Econ Final
The old adage, "Don't put all your eggs in one basket," is very similar to a modern bit of advice concerning financial matters:
"Diversify."
Which of the following lists is included in what economists call "money"?
Cash
When constructing a production possibilities frontier, which of the following assumptions is not made?
The quantities of the factors of production that are available are increasing over the relevant time period.
Suppose the cost of flying a 350-seat plane for an airline is $350,000 and there are 10 empty seats on a flight. The marginal cost of flying a passenger is
This cannot be determined from the information given.
At the equilibrium real interest rate in the open-economy macroeconomic model,
net capital outflow + domestic investment = saving.
If purchasing-power parity holds, then the value of the
real exchange rate is equal to one.
The shoeleather cost of inflation refers to the
waste of resources used to maintain lower money holdings.
Refer to Scenario 29-1. Assume that banks desire to continue holding the same ratio of excess reserves to deposits. What is the reserve requirement and the reserve ratio for Jaunian Banks?
4 percent, 5 percent
Refer to Scenario 34-1. The multiplier for this economy is
4.00.
Suppose that the adult population in the country of Atlantis is 140 million. If 90 million people are employed and 10 million are unemployed, then
40 million are not in the labor force.
Refer to Figure 30-3. At the end of the first year, the relevant money-supply curve was the one labeled MS1. At the end of the second year, the relevant money-supply curve was the one labeled MS2. Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for the second year?
43 percent
An increase in household saving causes consumption to
fall and aggregate demand to decrease.
Refer to Table 23-4. This country's inflation rate from 2016 to 2017 was
23.1%.
Which of the following is an example of U.S. foreign portfolio investment?
Erica, a U.S. resident, buys bonds issued by the Swiss government.
Public policy
can reduce both frictional unemployment and the natural rate of unemployment.
The rate of real economic growth is
underestimated using measures of income growth.
Refer to Table 23-2. What was country Krugeveaux's investment in 2019?
$1,988
Refer to Table 23-2. What was country Krugeveaux's GDP in 2019?
$7,603
Table 24-5 The following table shows the value of the consumer price index and the nominal interest rate for three consecutive years. Refer to Table 24-5. What was the real interest rate in Year 3?
2.0%
Which of the following statistics is usually regarded as the best single measure of a society's economic well-being?
Gross domestic product
Productivity is defined as the
amount of goods and services produced from each unit of labor input.
If the public decides to hold more currency and fewer deposits in banks, bank reserves
decrease and the money supply eventually decreases.
Crowding out occurs when investment declines because a budget
deficit makes interest rates rise.
The federal funds rate is the
interest rate at which banks lend reserves to each other overnight.
Resources are
scarce for households and scarce for economies.
The inflation tax refers to
the revenue a government creates by printing money.
Kayla faces risks and she pays a fee to ABC Company; in return, ABC Company agrees to accept some or all of Kayla's risks. ABC Company is
an insurance company.
Suppose a country increases trade restrictions. This country would be pursing
an inward-oriented, which most economists believe has adverse effects on the economy.
Refer to Table 23-2. What were country Krugeveaux's imports in 2019?
$140
Refer to Scenario 26-1. For this economy, private saving amounts to
$25,000.
If the reserve ratio is 4 percent, then the money multiplier is
25.
Refer to Table 29-4. The Bank of Cheerton's reserve ratio is
7.0 percent.
Which of the following would shift the long-run aggregate supply curve right?
An increase in the capital stock, but not an increase in the price level
Which of the following statements accurately describes catch-up growth?
In one generation, China will be one of the richest countries in the world, if China's GDP per person continues to grow 9% per year.
Refer to Figure 26-1. Which of the following events would shift the supply curve from S1 to S2?
In response to tax reform, households are encouraged to save more than they previously saved.
Which of the following statements is correct about the roles of economists?
In trying to improve the world, economists are policy advisers.
Maria is looking for work as a electrical engineer. Her prospects are good but so far she has not taken a job. Julie is looking for work in a paper mill. Every time Julie shows up for an interview, there are more people looking for work than there are openings. She realizes that it has been that way for a long time.
Maria is frictionally unemployed, and Julie is structurally unemployed.
Which of the following is correct?
Nominal and real interest rates do not always move together.
Refer to Figure 33-2. If the economy is in long-run equilibrium, a favorable shift in short-run aggregate supply curve would move the economy from
O to P.
Which of the following statements about trade is false?
With trade, one country must win and one country must lose.
Refer to Figure 2-8. The movement from point A to point B is
a movement along the demand curve.
Two of the economy's most important financial intermediaries are
banks and mutual funds.
When the Fed decreases the discount rate, banks will
borrow more from the Fed and lend more to the public. The money supply increases.
Suppose that a large number of people who used to work or seek work no longer do either. Other things the same, this makes
both the number of people unemployed and in the labor force fall.
Shifts in aggregate demand affect the price level in
both the short and long run.
The producer price index measures the cost of a basket of goods and services
bought by firms.
In recent years, the Federal Reserve has conducted policy by setting a target for the
federal funds rate.
If the Fed raised the reserve requirement, the demand for reserves would
increase, so the federal funds rate would rise.
Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has
increased measured GDP by the value added by the restaurant's preparation and serving of the meals.
