Econ 2306 Mid-term study
An decrease in the price of oranges would lead to a(n)
a movement down and to the left along the supply curve for oranges.
Which of the following combinations of nominal interest rates and inflation implies a real interest rate of 7 percent?
a nominal interest rate of 8 percent and an inflation rate of 1 percent.
A reduction in world oil supplies is likely to cause
a reduction in aggregate supply, a rise in the equilibrium price level, and a fall in real Gross Domestic Product (GDP).
Refer to Figure 4-8. Suppose the figure shows the market demand for coffee. Suppose the price of tea, a substitute good, increases. Which of the following changes would occur?
a shift from D2 to D1
Other things the same, continued increases in technology lead to
continued increases in real GDP and continued decreases in the price level.
A person who is not employed and claims to be trying hard to find a job but really is not trying hard to find a job is
counted as unemployed but should be counted as out of the labor force.
Lead is an important input in the production of crystal. If the price of lead decreases, then we would expect the supply of
crystal to increase.
If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the:
cyclical unemployment rate is 4 percent.
The law of increasing opportunity costs states that:
if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of other goods to do so.
According to liquidity preference theory, the money-supply curve would shift rightward
if the Federal Reserve chose to increase the money supply.
If the current unemployment rate is 5%, under which of the following circumstances would you expect the Fed to use expansionary monetary policy
if the natural unemployment rate is below 5%.
A government budget deficit affects the supply of loanable funds, rather than the demand for loanable funds, because
in our model of the loanable funds market, we define "loanable funds" as the flow of resources available to fund private investment.
Refer to Figure 4-1. The movement from point A to point B on the graph shows a(n)
increase in quantity demanded.
Refer to the below diagram, which shows demand and supply conditions in the competitive market for product X. A shift in the demand curve from D0to D1 might be caused by a(n):
increase in the price of complementary good Y.
Price floors and price ceilings:
interfere with the rationing function of prices.
Crowding out occurs when
investment declines because a budget deficit makes interest rates rise.
Which of the following would be most likely to induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in
investment spending.
Increases in government spending will lower the long term growth rate of GDP, if it lowers ________ spending and if the government purchases ________ and not ________ goods.
investment; consumption; investment
Refer to the below diagram. The combination of computers and bicycles shown by point F:
is attainable, but implies that the economy is not using all its resources.
If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level
is lower and output is the same as the original long-run equilibrium.
A lender need not be penalized by inflation if the:
lender correctly anticipates inflation and increases the nominal interest rate accordingly.
Kathleen is considering expanding her dress shop. If interest rates rise she is
less likely to expand. This illustrates why the demand for loanable funds slopes downward.
If a reform of the tax laws encourages greater saving, the result would be
lower Real interest rates and greater quantity of investment.
A rational decision maker takes an action only if the
marginal benefit is greater than the marginal cost.
Which of the following is included in GDP?
marijuana purchased legally in Colorado.
GDP is defined as the
market value of all final goods and services produced within a country in a given period of time.
f government purchases increased by $50 billion, then Aggregate Demand would be ________ $50 billion.
may be greater than or less than
An increase in the price level will
move the economy up along a stationary aggregate demand curve.
Refer to Figure 33-4. If the economy is at A and there is a fall in aggregate demand, in the short run the economy
moves to D.
If there is shortage of loanable funds, then
neither curve shifts, but the quantity of loanable funds supplied increases and the quantity demanded decreases as the interest rate rises to equilibrium.
Suppose there are constant returns to scale. Now suppose that over time a country doubles its physical capital but its technology is unchanged. Which of the following would double?
neither productivity nor output
If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?
nominal GDP but not real GDP.
Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her
nominal income increased, but their real income decreased.
In the long run, which of the following factor is affected by money supply?
nominal interest rates
The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,
production is more profitable and employment rises.
To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the
quantity theory of money.
A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move
raises GDP.
A larger budget deficit
raises the Real interest rate and reduces the quantity of investment.
An increase in the U.S. interest rate
raises the opportunity cost of holding dollars.
Alex sees that his neighbors' lawns all need mowing. He offers to provide the service in exchange for a wage of $20 per hour. Some neighbors accept Alex's offer and others refuse. Economists would describe Alex's behavior as:
rational self-interest, because he attempting to increase his own income by identifying and satisfying someone else's wants.
In the long run, which of the following factor is NOT affected by money supply?
real GDP
Ashley puts money in a savings account at her bank earning 2 percent interest. One year later she takes her money out and notes that prices rose 3 percent. Ashley earned a
real interest rate of -1 percent due to inflation.
An decrease in taxes shifts aggregate demand
to the right. The larger the multiplier is, the farther it shifts.
The primary reason people hold money is
to use it as a medium of exchange.
Refer to the below diagram. The combination of computers and bicycles shown by point G is:
unattainable, given currently available resources and technology.
