looking for employment and of employers seeking to hire workers.

As a general rule, what impact does technological progress have on a PPC?

It shifts the production possibilities curve outward, away from the origin.

Why is the multiplier principle important?

It shows why small shifts in investment have a powerful influence on national income.

Why is GDP not a perfect measure of welfare?

It treats a dollar spent on candy bars the same as a dollar spent on education.

Which of the following is true about the value of money?

It varies inversely with the general price level.

Which of the following assets can a commercial bank count as reserves?

Its vault cash and deposits with the Fed.

Which one of the following persons would be classified as unemployed by the Bureau of Labor Statistics?

Joe, who is on layoff waiting for better weather so he can return to his construction job.

Firms in a high-wage nation such as the U.S. can compete effectively with imports from low-wage nations if

Labor productivity is higher in the U.S.

What does the term pork-barrel legislation refer to?

Legislation that bundles together a number of projects, each benefiting local interests at the expense of general taxpayers.

If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?

Loans and investments generally earn more interest income for the banks than excess reserves.

Countries that impose high tariffs, exchange rate controls, and other barriers that restrict international trade have, on average

Low rates of economic growth.

If an unanticipated decrease in aggregate demand results in an output below the economy's long-run capacity, long-run equilibrium will eventually be restored by

Lower resource prices and lower real interest rates.

If there is a "long and variable time lag" between when a change in monetary policy is instituted and when it impacts aggregate demand and output, this will

Make it more difficult for the Fed to properly time changes in monetary policy.

According to data on GDP growth between 1980 and 2009, which of the following statements is true?

Many poor nations grew more rapidly than wealthy nations, while others continued to stagnate.

Which of the following will discourage investment?

Monetary instability.

If the government cuts the tax rate, workers get to keep

More of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.

Other things constant, countries that invest more will grow

More rapidly.

Which one of the following transactions would be included in GDP?

Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.

Why do opportunity costs primarily differ among nations?

Nations have different endowments of land, labor skills, capital, and technology.

If Asian economies suffer a serious economic slump, what will happen to U.S. net exports and Aggregate Demand (AD)?

Net exports will decrease and AD will shift leftward.

If expansionary monetary policy reduces real interest rates in the United States, which of the following is most likely to occur?

Net foreign investment will decline, causing the dollar to depreciate and net exports to increase.

Creative destruction refers to the process where

New products and methods of production are continuously replacing old ones.

Are outstanding credit card balances counted as part of the money supply?

No; money is an asset, while the credit card balances are a liability. Thus, they are not included in the money supply figures.

If borrowers and lenders expect a higher rate of inflation, what happens to interest rates?

Nominal interest rates will tend to rise.

Economically speaking, tariffs are

Obstacles that limit voluntary exchange.

Suppose the official unemployment rate is 10 percent. Which of the following is a definite conclusion to draw?

One of every ten people in the labor force is currently unemployed.

Economists use the term ceteris paribus to indicate which of the following?

Other things are assumed to be constant.

When prices in the goods and services market are below the level anticipated,

Output will temporarily fall short of the economy's long-run potential.

Other things the same, when the interest rate rises

People would want to lend more, making the quantity of loanable funds supplied increase.

Which of the following is a distinguishing characteristic of a user charge?

Persons pay roughly in proportion to the extent that they use the good or service.

Which of the following is a basic problem with the infant-industry argument?

Political pressure will likely prevent the withdrawal of the tariff when the industry matures.

Which of the following most accurately indicates the political incentive to spend and/or tax?

Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes.

Which of the following correctly states the difference between positive economic statements and normative economic statements?

Positive statements - FACT Normative statements - OPINION

Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because

Powerful trade unions and large corporations made wages highly inflexible.

After a hurricane in Florida knocked out the regional water supply for several days, the demand for bottled water increased sharply. In a market economy, how will this increase in demand affect the equilibrium price and quantity of bottled water?

Price will increase, and quantity will increase.

If the demand for a good decreased, what would be the effect on the equilibrium price and quantity?