Recently, Mina's wealth increased by $400. If her wealth were to increase by another $400 in the near future, then her utility would increase, but not by as much as it increased with the recent increase to her wealth. Based on this information, and graphing wealth on each horizontal axis, Mina's utility function
is upward sloping and her marginal utility function is downward sloping.
Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is temporarily
low and so supply a smaller quantity of labor.
In the short run, an increase in the money supply is likely to lead to
lower unemployment and higher inflation.
Purchasing-power parity theory does not hold at all times because
many goods are not easily transported and the same goods produced in different countries may be imperfect substitutes.
Suppose the interest rate is measured along the vertical axis on a graph. When the interest rate changes, there will be a
movement along the curve.
Because a government budget deficit represents
negative public saving, it decreases national saving.
Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is
no greater than 10.83 percent.
According to the assumptions of the quantity theory of money, if the money supply decreases by 5 percent, then
nominal GDP would fall by 5 percent; real GDP would be unchanged.
The manager of the bank where you work tells you that your bank has $10 million in excess reserves. She also tells you that the bank has $500 million in deposits and $455 million in loans. Given this information you find that the reserve requirement must be
7.0 percent.
In the circular-flow diagram,
income payments flow from firms to households.
In the simple circular-flow diagram, with households and firms, GDP can be computed as the
income received by households, in the form of wages, rent and profit.
Suppose that the real return from operating factories in France rises relative to the real rate of return in the United States. Other things the same, this will
increase U.S. net capital outflow and decrease French net capital outflow.
In the short run, open-market purchases
increase investment and real GDP, and decrease interest rates.
Refer to Figure 26-4. Starting at point A, a change in tax laws that encouraged households to save more would likely cause the quantity of loanable funds traded to
increase to $150 and the interest rate to fall to 2% (point D).
Refer to Figure 26-4. Starting at point A, the enactment of an investment tax credit would likely cause the quantity of loanable funds traded to
increase to $150 and the interest rate to rise to 6% (point C).
When the Fed buys bonds the supply of money
increases and so aggregate demand shifts right.
An increase in the minimum wage above the equilibrium wage
increases structural unemployment.
Changes in the GDP deflator reflect
only changes in prices.
If a country has positive net capital outflows, then its net exports are
positive, and its saving is larger than its domestic investment.
The overriding reason why households and societies face many decisions is that
resources are scarce.
Ahmet decided to increase the number of stocks in his portfolio. In doing so, Ahmet reduced
the firm-specific risk, but not the market risk of his portfolio.
If the Fed increases the money supply,
the interest rate decreases, which tends to raise stock prices.
The discount rate is
the interest rate the Fed charges banks.
The future value of a deposit in a savings account will be larger
the longer a person waits to withdraw the funds.
Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate rises, then
the nominal interest rate rises, but the real interest rate does not.
For a risk averse person,
the pain of losing $1,000 on a bet exceeds the pleasure of winning $1,000 on a bet.
Indexation refers to
using a law or contract to automatically correct a dollar amount for the effects of inflation.
The opportunity cost of an item is
what you give up to get that item.
To encourage formation of small businesses, the government could provide subsidies; these subsidies
would not be included in GDP because they are transfer payments.
Refer to Table 23-3. What was the growth rate of real GDP for 1930?
−8.62%. Real GDP is a better gauge of economic well-being than nominal GDP.
During some year a country had exports of $85 billion, imports of $60 billion, and domestic investment of $130 billion. What was its saving during the year?
$155 billion
You are tearing down a building and find $1 in change that someone lost when working on the building 140 years ago. If, instead of being careless with the $1 in change, this person had deposited it into a bank and earned 2 percent interest every year for 140 years, how much would be in the account today according to the rule of 70?
$16
Which of the following pairs of portfolios exemplifies the risk-return tradeoff?
For Portfolio A, the average return is 5 percent and the standard deviation is 15 percent; for Portfolio B, the average return is 8 percent and the standard deviation is 25 percent.
Which of the following best illustrates diversification?
Instead of holding only the stocks of companies engaged in the banking business, a person decides to hold stock in a number of different companies producing different goods and services.
Mixster Concrete Company is considering buying a new cement truck. The owners and their accountants decide that this is the profitable thing to do. Before they can buy the truck, the interest rate and price of trucks change. In which case do these changes both make them less likely to buy the truck?
Interest rates rise and truck prices rise.
Refer to Figure 33-4. The short-run equilibrium is defined by the given AD and SRAS curves. Which of the long-run aggregate-supply curves is consistent with the economy being in a recession?
LRAS3
A worker in Thailand can earn $12 per day making cotton cloth on a hand loom. A worker in the United States can earn $82 per day making cotton cloth with a mechanical loom. What is the likely explanation for the difference in wages?
Labor is more productive making cotton cloth with a mechanical loom than with a hand loom.
Which of the following equations is correct?
S = I + NCO
Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?
With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.
When a minimum-wage law forces the wage to remain above the equilibrium level, the result is
a surplus of labor and a shortage of jobs.
The CPI is a measure of the overall cost of the goods and services bought by
a typical consumer, and the CPI is computed and reported by the Bureau of Labor Statistics.
When you list prices for necklaces sold on your website, www.sparklingjewels.com, in dollars, this best illustrates money's function as
a unit of account.
Other things the same, a decrease in the Australian real interest rate induces
foreigners to buy fewer Australian assets, which increases Australia's net capital outflow.
A company in Panama pays a U.S. architect to design a factory building. By itself this transaction
increases Panama's imports and so decreases the Panama's trade balance.