If output is above its natural rate, then according to sticky-wage theory
workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
Suppose the government were to replace the income tax with a consumption tax so that interest on savings was not taxed. The result would be that the interest rate
would decrease and the quantity of investment would increase.
Money demand refers to
how much wealth people want to hold in liquid form, i.e. cash.
Refer to Figure 4-27. Panel (d) shows which of the following?
a decrease in quantity demanded and a decrease in supply
Suppose the economy is in equilibrium when there is a change in environmental policy that bans all chemical fertilizers on farmland. We would expect to observe
a decrease in real output and an increase in the price level.
Refer to the below diagram. A government minimal price support program to aid farmers is best illustrated by:
price C.
Refer to the below diagram. A government-set binding price floor is best illustrated by:
price C.
A market supply curve shows how the total quantity supplied of a good varies as
price varies.
Nominal GDP will definitely increase when
prices increase and output increases.
In national income accounting, we use which of the following pairs of terms interchangeably?
"public saving" and "government tax revenue minus government spending"
Consider the following data for a fictional economy that produces only two products: guns and butter. Refer to the table below. Nominal GDP for this fictional economy in 2006 equals:
$1,140.
Refer to Figure 4-18. At what price would there be an excess demand of 200 units of the good?
$20
If the CPI was 68 in 1965 and is 285 today, then $100 today purchases the same amount of goods and services as
$23.86 purchased in 1965.
Consider the following data (in billions of dollars) for an economy:• Consumption 3,500• Investment 800• Government Spending 900• Export 50• Import 100Gross domestic product (in billions of dollars) for this economy equals:
$5,150
Consider the following data for a fictional economy that produces only two products: guns and butter. Refer to the table below. Real GDP for this fictional economy for 2006 using 2000 as the base year equals:
$690.
Refer to the below diagram, which shows demand and supply conditions in the competitive market for product X. If the initial demand and supply curves are D0 and S0, equilibrium price and quantity will be:
0F and 0C respectively.
Refer to the below diagram, which shows demand and supply conditions in the competitive market for product X. If supply is S1and demand D0, then
0F represents a price that would result in a shortage of AC.
Suppose that in some state the adult population is 3 million, the labor force participation rate is 80%, and 240,000 people are unemployed. What is the unemployment rate?
10%
In the above figure, assume the economy is in equilibrium at point d. Then the Fed decreases the money supply so that the new aggregate demand curve is AD 1. In the long run, the new price level will be
100
If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:
11%.
Elizabeth just received her Ph.D. in economics and has two competing job offers. The first is in Washington, D.C. and pays a salary of $200,000. She has a similar job offer in Austin, TX that pays $90,000. Which pair of CPIs would make the two salaries have the same purchasing power?
160 in Washington, D.C. and 72 in Austin, TX
Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P =
2.
Based on the quantity equation, if M = 150, V = 4, and Y = 300, then P =
2.
Table 24-16 The following table shows the value of the Consumer Price Index and the nominal interest rate for 2013-2015. Refer to Table 24-16. What was the real interest rate in 2015?
2.0%
Consider the following values of the consumer price index for 2002 and 2003: The inflation rate between 2002 to 2003 equals
2.2 %
If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation is:
3 percent.
Suppose that the adult population in the country of Atlantis is 115 million. If 80 million people are employed and 5 million are unemployed, then
30 million are not in the labor force.
If the nominal interest rate is 7 percent and the rate of inflation is 3 percent, then the real interest rate is
4 percent.
Suppose each good costs $5 per unit and Megan holds $40. What is the real value of the money she holds?
8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.
Imagine that you borrow $5,000 for one year and at the end of the year you repay the $5,000 plus $600 of interest. If the inflation rate was 4%, what was the real interest rate you paid?
8%
If the inflation rate is 2 percent and the real interest rate is 7 percent, then the nominal interest rate is
9 percent
Refer to Figure 2-16. It is possible for this economy to produce
90 gadgets and 30 widgets.
Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact:
Answer: implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost.
Which of the points in the below graph are possible long run equilibriums?
A and C
Suppose the price of crude oil falls substantially. Which of the following is the most likely effect of the decrease in fuel prices on the economy?
A decrease in the equilibrium price level and an increase in equilibrium real GDP.
Which of the following will NOT shift a nation's long-run aggregate supply curve to the right?
A decrease in the nominal wage rate.
Refer to the below diagram. This production possibilities curve is:
A. convex to the origin because opportunity costs are constant. B. linear because opportunity costs are constant. C. concave to the origin because of increasing opportunity costs. D. convex to the origin because of increasing opportunity costs.
In recent years the economy of Japan has grown, despite the fact that the population of Japan has declined. Which of the following would best explain Japan's economic growth despite having a smaller population?
Advancements in technology that make labor more productive.
During the 1990-91 recession, consumers decided to decrease consumption to repay a larger portion of household debt. What happened?