Price would decrease, and quantity would decrease.

Suppose the dollar value of GDP increased approximately 2 percent between October 2007 and August 2008, but real GDP fell 1 percent during the period. Which of the following best explains these data?

Prices increased approximately 3%

Suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and real GDP decreased 1 percent. Which of the following best explains these events?

Prices increased approximately 5%.

Ceteris paribus, what will happen if there is a decrease in the price of a good?

Producer surplus derived from the good will decrease.

Why do producers tend to be better represented in lobbying efforts and other elements of the political process than consumers?

Producers are generally better organized than consumers.

If new regulations make it illegal to sell older model electrical appliances, then

Producers of new models that meet the regulations will see demand for their output rise.

If resource prices are fixed and the product selling price rises, then

Profits will increase.

When the tax to fund a government project is allocated among voters in proportion to the benefits they receive from the project,

Projects that are productive (efficient) will tend to be favored by an overwhelming majority of voters.

Which of the following is true about fiscal policy?

Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve.

What do individuals have a strong incentive to do when price is the rationing criterion?

Provide goods and services to others in exchange for income.

When competition is present and property rights secure, people will be encouraged to

Provide others with things that they value in exchange for income.

Which of the following is not included in aggregate demand?

Purchases of stock and bonds.

What will happen if the demand for bicycles increases?

Quantity supplied will increase.

Economists refer to the lack of incentive that voters have to search for and obtain information to help make better political choices as the

Rational-ignorance effect.

Which of the following statements about real GDP per person is true?

Real GDP per person provides more meaningful comparisons across time and countries than real GDP.

Which of the following will most likely occur during the expansionary phase of a business cycle?

Real GDP rises, and unemployment falls.

Within the aggregate demand/aggregate supply framework, what does the quantity produced and purchased in the goods and services market represent?

Real output or real GDP.

Obstacles that restrict trade, either domestic or international, will

Reduce output, income, and the general living standard of the populace.

The crowding-out effect implies that restrictive fiscal policy will

Reduce real interest rates.

Recent legislation provides parents with a substantial reduction in their personal income tax liability for each child that they have. The economic way of thinking indicates that legislation of this type will

Reduce the after-tax cost of raising children and, therefore, increase the birth rate.

If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will

Reduce the size of the deposit expansion multiplier.

International trade does all the following except

Reduce world output.

Which of the following will most likely occur under a system of clearly defined and enforced private property rights?

Resource owners will conserve vital resources for the future, particularly if they expect the resource to increase in value.

Within the AD/AS model, how does an economy adjust from an output beyond its long-run capacity as a result of an unanticipated increase in aggregate demand?

Resource prices and real interest rates will rise causing output to fall back to its long-run sustainable rate.

If an economy operates at a short-run equilibrium output that exceeds its long-run capacity, which of the following will be most likely to direct the economy toward full employment?

Resource prices will increase, causing the SRAS curve to shift to the left.

Which of the following is an example of an automatic stabilizer?

Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted.

Other things constant, an increase in consumer income will

Shift the demand curve for automobiles to the right.

Which of the following would cause prices to fall and output to rise in the short run?

Short-run aggregate supply shifts right.

An improvement in technology would shift which of the following curve(s)?

Short-run and long-run aggregate supply

A system of economic organization in which the ownership and control of productive capital assets rests with the state and in which resources are allocated through central planning and political decision making is called

Socialism.

If inventory investment during a year was negative $6 billion, producers must have

Sold $6 billion more goods and services during the year than they produced.

In the context of aggregate supply, the short run is defined as the period during which

Some prices are set by contracts and cannot be adjusted.

Full employment is the situation in which the economy operates at an unemployment rate equal to the sum of

Structural and frictional unemployment.

Louise is unemployed due to a decrease in the demand for workers with a knowledge of a certain word processing language. This is an example of

Structural unemployment

Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited.

Why is globalization becoming more of a worldwide phenomenon?

Technological advancements are decreasing transportation costs.

What will most likely happen when a domestic currency appreciates?