Suppose a country has only a sales tax. Now suppose it replaces the sales tax with an income tax that includes a tax on interest income. This would make equilibrium
interest rates rise and the equilibrium quantity of loanable funds fall.
Proprietary technology is knowledge that is known
only by the company that discovered it.
Chloe's college raises the cost of room and board per semester. This increase raises Chloe's opportunity cost of attending college
only if the amount she would have to pay for room and board if she didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Chloe's incentive to attend college.
If the supply of dollars in the market for foreign-currency exchange shifts left, then the exchange rate
rises and the quantity of dollars exchanged for foreign currency falls.
Refer to Figure 34-5. An increase in taxes will
shift aggregate demand from AD2 to AD3.
If at a given real interest rate desired national saving is $120 billion, domestic investment is $40.5 billion, and net capital outflow is $94.5 billion, then at that real interest rate in the loanable funds market there is a
shortage. The real interest rate will rise.
Evidence from research studies by economists
shows that increased unemployment benefits decrease the job search efforts of the unemployed.
Efficiency means that
society is getting the most it can from its scarce resources.
If the interest rate is 5 percent, then what is the present value of $4,000 to be received in 16 years?
$1,832.45
Refer to Table 23-2. What were country Krugeveaux's government purchases in 2019?
$1,991
Over the last century, U.S. real GDP per person grew at a rate of about
2 percent per year, so that it is now 8 times as high as it was a century ago.
According to the rule of 70, if the interest rate is 10 percent, about how long will it take for the value of a savings account to double?
About 7 years
Which of the following is a certificate of indebtedness?
Bonds but not stocks
A U.S. grocery chain borrows money to buy a warehouse in Ohio and another in Italy. Borrowing for which warehouse(s) is included in the demand for loanable funds in the United States?
Both the one in Ohio and the one in Italy.
Country K had a population of 1,400, of whom 350 worked an average of 8 hours a day and had a productivity of 44. Country L had a population of 2,500, of whom 1,250 worked 6 hours a day and had productivity of 41.
Country L had the higher level of real GDP and real GDP per person.
Refer to Figure 33-6. Suppose the economy starts at R. Stagflation would be consistent with the move to
P3 and Y1.
Which of the following is not a function of money?
Protection against inflation
If the stock market crashes, then
aggregate demand decreases, which the Fed could offset by purchasing bonds.
The level of real GDP per person
and the growth rate of real GDP per person vary widely across countries.
Suppose that the U.K. imposes an import quota on aluminum. The quota makes the real exchange rate of the British pound
appreciate but does not change the real interest rate in the U.K..
In determining living standards, productivity plays a key role for
both nations and individuals.
Other things the same, as the price level decreases it induces greater spending on
both net exports and investment.
An increase in the price of bread produced domestically will be reflected in
both the GDP deflator and the consumer price index.
Changes in nominal variables are determined mostly by the quantity of money and the monetary system according to
both the classical dichotomy and the quantity theory of money.
For a number of years country A had inflation of 3 percent but for the last five years has had inflation of 6 percent. Country B had inflation of 4 percent for many years, but very recently inflation unexpectedly rose to 9 percent. Other things the same, in which of the countries would the higher inflation rate be more likely to reduce unemployment?
country B but not country A
If expected inflation is constant and the nominal interest rate decreases by 4 percentage points, then the real interest rate
decreases by 4 percentage points.
In the last part of the 1800s
deflation made it harder for farmers to pay off their debt.
The initial impact of an increase in an investment tax credit is to shift aggregate
demand right.
Refer to Figure 25-1. The curve becomes flatter as the amount of capital per worker increases because of
diminishing returns to capital.
The unemployment rate is computed as the number of unemployed
divided by the labor force, all times 100.
Gabrielle, an Italian citizen, uses some previously obtained dollars to purchase a bond issued by a U.S. company. This transaction
does not change U.S. net capital outflow.
Net capital outflow
is always equal to net exports.
Frictional unemployment is thought to explain relatively
short spells of unemployment, while structural unemployment is thought to explain relatively long spells of unemployment.
Most spells of unemployment are
short, but most unemployment observed at any given time is long term.
Aggregate demand includes
the quantity of goods and services the government, households, firms, and customers abroad want to buy.
The real interest rate tells you
how fast the purchasing power of your bank account rises over time.
Which of the following is an example of a capital input?
A computer
For a closed economy, GDP is $31 trillion, consumption is $7 trillion, taxes are $3.0 trillion and the government runs a surplus of $4 trillion. What are private saving and national saving?
$21.0 trillion and $25.0 trillion, respectively
If in some year nominal GDP was $20 billion and the GDP deflator was 80, what was real GDP?
$25.0 billion
A company sells steel to a scooter company for $150. The scooter company uses the steel to produce a scooter, which it sells for $290. Taken together, these two transactions contribute
$290 to GDP.
Table 24-4 Will's expenditures on food for three consecutive years, along with other values, are presented in the following table.Refer to Table 24-4. To the nearest dollar, Will's Year 1 food expenditures in Year 2 dollars amount to Correct Answer
$4,160.
Refer to Scenario 29-1. Assuming the only other thing Jaunian banks have on their balance sheets is loans, what is the value of existing loans made by Jaunian banks?
$4,785 million
If the CPI was 90 in 1975 and is 225 today, then $100 today purchases the same amount of goods and services as
$40.00 purchased in 1975.