Aggregate demand declined, resulting in lower levels of real output and employment.
Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve
All of the above are correct.
The current price of blue jeans is $30 per pair, but the equilibrium price of blue jeans is $25 per pair. As a result,
All of the above are correct.
To decrease the money supply, the Fed could
All of the above are correct.
Which of the following effects helps to explain the slope of the aggregate-demand curve?
All of the above are correct.
Which of the following would increase output in the short run?
All of the above are correct.
Factors that influence the long-run aggregate supply curve are
All of the above.
Which of the following will NOT increase potential real GDP over the long run?
An increase in demand.
The negative slope of the production possibilities curve is a graphical way of indicating that:
Answer: to produce more of one product we must do with less of another.
Refer to the below production possibilities curve. At the onset of the Second World War the Soviet Union was already at full employment. Its economic adjustment from peacetime to wartime can best be described by the movement from point:
Answer: A A. c to point b. B. b to point c. C. a to point b. D. c to point d.
Which of the following most closely relates to the idea of opportunity costs?
Answer: A A. tradeoffs. B. economic growth. C. technological change. D. capitalism.
Refer to the below diagram. If society is currently producing 9 units of bicycles and 4 units of computers and it now decides to increase computer output to 6, the cost:
Answer: A A. will be 4 units of bicycles. B.will be 2 units of bicycles. C. will be zero because unemployed resources are available. D. of doing so cannot be determined from the information given.
After much consideration, you have chosen Ireland over Spain for your Study Abroad program next year. However, the deadline for your final decision is still months away and you may reverse this decision. Which of the following events would prompt you to reverse this decision?
Answer: A a. The marginal benefit of going to Spain increases. b. The marginal benefit of going to Ireland increases. c. The marginal cost of going to Spain increases. d. The marginal cost of going to Ireland decreases.
Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that
Answer: A a. people face tradeoffs. b. rational people think at the margin. c. people respond to incentives. d. improvements in efficiency sometimes come at the expense of equality.
Which of the following statements is correct?
Answer: B A. As a group, economists see no purpose in distinguishing between the nominal interest rate and the real interest rate. B. The interest rate that is usually reported is the nominal interest rate. C. If the nominal interest rate increases and the inflation rate remains unchanged, then the real interest rate decreases. D. All of the above are correct.
Refer to the below tables. Suppose that technology and the quality of resources are the same in both countries. We can conclude that:
Answer: B A. Duckistan has more resources than Herbania. B. Herbania has more resources than Duckistan. C. Duckistan has greater opportunity costs than Herbania. D. Prices are twice as high in Herbania as in Duckistan.
Which of the following statements is correct?
Answer: B A. The interest rate that is usually reported is the interest rate that has been corrected for inflation. B. The supply of, and demand for, loanable funds depend on the real (rather than nominal) interest rate. C. If the nominal interest rate has decreased and the real interest rate has also decreased, then the inflation rate must have decreased as well. D. All of the above are correct.
Refer to the below diagram. If society is currently producing the combination of bicycles and computers shown by point D, the production of 2 more units of bicycles:
Answer: B A. cannot be achieved because resources are fully employed. B. will cost 1 unit of computers. C. will cost 2 units of computers. D. will cause some resources to become unemployed.
Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates:
Answer: B A. distorted priorities. B. opportunity costs. c. increasing opportunity costs. d. productive efficiency.
Refer to the below diagram. Points A, B, C, D, and E show:
Answer: B A. that the opportunity cost of bicycles increases, while that of computers is constant. B. combinations of bicycles and computers that society can produce by using its resources efficiently. c. that the opportunity cost of computers increases, while that of bicycles is constant. d. that society's demand for computers is greater than its demand for bicycles.
The construction of a production possibilities curve assumes:
Answer: B A. the quantities of all resources are unlimited. B. technology is fixed. c. some resources are unemployed.
Refer to Figure 2-5. Suppose this economy is producing at point D. Which of the following statements would best explain this situation?
Answer: C A. The economy has insufficient resources to produce at a more desirable point. B. The economy's available technology prevents it from producing at a more desirable point. C. There is widespread unemployment in the economy. D. Any of the above statements would be a legitimate explanation for this situation.
Refer to the below production possibilities curve. At the onset of the Second World War the United States had large amounts of idle human and property resources. Its economic adjustment from peacetime to wartime can best be described by the movement from point:
Answer: C A. c to point b. B. b to point c. C. a to point b. D. c to point d.
Refer to the below tables. Opportunity costs are:
Answer: C A. constant in both Duckistan and Herbania. B. larger in Duckistan than in Herbania. C. increasing in both Duckistan and Herbania. D. increasing in Duckistan and constant in Herbania.C
Refer to Figure 2-2. If households are sellers in the markets represented by Box D of this circular-flow diagram, then
Answer: D A. Box D must represent the markets for factors of production. B. Box C must represent the markets for goods and services. C. firms are buyers in the markets represented by Box D. D. All of the above are correct.
