ECON FINAL EXAM & QUIZZES
The average tax on a professor's income of $100,000 is 18%, and the marginal tax rate above $100,000 is 45%. If the professor teaches during the summer and earns an additional $10,000 (bringing her total earnings for the year to $110,000), how much of the summer income does she keep after paying taxes?
$5,500
The United States imports televisions from Japan and Japan imports computer chips from the United States. If the theory of comparative advantage guides trade between the two countries, it must be true that
- The United States has a comparative advantage in computer chips. - The opportunity cost of producing televisions in Japan is lower than that in the United States. - The opportunity cost of producing computer chips in the United States is lower than that in Japan.
An increase in the money supply can typically affect the economy with a lag of _____ months.
6 to 18
Which of the following choices correctly illustrates how changes in opportunity costs affect supply?
A farmer produces corn and wheat. The price of wheat rises, so he shifts his resources toward wheat and the supply of wheat rises.
When the money supply increases, ___________.
Aggregate demand shifts up and to the right.
Which of the following is NOT a reason why the aggregate demand curve has a negative slope?
As prices fall, government purchases increase.
Jose sells his economics textbook from last semester, which he could sell back to the bookstore for $40, to Adolfo for $150. Adolfo had planned to pay $240 for the textbook at the bookstore. Which of the following statements is TRUE?
Both Jose and Adolfo are made better off by the trade.
David sells his car, which he considers worthless, to Cameron for $200. Which of the following statements is TRUE?
David and Cameron must have different preferences for the car.
How did the spread of the Internet affect the market for newspapers?
Demand decreased, causing the price to fall.
If hipsters decide that Pabst Blue Ribbon has become cliché and they seek out a more iconic beverage, what will happen in the market for PBR?
Demand will decrease, quantity supplied will decrease, and price will decrease.
If the price of Netflix decreases, what will happen in the market for Hulu?
Demand will decrease, quantity supplied will decrease, and price will decrease.
If the price of ground beef increases, what will happen in the market for steak?
Demand will increase, quantity supplied will increase, and price will increase.
The United States and the European Union are groups of semi-independent states that have come together under an agreement whereby resources can travel freely across borders and a common currency is in use. Which of the following statements best explains how this allows for the achievement of economies of scale?
Each state or country can adopt large-scale production techniques that allow lower per unit costs of production.
The matching theory of unemployment explains
Frictional unemployment, cyclical unemployment, and structural unemployment.
Comparative advantage explains a lot of the world trade patterns we observe. In class, we discussed an alternative approach. It focused on _______
Humanity's ability to recognize the gains from trade even without any assumed differences.
Which of the following is the reason banks are usually more concerned about downside risk than upside gain?
If the firm does poorly, the bank could lose the entire value of its loan, but if the firm does incredibly well, the bank simply gets its loan back plus interest
How is a class in which students are graded on a curve like a competitive market?
In a competitive market, demanders compete against one another for goods, the same way students compete for grades.
What is most likely to happen to inflation and real output growth when our major trading partners go into recession and Congress passes a bill increases the minimum wage to $1/hour?
Inflation decreases, output growth decreases.
What is most likely to happen to inflation and real output growth when a country loses access to the sea after a war and the deadly, Simian flu affects a large percentage of the population?
Inflation increases, output growth decreases.
What is most likely to happen to inflation and real output growth after the central bank halves the required reserve ratio and the Chinese yuan appreciates relative to the American dollar?
Inflation increases, output growth increases.
What is most likely to happen to inflation and real output growth when Thanos snapped his finger wiping out half of humanity and local, state, and national governments increase their spending on healthcare and education?
Inflation increases, output growth is ambiguous.
What is most likely to happen to inflation and real output growth when the Congress passes a bill authorizing the killing of half of the goat population and Congress passes a low prohibiting international trade?
Inflation is ambiguous, output growth decreases.
What is most likely to happen to inflation and real output growth when the housing market reaches an all-time high and the world's largest oil reserve is discovered ?
Inflation is ambiguous, output growth increases.
What is most likely to happen to inflation and real output growth when the Federal Reserve increases the money supply and the federal government raises income taxes?