Sanjay would like to double the money in his retirement account in ten years. According to the rule of 70, what rate of interest would he need to earn to attain his objective?
7 percent
Suppose private saving in a closed economy is $21b and investment is $8b.
The government budget deficit must equal $13b.
Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC2 + MPC3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of
2.5.
The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?
3 percent
Consider a closed economy. In which of the following cases national saving must equal private saving?
The government's tax revenue is equal to its expenditures.
In 2009, Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?
Both the increased funding for states and the tax cuts
Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?
As the price level increases, the interest rate rises, so spending falls.
Fiscal policy affects the economy
in both the short and long run.
Other things the same, a country that increases its savings rate will have
higher future capital and higher future real GDP per person.
Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot.
The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.
Minimum-wage laws are least likely to affect the wages paid to
highly-educated workers.
Microeconomics is the study of
how individual households and firms make decisions.
Refer to Figure 2-7. The graph shown is known as a
scatterplot.
Suppose you are deciding whether to buy a particular bond. If you buy the bond and hold it for 4 years, then at that time you will receive a payment of $10,000. If the interest rate is 6 percent, you will buy the bond if its price today is no greater than
$7,920.94.
A country has a net capital outflow of $600 billion and domestic investment of $130 billion. What is the quantity of loanable funds demanded?
$730 billion
Laws that enforce chemical hazard control are examples of government intervention that is intended to reduce
externalities.
If the reserve ratio is 5 percent, then $500 of additional reserves would ultimately generate
$10,000 of money.
Which of the following is the correct way to compute the future value of $100 put into an account that earns 4 percent interest for 10 years?
$100(1 + .04)10
The manager of the bank where you work tells you that the bank has $100 million in deposits and $22 million dollars in loans. If the reserve requirement is 8 percent, how much is the bank holding in excess reserves?
$14 million
Refer to Table 29-2. What is the M1 money supply in Florencial?
$505 billion
If a bank with a required reserve ratio of 15 percent receives a deposit of $600, it now has a
$510 increase in excess reserves and a $90 increase in required reserves.
A country has national saving of $60 billion, government expenditures of $40 billion, domestic investment of $10 billion, and net capital outflow of $45 billion. What is its supply of loanable funds?
$60 billion
Refer to Scenario 29-1. Suppose the Bank of Jaune loaned the banks of Jaune $30 million. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply change?
$600 million
Suppose that in a closed economy GDP is equal to $33,000, consumption equal to $18,000, government purchases equal $6,500, and taxes equal $6,750. What are private saving, public saving, and national saving?
$8,250, $250, and $8,500, respectively
Sari puts $100 into an account with an interest rate of 10 percent. According to the rule of 70, about how much does she have at the end of 21 years?
$800
Suppose a closed economy had public saving of −$7 trillion and private saving of $16 trillion. What are national saving and investment for this country?
$9 trillion, $9 trillion
In an open economy, gross domestic product equals $2,460 billion, consumption expenditure equals $1,435 billion, government expenditure equals $325 billion, investment equals $560 billion, and net capital outflow equals $375 billion. What is national saving?
$935 billion
Suppose a basket of goods and services has been selected to calculate the CPI and Year 1 has been selected as the base year. In Year 1, the basket's cost was $50; in Year 2, the basket's cost was $52; and in Year 3, the basket's cost was $55. The value of the CPI in Year 3 was
110.0.
Scenario 24-1 Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year. Refer to Scenario 24-1. In real terms, the income of Mia's son amounts to about what percentage of Mia's income?
1164.8 percent
Last year, you earned a nominal wage of $10 per hour and the price level was 120. This year your nominal wage is $11 per hour, but you are unable to purchase the same amount of goods as last year. The price level this year must be
135.
If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?
2 gallons of Argentinean milk/1 gallon of U.S. milk
Suppose a burrito costs $6. Clara holds $120. What is the real value of the money she holds?
20 burritos. If the price of burritos rises, to maintain the real value of her money holdings she needs to hold more dollars.
If imports = 500 billion euros, exports = 700 billion euros, purchases of domestic assets by foreign residents = 600 billion euros, and purchases of foreign assets by domestic residents = 800 billion euros, what is the quantity of euros demanded in the market for foreign-currency exchange?
200 billion euros
Refer to Figure 34-1. There is an excess demand for money at an interest rate of
3.25 percent.
If the real exchange rate for coal is 1.5, the price of coal in the United States is $50 per ton, and the price of coal in Britain is 20 British pounds per ton, what is the nominal exchange rate?
3/5 or 0.6 pounds per dollar
Last year real GDP per person in the imaginary nation of Olympus was $4,260. The year before it was $4,100. By about what percentage did real GDP per person grow during the period?
4 percent
Refer to Table 2-3. What is the opportunity cost of increasing the production of rye from 700 bushels to 1200 bushels?
500 bushels of corn
Refer to Table 28-3. What is the U-3 measure of labor underutilization?
6.2%
Scenario 24-1 Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year. Refer to Scenario 24-1. In real terms, Mia's income amounts to about what percentage of her son's income?
8.6 percent
Refer to Table 23-3. If prices had remained constant between 1929 and 1930, Nominal GDP would have decreased
8.62%.
When you were 10 years old, your grandparents put $500 into an account for you paying 7 percent interest. Now that you are 18 years old, your grandparents tell you that you can take the money out of the account. What is the balance to the nearest cent?