That country's net exports will decline and therefore decrease aggregate demand.

Restrictions that limit sugar imports, subsidies for the construction of sports stadiums, and federal spending on programs like the construction of an indoor rain forest in Iowa all provide examples of government programs

That reflect the political attractiveness of special-interest issues.

Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid $200,000 for the brand new house. He sold the house in 2006 for $225,000. Which of the following statements is correct regarding the sale of the house?

The 2006 sale affected neither 2005 GDP nor 2006 GDP

If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted?

The GDP of the United States because that is where it was built.

If the dollar depreciates relative to the Peso, it can be said that

The Peso appreciates relative to the dollar.

The actual rate of unemployment will be greater than the natural rate of unemployment when

The actual output is less than the economy's potential output.

Mathematically, the marginal propensity to consume is

The change in consumption divided by the change in income.

If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price, which of the following conclusions can be made?

The country will be an exporter of the good.

If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price, which of the following conclusions can be made?

The country will be an importer of the good.

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?

The crowding-out effect.

As the Fed shifted to a highly expansionary monetary policy during the second half of 2008, why were banks reluctant to extend loans and make investments?

The demand for loans was weak and the business climate was uncertain.

What is mostly likely to happen if decreased government borrowing drives down real interest rates in the United States?

The dollar will depreciate leading to an increase in net exports.

Who would most likely be helped by an increase in the tariff on foreign-produced automobiles?

The domestic producers of automobiles.

The primary source of purchasing power used to buy imported goods is

The exports of a nation.

Which of the following would be true if money were not used as a medium of exchange?

The gains from trade would be severely limited.

What basket of goods is used to construct the CPI

The goods and services that are typically bought by consumers as determined by government surveys

Which of the following is most likely true when household debt as a share of income is abnormally high?

The growth of consumption is likely to remain sluggish even as the economy begins to recover.

Growth of output is necessary for

The growth of income.

Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if

The higher taxes cause workers to work less.

The GDP figures fail to count labor services and other household production. Once this omission is taken into account,

The income differences between the high and low income countries are still huge.

The rational-ignorance effect refers to which of the following scenarios?

The lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election.

The larger the marginal propensity to consume

The larger the multiplier.

Why are people are willing to pay more for a diamond than for a bottle of water?

The marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water.

Which of the following will occur if consumer tastes are changing more in favor of the consumption of a particular good?

The market demand curve would shift to the right.

Which of the following arguments in support of trade restrictions limiting U.S. dependence on foreign suppliers of petroleum and aircraft is most valid when applied to the United States?

The national defense argument

If there is both an increase in the supply of a good and a decrease in demand for a good, which of the following will definitely occur?

The price of the good will decrease.

If there is both a decrease in the supply of a good and an increase in demand for a good, which of the following will definitely occur?

The price of the good will increase.

In a market economy, what determines whether an entrepreneur will continue in business or terminate the production of a new product?

The profit or loss of the business.

Which of the following is true if there is a shortage of loanable funds?

The quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium.

Which of the following is true if there is a surplus of loanable funds?

The quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.

Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?

The reserve requirements mandated by the Fed

Which of the following is true when collective decision making is utilized to resolve economic questions regarding the allocation of resources?

The role of markets will be replaced by political decision making.

Which of the following will increase interest rates in the short run?

The sale of bonds by the Federal Reserve in the open market.

Which of the following explains why elected representatives will find borrowing to be an attractive method of financing current government programs?

The shortsightedness effect.

Which of the following would be expected if the tariff on foreign-produced automobiles were increased?

The supply of foreign automobiles to the domestic market would decline, causing auto prices to rise.

If the Federal Reserve unexpectedly decides to sell bonds, which of the following will most likely happen in the short run?

The supply of loanable funds will decrease, which will exert upward pressure on the interest rate.

Which of the following would decrease the supply of sugar?

The tariff (tax) on imported sugar increases.

Compared to a barter economy, using money increases efficiency by reducing

Transaction costs.