The real interest rate effect provides a partial explanation for why the aggregate demand curve slopes downward. Which of the following statements best explains the real interest rate effect?
At a lower price level, the real interest rate tends to be lower; thus, the quantity of investment goods demanded is larger.
f toast and butter are complements, then which of the following would increase the demand for toast?
a decrease in the price of butter
Which of the following people are NOT included in the labor force?
Lizzie who is a full time student
Bob is looking for work after school, but everywhere he fills out an application, the managers say they always have a lot more applications than open positions. Tom has a law degree. Several firms have made him offers, but he thinks he might be able to find a firm where his talents could be put to better use.
Bob is structurally unemployed, and Tom is frictionally unemployed.
In the above figure, suppose the economy is initially at a short-run equilibrium at point D and there is an unanticipated increase in the money supply. Which point represents the new short-run equilibrium?
C
Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long run equilibrium be?
C
Suppose the government deficit increases, but the real interest rate remains the same. Which of the following things might have happened simultaneously to keep real interest rates the same?
Consumers decide to decrease consumption and work more in order to save more.
Refer to the below tables. Suppose that Duckistan and Herbania are each producing 14 units of civilian goods and 2 unit of military goods. Then:
Duckistan is fully employing its resources but Herbania is not.
In the above figure, if we start at AD 1 and SRAS 1, and the money supply increases unexpectedly, what would be the long-run equilibrium?
E3
Sam, an American citizen, prepares meals for his family at home. Ellen, a Canadian citizen, commutes to the U.S. to help prepare meals at a restaurant in Idaho. Whose value of services preparing meals is included in U.S. GDP?
Ellen's but not Sam's.
Suppose the income of buyers in a market for an inferior good decreases and a technological advancement occurs also. What would we expect to happen in the market?
Equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous.
Which of the following helps to explain the downward-sloping nature of the aggregate demand curve?
Falling prices put downward pressure on real interest rates, causing business investment to increase.
Refer to the below tables. Suppose that the amount and quality of resources are the same in both countries. We can conclude that:
Herbania is technologically superior to Duckistan in producing civilian goods.
Which of the following statement is correct?
In the national income accounts GDP can be measured as production, income, or expenditures.
Which of the following would cause the short-run aggregate supply curve to be upward sloping?
Labor contracts make wages sticky.
Who would be included in the labor force?
Lisa, who is unhappy with her current job.
A bagel shop sells fresh baked bagels from 5 a.m. until 7 p.m. every day. The shop does not sell day-old bagels, so all unsold bagels are thrown away at 7 p.m. each day. The cost of making and selling a dozen bagels is $1.00; there are no costs associated with throwing bagels away. If the manager has 8 dozen bagels left at 6:30 p.m. on a particular day, which of the following alternatives is most attractive?
Lower the price of the remaining bagels, even if the price falls below $1.00 per dozen.
If P = 2 and Y = 1000, then which of the following pairs of values are not possible?
M = $300, V = 3.
Recently a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been acquiring increases in the nominal incomes of its members through collective bargaining. Is the critic correct?
No, because real income may fall if prices increase more proportionately than the increase in nominal income
In which of the following cases would purchasing power rise?
Nominal income rises by 2 percent, and the price level remains unchanged.
Refer to Figure 33-8. Suppose the economy starts at Z. Stagflation would be consistent with the move to
P3 and Y1 .
Refer to Figure 4-27. Which of the four panels illustrates a decrease in quantity supplied?
Panel (b)
Refer to Figure 4-27. Which of the four panels illustrates an increase in quantity demanded?
Panel (c)
In the above figure, if we start at AD 1 and SRAS 1, and the money supply increases unexpectedly, what causes the economy to get to the long-run equilibrium?
People's expectations will revise after a short-run gain in output, wages will rise, and SRAS will shift leftward.
Refer to Figure 4-6. Suppose that the federal government is concerned about obesity in the United States. Congress is considering two plans. One would require "junk food" producers to include warning labels on all junk food. The other would impose a tax on all products considered to be junk food (tax on the producers). We could illustrate the tax as producing a movement from
Point A to Point C in Panel 2.
Refer to Figure 33-5. In Figure 33-5,
Point B represents a short-run equilibrium, and Point A represents a long-run equilibrium.
According to the aggregate demand/aggregate supply model, one possible cause of a recession is:
a decrease in demand for investment goods by businesses.
Refer to Figure 4-26. Which of the following movements would illustrate the effect in the market for wedding cakes resulting from a decrease in the number of pastry chefs?
Point C to Point D
What would happen in the market for loanable funds if the government were to increase the tax on interest income?
Real interest rates would rise.
The graph below pertains to the supply of paper to colleges and universities. Refer to Figure 4-25. All else equal, a major paper manufacturer filing for bankruptcy and shutting down as a result of an IRS tax evasion investigation would cause a move from
SB to SA.