859.09
Table 24-1 The following table pertains to Cheeseland, an economy in which the typical consumer's basket consists of 11 bushels of apples and 7 bushels of almond . Refer to Table 24-1. If Year 1 is the base year, then the CPI for Year 2 was
92.22.
Which of the following both increase the money supply?
A decrease in the discount rate and a decrease in the interest rate on reserves
Which of the following changes would increase the present value of a future payment?
A decrease in the interest rate
Which of the following shifts aggregate demand to the left?
A decrease in the money supply
Refer to Figure 2-5. Which of the following events would explain the shift of the production possibilities frontier from A to B?
A general technological advance
On which of these bonds is the prospect of default most likely?
A junk bond
Which of the following includes everyone in the adult population that the Bureau of Labor Statistics counts as "unemployed"?
Anyone who is not employed, is available for work, has looked for work in the past four weeks, and anyone who is waiting to be recalled from a job from which they have been laid off
Which of the following counts as part of the supply of loanable funds?
Bank deposits and purchases of bonds
Natalia worked part-time for her mother's business without pay. Tabitha was absent from work because she had strep throat. Who is counted as "employed" by the Bureau of Labor Statistics?
Both Natalia and Tabitha
You are thinking of buying a bond from Bluestone Corporation. You know that this bond is long term and you know that Bluestone's business ventures are risky and uncertain. You then consider another bond with a shorter term to maturity issued by a company with good prospects and an established reputation. Which of the following is correct?
Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by Bluestone.
Refer to Scenario 33-2. In the short run what happens to the price level and real GDP?
Both the price level and real GDP fall.
Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
By $30 billion
Refer to Figure 2-1. Chloe receives her first paycheck for working as a pretzel vendor. To which of the arrows does this transaction directly contribute?
C and D
Which of the following steps does an economist not take when studying the economy?
Conduct a laboratory experiment in order to generate data
Country Y has a population of 1,500, of whom 375 work 7 hours a day to make 128,000 final goods. Country Z has a population of 2,200, of whom 880 work 5 hours a day to make 384,000 final goods.
Country Y has lower productivity and lower real GDP per person than country Z.
Joe and Bob purchase oranges at a grocery store, but Bob also grows oranges in his backyard. Regarding these two practices, which of the following statements is correct?
Only Joe's and Bob's grocery store purchases are included in GDP.
Refer to Figure 27-3. From the appearance of the utility function, we know that
Dexter gains more satisfaction when his wealth increases by X dollars than he loses in satisfaction when his wealth decreases by X dollars.
The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the
Fisher Effect.
The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:
Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate.
Suppose the government passes a law eliminating holidays and, as a result, the production of goods and services increases because people work more days per year (and thus enjoy less leisure per year). Based on this scenario, which of the following statements is correct?
GDP would definitely increase because GDP excludes leisure.
Which of the following statements does not apply to a market economy?
Government policies are the primary forces that guide the decisions of firms and households.
In the simple circular-flow diagram, which of the following is not true?
Households are the only decision makers.
With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?
Interest-rate effect, exchange-rate effect, wealth effect
The banking system currently has $10 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 10 percent. If the Fed raises the reserve requirement to 12.5 percent and at the same time buys $1 billion worth of bonds, then by how much does the money supply change?
It falls by $12 billion.
A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve requirement.
It has $800 in reserves and $9,200 in loans.
Refer to Scenario 33-1. What would happen to the dollar?
It would appreciate in foreign exchange markets making U.S. goods more expensive compared to foreign goods
Last year, Jane spent all of her income to purchase 200 units of corn at $5 per unit. This year, she spent all of her income to purchase 180 units of corn at $6 per unit.
Jane's nominal income increased this year, but her real income decreased.
Kamila is not working but is available for work. Daniel was fired but has not looked for work during the last two months. Who does the Bureau of Labor Statistics count as "unemployed"?
Kamila but not Daniel
Refer to Figure 33-4. The short-run equilibrium is defined by the given AD and SRAS curves. Which of the long-run aggregate-supply curves is consistent with a short-run economic an expansion?
LRAS1
Which of the following is not included in either M1 or M2?
Large time deposit
Which of the following is an example of a nonrenewable resource?
Livestock
Refer to Scenario 33-1. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand?
Net exports would fall which by itself would decrease U.S. aggregate demand.
Parker says that the present value of $350 to be received one year from today if the interest rate is 6 percent is less than the present value of $350 to be received two years from today if the interest rate is 3 percent. Ryan says that $350 saved for one year at 6 percent interest has a smaller future value than $350 saved for two years at 3 percent interest.
Only Ryan is correct.
Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the following makes the price of FineLine Corporation Stock fall?
Only the interest rate rising
Which of the following is an example of a positive, as opposed to normative, statement?
Prices rise when the government prints too much money.
When ranking movies by nominal box office receipts, what important fact is overlooked?
Prices, including those for movie tickets, have been rising over time.
In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would happen to private and national saving?
Private saving would rise and national saving would fall.
Refer to Figure 2-4, Graph (a) and Graph (b). Which of the following is not a result of the shift of the economy's production possibilities frontier from Graph (a) to Graph (b)?
Production of 2 tractors and 2 trucks becomes efficient.
Refer to Figure 33-2. If the economy is in long-run equilibrium, then an adverse shift in short-run aggregate supply would move the economy from
Q to R.