According to the Economic Freedom of the World measure, the United States was

The third freest economy in the world, behind only Hong Kong and Singapore during 1980-2000.

Why will it be difficult for the Fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?

The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable.

Matt loses his job and decides to sit on the beach rather than looking for work the next few months. Other things the same, what happens to the unemployment rate and labor-force participation rate?

The unemployment rate increases, and the labor-force participation rate decreases.

The primary source of earnings of commercial banks is income derived from

The use of deposits to extend loans and undertake investments.

Which of the following statements about trade is true?

The value of a good generally depends on who uses it and circumstances such as when and where it is used.

What is the opportunity cost of an action?

The value of the best opportunity that must be sacrificed in order to take the action.

Which of the following activities describes the opportunity cost of attending an economics class?

The value of the highest valued alternative that must be forgone because of attending the class.

Which of the following activities describes the opportunity cost of watching a play in a theater?

The value of the highest valued alternative that must be forgone because of the time and money required to watch the play.

If Kim can wash 10 cars or wax 2 cars during a day, and Susan can wash 8 cars or wax 2 cars during a day, then according to the law of comparative advantage,

Their total output can be expanded if Susan specializes in waxing and Kim in washing.

Government action will often result in the counterproductive use of resources because

There is often a conflict between winning political elections and adoption of only productive programs.

If net exports are positive, then

There will be net capital outflow, so foreign assets bought by Americans are greater than American assets bought by foreigners.

Checking account deposits are counted as part of the M1 money supply because

They are widely used as a means of making payment.

Which of the following is true regarding the foreign holdings of U.S. dollars?

They indicate that foreigners have confidence in the monetary policy and economy of the United States.

Why do higher unemployment insurance benefits tend to increase unemployment?

They reduce the opportunity cost of job search and, hence, increase the search time.

For a college student who wishes to calculate the true costs of going to college, how should the costs of room and board be included in the calculation?

They should be counted only to the extent that they are more expensive at college than elsewhere.

When the Fed decreases the money supply, what will happen to nominal interest rates?

They will rise.

Aggregate Demand

Total demand for final goods and services in an economy at a given time and at all possible price levels.

Aggregate Supply

Total supply of goods and services that firms in a national economy plan on selling at a given price level in an economy.

What would opening trade between two nations do?

Trade would leave the production possibilities unchanged and increase their consumption possibilities.

Imagine that there are only two nations in the world, the United States and Mexico. Ceteris paribus, what will happen if Americans buy more goods made in Mexico?

U.S. demand curve for Mexican pesos will shift rightward.

A decrease in the dollar price of the English pound will make

U.S. exports to England decrease.

At the most basic level, the distinguishing characteristic of government that makes it different from private firms is its ability to

Use coercive force against adults to modify their behavior or force them to pay for a good or service.

Three basic decisions must be made by all economies. What are they?

What goods will be produced; how will goods be produced; for whom will goods be produced?

When is crony capitalism most likely to be present?

When businesses either implicitly or explicitly provide political decision-makers with contributions and other forms of political support in "exchange" for government favors that will improve their profitability.

In which of the following situations is the political process likely to result in the inefficient and wasteful use of resources?

When the benefits are concentrated and the costs widespread.

When is the economy considered to be at full employment?

When the rate of cyclical unemployment is zero.

When will the price of a good will tend to fall?

When there is excess supply of the good.

Economic analysis suggests that gains from specialization and exchange

Will be realized if individuals are allowed to pursue goals that are in their own self-interest.

Within the framework of the AD/AS model, in the long run, output

Will converge toward the economy's long-run capacity.

The vertical long-run aggregate supply curve reflects the fact that in the long run, an increase in the price level

Will not alter the economy's maximum sustainable rate of output.

A business produced $10 million of goods in 2007 but sold only $9 million. Is the $1 million increase in inventory counted as part of the 2007 gross domestic product?

Yes, because these inventories are part of the output of the economy in 2007.

Compared to those with less economic freedom, countries with more economic freedom generally have ____ per capita GDP levels and ____ growth rates.

higher; more rapid