The graph below pertains to the supply of paper to colleges and universities. Refer to Figure 4-25. All else equal, an increase in the price of the pulp used in the paper production process would cause a move from
SB to SA.
The U.S. government pays an economist at the U.S. Department of Commerce $100,000 in salary in 2013. The economist then retires. In 2014, the government pays him $60,000 in Social Security benefits. Which of the following is correct?
The 2013 payment is included in 2013 GDP as government purchases, but the 2014 payment is not included in 2014 GDP.
Suppose Congress institutes an investment tax credit. What would happen in the market for loanable funds?
The Real interest rate and investment would rise.
Suppose a country has a consumption tax that is similar to a state sales tax. If its government were to eliminate the consumption tax and replace it with an income tax that includes an income tax on interest from savings, what would happen?
The Real interest rate would increase and saving would decrease.
In January, buyers of gold expect that the price of gold will fall by February. What happens in the gold market in January, holding all else constant?
The demand curve shifts to the left.
everal studies have shown promising links between green tea consumption and cancerprevention. How does this affect the market for green tea?
The demand for green tea curve shifts to the right because of a change in tastes and preferences in favor of green tea.
Suppose that Congress were to repeal an investment tax credit. What would happen in the market for loanable funds?
The demand for loanable funds would shift left.
Consider the expressions T - G and Y - T - C. Which of the following statements is correct?
The first of these is public saving; the second one is private saving.
Which of the following could cause nominal GDP to decrease, but real GDP to increase?
The price level falls and the quantity of final goods and services produced rises.
In the above figure, suppose the economy is currently in equilibrium at point C. Applying misperception theory (also called rational expectations theory), what happens in Long Run if the Fed announces that it is decreasing the money supply?
The price level will decrease.
Which of the following is not correct?
The purchasing power of an interest-earning deposit can increase or decrease over time, but it cannot stay the same.
Farmers can plant either corn or soybeans in their fields. Suppose that a new technology for converting corn into liquid fuel increases the demand for corn. Which of the following is most likely to occur?
The supply of soybeans will decrease.
Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. Refer to Figure 26-4. Which of the following events could explain a shift of the demand-for-loanable-funds curve from D 1 to D 2
The tax code is reformed to encourage greater investment.
When looking at a graph of aggregate demand, which of the following is correct?
The variable on the vertical axis is nominal; the variable on the horizontal axis is real
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
There would be an increase in the amount of loanable funds borrowed.
Rachel cuts her sister's hair for free. When she cuts the hair of her customers in her shop, she charges $10. When is Rachel's haircutting included in GDP?
When she cuts her customers' hair, but not her sister's.
Suppose there's an unanticipated increase in the rate of inflation. Which of the following is likely to be true?
Workers whose nominal wages are set at the beginning of the year are likely to suffer a decrease in real wages (purchasing power).
A movement along the demand curve for Aquafresh toothpaste is caused by
a change in the price of Aquafresh toothpaste.
A surplus of a product will arise when price is:
above equilibrium with the result that quantity supplied exceeds quantity demanded.
The long-run aggregate supply is vertical because in the long run changes in the price level do NOT:
affect the number of workers, the capital stock, or technology.
Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P 1 and Y 1 , then it must be the case that
aggregate demand has decreased.
Refer to the above figure. Suppose the economy is in equilibrium at point A. If the Fed tries to stimulate the economy by expansionary monetary system, and this is not expected by the people in the economy, we would expect to see
aggregate demand increases, real GDP increases, and the price level increases in the short run. In the long run, people realize the real situation, causing the short-run aggregate supply curve to shift up and the real GDP returns to $4 trillion and the price level increases to 150.
Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction?
aggregate demand shifts left
Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. Which curve shifts and in which direction?
aggregate demand shifts right
Which of the following would cause prices and real GDP to rise in the short run?
aggregate demand shifts right
The price level rises in the short run if
aggregate demand shifts right or aggregate supply shifts left.
An increase in government spending initially and primarily shifts
aggregate demand to the right.
Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
aggregate demand to the right.
In the above figure, starting at E 1, if there is a supply shock that is temporary (short run), the
aggregate supply would shift to SRAS 1 and then return to SRAS 0.
Refer to the figure below. The economy's GDP could find itself below potential GDP in short-run macroeconomic equilibrium as a result of:
an increase in oil prices.
If mayonnaise and Miracle Whip are substitutes, then which of the following would increase the demand for Miracle Whip?
an increase in the price of mayonnaise
Refer to Figure 4-11. The movement from point A to point B on the graph is caused by
an increase in the price of the good.
A likely example of substitute goods for most people would be
apple juice and orange juice.
College-age athletes who drop out of college to play professional sports
are well aware that their opportunity cost of attending college is very high.
To be officially unemployed a person must:
be in the labor force.