In the open-economy macroeconomic model, the market for loanable funds identity can be written as
S = I + NCO.
Which of the following industries has a marginal cost that is close to zero?
Software
Which of the following countries benefited significantly from the catch-up effect in the last half of the twentieth century?
South Korea
When Bill, a Mexican citizen, sells dresses he desings to Spain, the sale is
Spain's import and Mexico's export.
Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in his retirement account. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?
Stan
Which of the following statements is correct?
The CPI can be used to compare dollar figures from different points in time.
The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the
The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the
Economists who are primarily responsible for advising Congress on economic matters work in which agency?
The Congressional Budget Office
Which of the following is correct?
The Federal Reserve has 12 regional banks. The Board of Governors has up to 7 members who serve 14-year terms.
An automobile manufacturer unexpectedly announces that it has hired a new chief executive officer. It is widely believed that the presence of this individual will raise the profitability of the corporation. At the same time interest rates unexpectedly rise. Which of the above would tend to make the price of the stock rise?
The announcement but not the rise in interest rates
Which of the following statements exemplifies a principle of individual decision making?
The cost of something is what you give up to get it.
Refer to Figure 32-3. Which curve shows the relation between the exchange rate and net exports?
The demand curve in graph (c).
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 could prompt you to reverse this decision?
The marginal benefit of going to Spain increases.
Rami Home Builders, Inc., has built 24 houses so far this year at a total cost to the company of $4.2 million. If the company builds a 25th house, its total cost will increase to $4.375 million. Which of the following statements is correct?
The marginal cost of the 25th house, if it is built, will equal $175,000.
According to the classical dichotomy, which of the following increases when the money supply increases?
The nominal wage
Some poor countries appear to be falling behind rather than catching up with rich countries. Which of the following could explain the failure of a poor country to catch up?
The poor country has a health epidemic such as the Zika virus.
Which of the following items is the one type of household expenditure that is categorized as investment rather than consumption?
The purchase of a new house
Sage decides to cash in all his savings to open a recording studio. He has three accounts to cash in. The first earned 9 percent for two years. The second earned 6 percent for three years. And the last earned 3 percent for six years. Supposing he started with $5,000 in each account, from which account will he get the most cash?
The six-year account at 3 percent
Which of the following is an example of a normative, as opposed to a positive, statement?
The social security system is a good system and it deserves to be preserved as it is.
Which of the following can be measured by the level of real GDP per person?
The standard of living but not productivity
The Karmic Deed Restaurant uses all of the following to produce vegetarian meals. Which of them is an example of physical capital?
The tables and chairs in the restaurant
Refer to Figure 2-3. Suppose this economy is producing at point B. Which of the following statements would best explain this situation?
There is widespread unemployment in the economy.
Which is the most accurate statement about trade?
Trade can make every nation better off.
Which of the following is not a cause of the decline in the U.S. men's labor-force participation rate over the past several decades?
With more women employed, there are fewer jobs now available to men.
An organization that tries to encourage the flow of investment from advanced countries to poor countries is the
World Bank.
Refer to Figure 33-1. The natural level of output occurs at
Y2.
If the consumer price index was 93 in Year 1, 97 in Year 2, and 100 in Year 3, then the base year must be
Year 3.
Economists who are skeptical about the relevance of "liquidity traps" argue that
a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.
The consumer price index tries to gauge how much incomes must rise to maintain
a constant standard of living.
You bought some shares of stock and, over the next year, the price per share increased by 5 percent, as did the price level. Before taxes, you experienced
a nominal gain, but no real gain, and you paid taxes on the nominal gain.
Investment is
a small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
Social Security payments are
excluded from GDP because they do not reflect the economy's production.
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.
The price level rises in the short run if
aggregate demand shifts right or aggregate supply shifts left.
Trade
allows specialization, which reduces costs.
The United Kingdom is
an advanced economy, and over the past century its rate of economic growth has been lower than that of the United States.
Rory has purchased a product from an insurance company that requires the insurance company to pay him $5,000 each year, and he will continue to receive these payments until he dies. This series of payments is called
an annuity.
The willingness of citizens to pay for vaccinations does not include the benefit society receives from having vaccinated citizens who cannot transmit an illness to others. This extra benefit society gets from vaccinating its citizens is known as
an externality.
Economic expansions in Europe and China would cause the U.S. price level
and real GDP to rise.
If the demand for loanable funds shifts left, then the real interest rate
and the equilibrium quantity of loanable funds both fall.
Suppose the city of Des Moines has a high credit rating, and so when Des Moines borrows funds by selling bonds, the city's high credit rating
and the tax status of municipal bonds both contribute to a lower interest rate than would otherwise apply.
When inflation causes relative-price variability consumer decisions,
are distorted and the ability of markets to efficiently allocate factors of production is impaired.
Labor unions
are similar to cartels.
Suppose your finance professor has been offered a corporate job with a 25 percent pay increase. He has decided to take the job. For him, the marginal
benefit of leaving was greater than the marginal cost.
The natural rate of unemployment includes
both frictional and structural unemployment.
Refer to Table 2-3. Based on the values in the table, the production possibilities frontier is
bowed outward indicating increasing opportunity costs.
A large and sudden movement of funds out of a country is called
capital flight.
To open a print shop you need printers, computers, and furniture. Economists call these expenditures
capital investment.