Inflation is ambiguous, output growth is ambiguous.
Which of the following individuals can be counted as unemployed?
Juan, a recent college graduate looking for his first job
In 60 minutes, Kana can either make miso soup or she can clean the kitchen. In 15 minutes, Mitchell can make miso soup; it takes Mitchell an hour to clean the kitchen. Who has the comparative advantage in each activity?
Kana has a comparative in cleaning the kitchen, Mitchell has a comparative in making miso soup.
Suppose that a central bank annouces it will follow Bagehot's rule when the next financial crisis occurs. This means that it will ________________.
Lend to illiquid banks at above market interest rates.
In 30 minutes, Kana can either make miso soup or she can clean the kitchen. In 30 minutes, Mitchell can make miso soup; it takes Mitchell half an hour to clean the kitchen. Who has the comparative advantage in each activity?
No one has a comparative advantage.
In two hours, Ethan can bake 50 cookies or hang the drywall for five rooms. In one hour, Sienna can bake 50 cookies or hang the drywall for five rooms. Who has the comparative advantage in each activity?
No one has a comparative advantage.
Kara can build two glass sculptures per day or she can design one full-page newspaper advertisements per day. Sara can build four glass sculptures per day or design two full-page newspaper ads per day. Who has the comparative advantage in each activity?
No one has a comparative advantage.
Economic growth in Arendelle has stagnated for decades. After a coup that removed the evil and corrupt Queen Elsa, the newly elected President Olaf announces that the central bank will greatly reduce the growth rate of the money supply. Will this new monetary policy achieve its goal of increasing real income in the long-run?
No, since a decrease in the money supply only affects the price level in the long-run.
Suppose that deposits in U.S. banks increased and the Federal Reserve increased the money supply by 4% in 2015. What likely happened to the nominal GDP?
Nominal GDP may or may not have changed.
Omar can write 12 excellent poems per day or solve 2 difficult physics problems per day. Riker can write 12 excellent poem per day or solve 4 difficult physics problems per day. Who has the comparative advantage in each activity?
Omar has a comparative advantage in writing poems; Riker has a comparative advantage in solving physics problems.
Which of the following is NOT true of irreversible investments?
Once an investment opportunity is identified, the execution should follow immediately.
Which is INCORRECT in the quantity theory of money equation, Mv = PYR?
P = production level
If price controls are so harmful, why would a country ever impose them?
Politicians have strong incentives to respond to public opinion with price controls when prices increase sharply.
Which of the following describes the process through which a major decline in the stock market leads to a change in aggregate demand?
Reductions in consumer wealth produce a negative AD shock.
In 1970, 1.3 barrels of oil were used to produce $1,000 of GDP. In 2004, it took only 0.64 barrel of oil to do the same. What implications does this have for economic fluctuations in the United States today?
Spikes in oil prices will not have as severe an impact on the U.S. economy today as they did in the 1970s.
Pipefitter union workers have demanded that all employers of pipefitters provide health insurance at no cost to the pipefitter. What will happen to the supply of goods produced in factories employing pipefitters?
Supply will decrease, shifting up and to the left.
Suppose the federal government imposes a maximum price on health care that is well below the equilibrium price. What happens in the market for health care?
The demand curve does not shift; the supply curve does not shift.
Suppose people decide to increase the amount of paper products they recycle. What happens in the market for pine trees (a common source of paper)?
The demand curve shifts down and to the left; the supply curve does not shift.
Suppose the American Ophthalmological Society releases a report that found looking at purple and gold clothes leads to blindness by age 25. What happens in the market for JMU clothing?
The demand curve shifts down and to the left; the supply curve does not shift.
Suppose Drake records the classic song by Phineas and Candace Flynn, "A.G.L.E.T" and it peaks at number one on the Billboard Hot 100 chart. What likely happens in the market for aglets?
The demand curve shifts up and to the right; the supply curve does not shift.
A market can be described by the equations Qd = 50 - 3P and Qs = 2P. What are the equilibrium price and quantity in this market?
The equilibrium price is $10, and the equilibrium quantity is 20 units.
Fluctuations in graduate school enrollment correlate positively with fluctuations in unemployment. What is the most likely reason why?