A person should consume more of something when its marginal:
benefit exceeds its marginal cost.
Adam is looking for a job in marketing. He has had some offers and his prospects are promising, but he has not yet accepted a job. Amanda lost her job working for Mercury Bicycles because many customers decided they prefer bicycles manufactured by Ultimate Bicycles instead. Who is frictionally unemployed?
both Adam and Amanda
A tax increase has
both a crowding out and multiplier effect
An increase in the price of a key input, such as labor, will result in
both increase in prices and decrease in national production.
Which of the following decreases in response to the interest-rate effect from an increase in the price level?
both investment and consumption
In drawing a production possibilities curve we hold constant:
both technology and resource supplies.
Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. What happens to the price level and real GDP in the short run?
both the price level and real GDP fall.
When the Federal Reserve conducts open-market operations to increase the money supply, it
buys government bonds from the public.
Which of the following is not included in GDP?
carrots grown in your garden and eaten by your family
If aggregate supply remains unchanged, a decrease in aggregate demand may
cause a recession.
An unexpected decrease in aggregate demand
causes the price level to fall and the unemployment rate to rise.
A budget deficit
changes the supply of loanable funds.
The point on the production possibilities curve that is most desirable can be found by:
comparing marginal benefits and marginal costs.
Refer to the below diagram. The movement down the production possibilities curve from point A to point E suggests that the production of:
computers, but not bicycles, is subject to increasing opportunity costs.
The law of increasing opportunity costs is reflected in a production possibilities curve that is:
concave to the origin.
Kara was out jogging and despite being tired, decided to run one more mile. Based on her actions, economists would conclude that Kara:
decided that the marginal benefit of running one more mile would outweigh the cost of the additional mile.
To fight a recession, Congress and the president should
decrease taxes to increase aggregate demand.
In the long run, a decrease in the money supply will
decrease the price level.
To increase the money supply, the Fed could
decrease the required reserve ratio
If taxes
decrease, then consumption increases, and aggregate demand shifts rightward.
If the price level rose in three consecutive years from 100 to 120 to 140, then the inflation rate over those years would
decrease.
Suppose you like to make, from scratch, pies filled with banana cream and vanilla pudding. You notice that the price of bananas has increased. As a result, your demand for vanilla pudding would
decrease.
To keep the budget balanced during the recession when tax revenue is low and government purchase is high, the federal government must _________ government spending, or ________ taxes, and which will ________ aggregate demand.
decrease; increase; reduce
Bolivia had a smaller budget deficit in 2003 than in 2002. Other things the same, we would expect this reduction in the budget deficit to have
decreased interest rates and increased investment.
The Fed initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy. The result is
decreased prices, but no change in real GDP.
If the Fed conducts open-market sales, the money supply
decreases and aggregate demand shifts left.
Suppose that coffee growers sell 200 million pounds of coffee beans at $2 per pound in 2007, and sell 240 million pounds for $3 per pound in 2008. Based on this information we can conclude that the:
demand for coffee beans has increased.
f, at the current price, there is a shortage of a good, then
he price is below the equilibrium price.
A binding minimal wage leads to
higher unemployment rate.
The optimal point on a production possibilities curve is achieved where:
each good is produced at a level where marginal benefits equal marginal costs.
Suppose you lend $1,000 at an interest rate of 10 percent. If the expected real interest rate is 4 percent (based on your expected inflation), then the rate of inflation over the upcoming year that would be most beneficial to you (among the following choices) would be a rate of inflation
equal to 0%
Refer to Figure 4-19. If price in this market is currently $14, then there would be a(n
excess supply of 40 units. The law of supply and demand predicts that the price will fall from $14 to a lower price.
Social Security payments are
excluded from GDP because they do not reflect the economy's production.
During recessions, taxes tend to
fall and thereby increase aggregate demand.
Suppose government spending is cut. Other things being equal, the aggregate demand for national production will
fall.
Suppose an economy produces only ice cream cones. If the price level rises, the value of currency
falls, because one unit of currency buys fewer ice cream cones.
Refer to Figure above. Which of the following pairs correctly identify W and Y?
firms and households
If aggregate demand shifts right then in the short run
firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.
A price floor means that:
government is imposing a minimum legal price that is typically above the equilibrium price.
Aggregate demand shifts right if
government purchases increase and shifts left if stock prices fall.
According to the theory of liquidity preference,
he demand for money is represented by a downward-sloping line on a supply-and-demand graph.
Refer to the below diagram, which shows demand and supply conditions in the competitive market for product X. Other things equal, a shift of the supply curve from S0 to S1 might be caused by a(n):
increase in the wage rates paid to laborers employed in the production of X.
According to the interest-rate effect, an increase in the price level will
increase money demand and interest rates. Investment declines.
If Canada goes from a large budget deficit to a small budget deficit, it will
increase public saving and so shift the supply of loanable funds right.