Communist countries worked under the premise that
central planners were in the best position to determine the allocation of scarce resources in the economy.
Domestic saving must equal domestic investment in
closed, but not open economies.
You are considering staying in college another semester so that you can complete a major in finance. In deciding whether or not to stay you should
compare the cost of staying one more semester to the benefits of staying one more semester.
Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could
decrease the money supply, which will increase interest rates.
To be counted as "employed" in the U.S. labor force statistics, a person
does not have to be working for pay if they are working for a family business and does not have to be working full time.
Refer to Figure 32-5. Suppose that initially the economy is in equilibrium at r1 (point d) and e3 (point i). If the government removes import quotas, the exchange rate will move to
e1.
It is likely that a constitutional amendment that required the government always to run a balanced budget would
eliminate the economy's automatic stabilizers.
Joshua is working from home for a start-up company developing mobile apps. The Bureau of Labor Statistics counts Joshua as
employed.
Purchasing-power parity describes the forces that determine
exchange rates in the long run.
Suppose a country's net capital outflow does not change, but its investment declines by $420 billion. Its saving must have
fallen by $420 billion, but its net exports are unchanged.
If the exchange rate is expressed as euros/dollar, the dollar is said to depreciate against the euro if the exchange rate
falls. Other things the same, it will cost fewer euros to buy U.S. goods
If you are vacationing in Spain and the dollar depreciates relative to the euro, then the dollar buys
fewer euros. It will take more dollars to buy a good that costs 50 euros.
Refer to Figure 2-2. If households are buyers in the markets represented by Box C of this circular-flow diagram, then
firms are sellers in the markets represented by Box C.
In recent decades, Americans have increased their purchase of stocks of foreign-based companies. The Americans who have bought these stocks were engaged in
foreign portfolio investment.
Instead of conducting laboratory experiments to generate data to test their theories, economists often
gather data from historical episodes of economic chang
Net exports of a country are the value of
goods and services exported minus the value of goods and services imported.
The "invisible hands" ability to coordinate the decisions of the firms and households in the economy can be hindered by
government actions that distort prices.
The basic principles of economics suggest that
government should become involved in markets when those markets fail to produce efficient or fair outcomes.
In Belgium, Norway, and Sweden, the percentage of workers who belong to unions is
greater than it is in the United States.
If the real exchange rate for the dollar is above the equilibrium level, the quantity of dollars supplied in the market for foreign-currency exchange is
greater than the quantity demanded and the dollar will depreciate.
During a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that the GDP deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person
grew, but by less than 12 percent.
Economists at the Department of Justice
help enforce the nation's antitrust laws.
Economists generally argue that
high inflation is costly, but costs of moderate inflation are not nearly as large as the public believes.
James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is
higher than he had expected, and the real value of the loan is higher than he had expected.
Teenagers have more frequent unemployment spells and spend more time searching for jobs. Other thing the same, this means that teenagers have a
higher unemployment rate. If a larger portion of the adult population were teenagers, the natural rate of unemployment would be higher.
Shoeleather costs arise when higher inflation rates induce people to
hold less money.
In the CPI, goods and services are weighted according to
how much consumers buy of each good or service.
A policy that increases saving will
improve economic growth and health outcomes.
A Texas household receives a Social Security check for $1500, which it uses to purchase a $40 pair of shoes made in Thailand by a Thai firm, a $1240 television made by a Korean firm in Korea, and $220 on groceries from a local store. As a result, U.S. GDP
increases by $220.
According to the liquidity preference theory, an increase in the overall price level of 10 percent
increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.
When the price level rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls.
When the quality of a good improves while its price remains the same, the purchasing power of the dollar
increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
The term economists use to describe a situation in which the economy's overall price level is rising is
inflation.
The value of goods added to a firm's inventory in a certain year is treated as
investment, since GDP aims to measure the value of the economy's production that year.
A country's trade balance
is greater than zero only if exports are greater than imports.
You hold bonds issued by the city of Sacramento, California. The interest you earn each year on these bonds
is not subject to federal income tax and so these bonds pay a lower interest rate than otherwise comparable bonds issued by the U.S. government.
The catch-up effect refers to the idea that
it is easier for a country to grow fast and so catch-up if it starts out relatively poor.
Refer to Figure 32-4. In the market for foreign-currency exchange, the effects of an increase in the budget surplus shown in graph (c) can be illustrated as a move from j to
k.
When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, the price level increases if money demand shifts
left and decreases if money supply shifts left.
The term used to describe a situation in which markets do not allocate resources efficiently is
market failure.
During the 1970s, U.S. prices rose by 7.8 percent per year and real GDP increased. Holding velocity constant and using the quantity equation, we conclude that
money growth must have been greater than the growth of real income.
When the market for money is drawn with the value of money on the vertical axis and the quantity of money on the horizontal axis, if the Fed sells bonds then the
money supply and the price level decrease.
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 and output rises.
The effect of an increase in the price level on the aggregate-demand curve is represented by a
movement to the left along a given aggregate-demand curve.
Table 24-2 The following table pertains to Shishkaton, an economy in which the typical consumer's basket consists of 15 pounds of prunes and 7dolls. Refer to Table 24-2. The inflation rate was
negative in Year 2 and negative in Year 3.
Refer to Figure 32-3. At an interest rate of 4 percent, the diagram indicates that
net capital outflow + domestic investment = national saving.