The opportunity cost of going to graduate school is low when jobs are hard to find.
Coke and Pepsi are substitute soft drinks. Which of the following would cause the demand curve for Pepsi to shift to the left?
The price of Coke decreases.
Suppose the good dairy farmers of Wisconsin reduce the size of their herds by fifty percent due to a drought. What happens in the market for ice cream?
The supply curve shifts up and to the left; the demand curve does not shift.
Suppose the federal government decides to subsidize businesses that provide health care. What happens in the market for health care?
The supply shifts up and to the right; the demand curve does not shift.
As discussed in class, which variable does not affect the matching problem?
The worker's desire to work.
People's expectation of the price of gasoline going up tomorrow may increase the demand for gasoline today. If so, what does this imply about the relationship between gasoline tomorrow and gasoline today?
They are substitutes.
Matilda sells her iPhone, which she considers worthless, to Gabriel for $200. Which of the following statements is TRUE?
This trade created value because Gabriel is buying the iPhone for more than Matilda thinks it is worth
After 9/11, why were many investors unwilling to engage in new construction in New York City?
Uncertainty regarding future terrorist attacks left investors unsure about the demand for new offices.
Zoey receives a big raise at work and decides to buy additional porcelain figurines. Which of the following statements is TRUE?
Zoey considers porcelain figurines to be a normal good.
The consumer price index measures the prices of:
a basket of goods bought by a typical American consumer.
What causes a shift in the short-run aggregate supply curve?
a change in the expected inflation rate
Which of the following is an example of a shock that shifts the long-run aggregate supply curve to the right?
a decrease in government regulation
Banks retain only a small portion of their deposits as reserves in:
a fractional reserve banking system.
Which worker might be viewed by a firm as posing the greatest risk of not performing well if hired to work in a specific field of expertise?
a high-school graduate with three years of work in an unrelated field of expertise
Which asset is the LEAST liquid?
a pile of dog fur
Tight monetary policy is typically followed by:
a reduction in the growth rate.
Inflation increases, output growth decreases.
a reduction in the rate of inflation.
Imagine a free market in equilibrium. After a sudden decrease in supply (but before the price can adjust), the market experiences:
a shortage.
The problem associated with too much expansionary monetary policy is:
additional inflation.
On June 13, 2011, writer Sebastian Anthony at Extreme Tech wrote, "During the two days that the Les Paul [Google] doodle was online, those 740 million visitors spent 26 seconds more on the Google home page than normal. That's a total of almost 10.7 million work hours spent playing with the Les Paul Google Doodle. Assuming the average Google user earns $25/hour, the doodle cost companies around the world $268 million in lost productivity." Mr. Anthony's mistake is overestimating opportunity costs. He is doing this by assuming that:
all those work hours would have been spent working if not for the doodle.
According to the AD-AS model, if the economy is initially at its long-run potential growth rate, then a temporary increase in the growth rate of investment spending will cause:
an increase in both the inflation and real growth rates in the short run.
Which of the following most likely causes the long-run aggregate supply curve to shift to the right?
an increase in crop production due to more rainfall
Which of the following is NOT an example of a real shock?
an increase in sales tax revenues due to population growth
Which of the following would cause the aggregate demand curve to shift to the right?
an increase in the growth rate of the money supply
Which of the following would NOT shift the long-run aggregate supply curve?
an increase in the money supply
Which option best explains why firms develop new ideas for production techniques and product features?
because they are interested in making a profit
The yearly shortage of Super Bowl tickets implies that the price of Super Bowl tickets is:
below the equilibrium price.
One of the Fed's greatest powers is its ability to:
boost market confidence.
The Smoot-Hawley Tariff of 1930 raised tariff rates on tens of thousands of imported goods, and the results were that:
both exports and productivity fell, thereby reducing aggregate demand and aggregate supply.
Volatile hyperinflation causes financial intermediation to:
break down.
Moral hazard occurs when:
businesses take on too much risk because they are insured.
Structural unemployment is:
caused by long-lasting shocks or changes in permanent features of an economy.