In the long run, the effect of an increase in the money supply is to
increase the price level only.
Funsters, Inc., the largest toy company in the country, sells its most popular doll for $15. It has just learned that its leading competitor, Toysorama, is mass-producing an excellent copy and plans to flood the market with their $5 doll in six weeks. Funsters should
increase the supply of its doll now before the other doll hits the market.
Open-market purchases by the Fed make the money supply
increase, which makes the value of money decrease.
Imagine the U.S. economy is in long-run equilibrium. Then suppose the aggregate demand increases. We would expect that in the long-run the price level would
increase.
An increase in government spending
increases the interest rate and so investment spending decreases.
If crowding out occurs, an increase in government spending
increases the real interest rate and consumption and investment spending decline.
Which of the following is not a tool of monetary policy?
increasing the government budget deficit
If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by
increasing the money supply, which lowers interest rates.
According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increases
inflation and nominal interest rates, but does not change real interest rates.
Monetary policy in Japan since the early 1990s has had limited effectiveness even though the Bank of Japan lowered
nominal interest rates to almost zero, because deflation (a negative rate of inflation) kept real interest rates up.
Suppose that when income rises, the demand curve for doctor's visits shifts to the right. In this case, we know doctor's visits are
normal goods.
Unemployment compensation is
not part of GDP because it is a transfer payment.
A goal of monetary policy and fiscal policy is to
offset shifts in aggregate demand and thereby stabilize the economy.
A key implication of the policy irrelevance (policy ineffectiveness) proposition is that
only unanticipated policy actions can influence real Gross Domestic Product (GDP).
Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of:
opportunity costs.
As the price level falls
people will want to buy more bonds, so the interest rate falls.
The unemployment rate is the:
percentage of the labor force that is unemployed.
In the basic aggregate demand and aggregate supply model, which of the following could cause a recession? An increase in:
personal income taxes.
Refer to the below diagram. A binding rent controls are best illustrated by:
price A.
Refer to the below diagram. A government-set binding price ceiling is best illustrated by:
price A.
Refer to the below diagram. A binding minimal wage is best illustrated by:
price C.
Financial CrisisSuppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output?
real wages rise, so firms choose to produce less
A larger budget surplus
reduces the Real interest rate and raises the quantity of investment.
Unanticipated inflation:
reduces the real burden of the public debt to the Federal government.
The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
relative to prices wages are higher and employment falls.
The law of increasing opportunity costs exists because:
resources are not equally efficient in producing various goods.
Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's purchasing power will:
rise by about 15 percent.
If Congress instituted an investment tax credit, the equilibrium quantity of loanable funds would
rise.
An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level
rises, shifting aggregate supply left.
Which of the following would cause stagflation?
rising oil prices
In deciding whether to study for an economics quiz or go to a movie, one is confronted by the idea(s) of:
scarcity and opportunity costs.
Refer to the below diagram. The direct economic impact of the destruction and loss of lives caused by the terrorist attacks of September 11, 2001 is illustrated by the:
shift of the production possibilities curve from CD to AB.
In the mid-1970s the price of oil rose dramatically. This
shifted aggregate supply left, the price level rose, and real GDP fell.
Other things the same, an increase in the expected price level shifts
short-run aggregate supply left.
Refer to Figure 4-22. At a price of $12, there is a
shortage of 4 units.
Refer to the below tables. Opportunity costs of producing military goods are:
smaller in Duckistan than Herbania.
A decrease in the money supply might indicate that the Fed had
sold bonds in an attempt to increase the federal funds rate.
A country can CONSUME some combination of goods outside its production possibilities curve by:
specializing and engaging in international trade.
Suppose that a decrease in the price of good X results in fewer units of good Y being demanded. This implies that X and Y are
substitute goods.
The concept of opportunity cost:
suggests that the use of resources in any particular line of production means that alternative outputs must be forgone.
A improvement in production technology will shift the
supply curve to the right.
Refer to the below diagram, which shows demand and supply conditions in the competitive market for product X. Given D0, if the supply curve moved from S0 to S1, then:
supply has decreased and equilibrium quantity has decreased.
In 2009, the U.S. government's budget deficit increased substantially. Other things the same, this means the
supply of loanable funds shifted to the left.
Suppose that salsa manufacturers sell 2 million bottles at $3.50 in one year, and 3 million bottles at $3 in the next year. Based on this information we can conclude that the:
supply of salsa has increased.
Suppose chocolate-dipped strawberries are currently selling for $30 per dozen, but the equilibrium price of chocolate-dipped strawberries is $20 per dozen. We would expect a
surplus to exist and the market price of chocolate-dipped strawberries to decrease.
The supply of money increases when
the Fed makes open-market purchases.
In response to the terrorist attacks of September 11, 2001, the government decided to allocate more resources toward defense goods. The government's decision reflects their assessment that:
the marginal benefits of additional defense goods outweighed the marginal cost.