Suppose exchange rates are defined as foreign currency per dollar and foreign goods per U.S. goods. According to purchasing-power parity, if the price of a basket of goods in the United States rose from $1,500 to $2,000 and the price of the same basket of goods rose from 600 units of some other country's currency to 1,000 units of that country's currency, then the
nominal exchange rate would appreciate.
The price level is a
nominal variable.
The behavior of market prices over time indicates that natural resources are
not a limit to economic growth.
Changes in real GDP reflect
only changes in the amounts being produced.
The adage, "There ain't no such thing as a free lunch," means
people face tradeoffs.
Refer to Figure 34-1. If the current interest rate is 3.25 percent,
people will sell more bonds, which drives interest rates up.
When the government redistributes income from the wealthy to the poor,
people work less and produce fewer goods and services.
When economists talk about growth in the economy, they measure that growth as the
percentage change in real GDP from one period to another.
The use of theory and observation is more difficult in economics than in sciences such as biology due to the difficulty in
performing an experiment in an economic system.
If the value of goods and services that Mexico purchases from the United States is greater than the value of goods and services that the United States purchases from Mexico, then the United States has
positive net exports and a trade surplus with Mexico.
The slope of the supply of loanable funds curve represents the
positive relation between the interest rate and saving.
Refer to Figure 2-4, Graph (a). Production at point Q is
possible but inefficient.
In a closed economy, national saving equals
private saving plus public saving.
Productivity is the amount of goods and services
produced for each hour of a worker's time. It is linked to a nation's economic policies.
Other things the same, in the open-economy macroeconomic model, if the real exchange rate rises, the
quantity of dollars demanded falls.
Other things the same, automatic stabilizers tend to
raise expenditures during recessions and lower expenditures during expansions
An increase in the money supply will
reduce interest rates, increasing investment and aggregate demand.
Efficiency
refers to how much a society can produce with its resources. Equality refers to how evenly the benefits from using resources are distributed among members of society.
In 2010 the U.S. government was running a large deficit. Some were concerned that pressures might be put on the Federal Reserve to purchase government bonds to help the government finance this deficit. If the Fed were to buy government bonds to help the government finance its expenditures, then the price level would
rise, so the value of money would fall.
If the supply for loanable funds shifts to the left, then the equilibrium interest rate
rises and the quantity of loanable funds falls.
If over a short time there is an increase in the number of people retired and a decrease in the number of people working, then productivity
rises but real GDP per person falls.
If the nominal exchange rate is expressed as foreign currency per dollar, which of the following would both make Americans more willing to buy Italian goods? The nominal exchange rate
rises, the price of goods in Italy falls.
The dollar is said to appreciate against the euro if the exchange rate
rises. Other things the same, it will cost more euros to buy U.S. goods.
Fundamentally, economics deals with
scarcity.
Suppose the cost of flying a 200-seat plane for an airline is $100,000 and there are 10 empty seats on a flight. If the marginal cost of flying a passenger is $200 and a standby passenger is willing to pay $300, the airline should
sell the ticket because the marginal benefit exceeds the marginal cost.
Refer to Figure 33-3. In Figure 33-3, Point B represents a
short-run equilibrium, and Point A represents a long-run equilibrium.
If the United States raised its tariff on tires, then at the original exchange rate there would be a
shortage in the market for foreign-currency exchange, so the real exchange rate would appreciate.
Cash, fine art, and silver are all
stores of value.
Refer to Figure 32-3. Suppose that the government goes from a budget surplus to a budget deficit. The effects of the change could be illustrated by shifting the
supply curve in panel a to the left and the supply curve in graph (c) to the left.
If the quantity of loanable funds supplied is greater than the quantity demanded, then there is a
surplus of loanable funds and the interest rate will fall.
In a closed economy, public saving is the amount of
tax revenue that the government has left after paying for its spending.
Suppose the Federal Reserve announces that it will be making a change to a key interest rate to increase the money supply. This is likely because
the Federal Reserve is worried about unemployment.
Both the production of goods and services and the unemployment rate are used to measure
the business cycle.
Suppose that in 2018, the producer price index increases by 1.5 percent. As a result, economists most likely will predict that
the consumer price index will increase in the future.
If the price of Italian shoes imported into the United States increases, then
the consumer price index will increase, but the GDP deflator will not increase.
If the United States were to impose import quotas
the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not.
During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would shift
the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left.
Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2,
the equilibrium value of money decreases.
In the circular-flow diagram, in the markets for
the factors of production, households are sellers and firms are buyers.
The Employment Act of 1946 states that
the government should promote full employment and production.
Unions contribute to
the natural rate of unemployment but not frictional unemployment.
The term inflation is used to describe a situation in which
the overall level of prices in the economy is increasing.
During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of inflation. A likely explanation of these facts is that
the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey
If for some reason Americans desired to increase their purchases of foreign assets, then other things the same
the real exchange rate would fall and the quantity of dollars exchanged in the market for foreign currency would rise.
If net exports is a negative number for a particular year, then
the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.
Refer to Figure 33-2. If the economy starts at O, a decrease in the money supply moves the economy
to Q in the long run.
Sasha is on temporary layoff. The Bureau of Labor Statistics counts Sasha as
unemployed and in the labor force.
An example of an automatic stabilizer is
unemployment benefits.
The Federal Reserve
was created in 1913.