In a closed economy, private saving is
the amount of income that households have left after paying for their taxes and consumption.
Opportunity cost is best defined as:
the amount of one product that must be given up to produce one more unit of another product.
If the price of SUVs increases, we would expect
the demand for gasoline to decrease.
Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then
the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original Real interest rate.
Suppose that over the past year, the real interest rate was 3 percent and the inflation rate was 1 percent. It follows that
the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 3 percent.
Suppose that over the past year, the real interest rate was 6 percent and the inflation rate was -2 percent. It follows that
the dollar value of savings increased at 4 percent, and the purchasing power of savings increased at 6 percent.
Suppose that over the past year, the real interest rate was 5 percent and the inflation rate was 3 percent. It follows that
the dollar value of savings increased at 8 percent, and the purchasing power of savings increased at 5 percent.
The real interest rate effect and wealth effect are important because they help to explain
the downward-sloping nature of the aggregate demand curve.
Suppose government expenditures on goods and services increase, transfers are unchanged, and taxes rise by less than the increase in expenditures. These changes in the government's budget cause
the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall.
Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?
the interest rate would decrease and the quantity of loanable funds would increase.
When the Fed sells government bonds,
the money supply decreases and the federal funds rate increases.
In the above figure, if A is the initial equilibrium point and there is an unanticipated rise in aggregate demand from AD 1 to AD 2, then
the new short-run equilibrium will be at point B.
In which case would people desire to borrow the most?
the nominal interest rate is 8% and the inflation rate is 7%
Money demand and money supply determine
the nominal interest rate.
The real rate of interest is
the nominal rate of interest minus the anticipated rate of inflation.
Which of the following is an economic explanation for why most college-aged movie stars do not attend college.
the opportunity cost in terms of reduced income is too great
An exception to the advice "go to college, stay in college, and earn a degree" occurs when:
the opportunity cost of attending college is extraordinarily high.
Which of the following affects Money demand?
the price level but not the nominal interest rate.
in comparing GDP data over a period of years, a difference between nominal and real GDP may arise because:
the price level may change over time.
In the above figure, start with the economy in equilibrium at point A. Then an unanticipated reduction in aggregate demand occurs. In the short run, this would cause
the price level to fall from P 1 to P 2, real Gross Domestic Product (GDP) to fall from y 1 to y 2, and the rate of unemployment to increase.
A\In the short run, an unexpected increase in aggregate demand typically causes
the price level to increase and the unemployment rate to fall.
Suppose the economy is in long-run equilibrium. If there is a sharp decline in government purchases combined with a significant increase in immigration of skilled workers, then in the short run,
the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.
Figure 26-2. The figure depicts a supply-of-loanable-funds curve and two demand-for-loanable-funds curves. Refer to Figure 26-2. What is measured along the horizontal axis of the graph?
the quantity of loanable funds
A decrease in government spending and the enactment of an investment tax credit would definitely cause
the quantity of loanable funds traded to increase.
Figure 34-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. Refer to Figure 34-2. What is measured along the horizontal axis of the left-hand graph?
the quantity of money
Figure 26-4. On the horizontal axis of the graph, L represents the quantity of loanable funds in billions of dollars. Refer to Figure 26-4. If the equilibrium quantity of loanable funds is $50 billion and if the equilibrium nominal interest rate is 8 percent, then
the rate of inflation is approximately 2 percent.
Suppose the market for loanable funds is in equilibrium. What would happen in the market for loanable funds, other things the same, if the Congress and President increased the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts?
the real interest rate would decrease and the quantity of loanable funds would increase.
When production costs rise,
the short-run aggregate supply curve shifts to the left.
The natural rate of unemployment is:
the sum of frictional and structural unemployment.
A decrease in the number of sellers in the market causes
the supply curve to shift to the left.
A policy that induces people to save more shifts
the supply of loanable funds and reduces interest rates.
If the government institutes policies that diminish incentives to save, then in the loanable funds market
the supply of loanable funds shifts leftward.
When the Fed buys bonds
the supply of money increases and so aggregate demand shifts right.
The production possibilities curve shows:
the various combinations of two goods that can be produced when society employs all of its scarce resources.
If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,
there is a shortage so interest rates will rise.
A production possibilities frontier can shift outward if
there is a technological improvement.
Consumers might leave a fast-food restaurant without being served because:
they conclude that the marginal cost (monetary plus time costs) exceeds the marginal benefit.
Consider the exhibit below for the following questions. Figure 33-4 Refer to Figure 33-4. If the economy starts at A, a decrease in the money supply moves the economy
to C in the long run.
If the supply of a product increases, then we would expect equilibrium price
to decrease and equilibrium quantity to increase.
The graph below pertains to the supply of paper to colleges and universities. Refer to Figure 4-25. All else equal, the return of college students to campus in the fall would cause a move from
x to y.