What can cause both equilibrium price and quantity to increase?
consumer tastes becoming more favorable toward the good
Because of money illusion, inflation often confuses:
consumers, workers, and firms.
Monetary policy is a _____ means of popping a bubble because monetary policy _____ push down the price of specific commodities.
crude; can't
Unemployment correlated with the business cycle is called:
cyclical unemployment.
An early frost in the vineyards of Napa Valley would cause a(n):
decrease in the supply of wine, increasing price
Higher implicit tax rates tend to cause labor force participation rates to:
decrease.
Imagine that millions of refugees move out of country A and into country X. This would cause the demand for housing in country A to _____ and the demand for housing in country X to _____.
decrease; increase
Specialization and trade can _____ the per unit cost of production because _____ .
decrease; they create economies of scale associated with large-scale production
What factors triggered the Great Depression?
decreased consumer spending and tight monetary policy
The money multiplier equals 1:
divided by the reserve ratio.
As the price of lead falls (a key input in the production of automobile batteries), the cost of producing batteries decreases, shifting the supply curve of batteries:
down and to the right.
Which of the following is NOT a factor that can increase structural unemployment?
early employment bonuses
What types of laws affect young, minority, and unemployed workers most negatively?
employment protection
Other things being equal, which would make a lender view a borrower as low risk?
escalation of the market value of collateral
Episodes of hyperinflation are caused by:
extremely high rates of money growth
In the late 1990s, the rising popularity of Barnes & Noble and Borders shifted workers from independent bookshops to larger chains. What type of unemployment was associated with this reallocation of the workforce?
frictional unemployment
The Great Depression was due primarily to the:
great fall in aggregate demand.
An illiquid bank is one that:
has more short-term liabilities than short-term assets.
Which would create labor adjustment costs?
higher gas prices that hurt SUV manufacturers but create a boom in the hybrid industry
A real shock to the economy does NOT:
impact the money supply.
As world coal prices rise due to increasing scarcity and coal-based energy costs rise, the demand for wind energy will:
increase.
If romaine lettuce and iceberg lettuce are substitutes, a(n) _____ in the price of romaine lettuce will _____ the demand for iceberg lettuce.
increase; increase
Which of the following would cause the AD curve to shift to the left?
increased growth in imports
If the price of computers _____, the demand for printers will ____
increases; decrease
If the price of shotguns _____, the demand for shotgun shells will _____.
increases; decrease
The average age in the United States is _____, causing the demand for prescription drugs to _____.
increasing; increase
The unemployment benefit program that would create the greatest incentive to return to work as quickly as possible while helping to replace lost income is the unemployment benefit that:
is contingent on the recipient applying for new jobs each week.
Imagine a free market in which, at a price of $4, quantity supplied is 120 units and quantity demanded is 100 units. Equilibrium price in this market:
is less than $4.
In the long run, money:
is neutral with respect to quantity produced.
The Federal Reserve acquires its exclusive powers through its ability to:
issue money.
A bank is considered illiquid but solvent if:
it has short-term liabilities greater than its short-term assets, but overall assets greater than liabilities.
A major problem with inflation is that after it starts:
it is difficult to stop without experiencing high unemployment.
Generally, inflation is assumed to be bad for an economy EXCEPT when:
it is mild and sustained.
Which asset is the LEAST liquid?
knowledge of how to tie one's shoe
Banks hold many illiquid assets, including
loans that are payable over long periods of time.
If the Fed reduces 𝑀−→M→ to fight inflation after a negative real shock, what should occur?
lower real growth
Uncertainty tends to amplify business cycles because:
many investments are irreversible with large sunk costs; thus, investors decrease investment during bad times and wait until they are more certain about the future direction of the economy.
When inflation is highly variable and unpredictable, it becomes very difficult to:
negotiate long-term contracts that involve payments.
Two of the challenging factors faced by the U.S. Bureau of Labor Statistics when computing the consumer price index are:
new goods and better-quality goods.
An example of a negative real shock is a rapid increase in:
oil prices.
Which is used most often by the Federal Reserve to control the money supply?
open market operations
Which of the following is an example of an active labor market policy?
paying unemployed workers who find a job
When inflation functions as a type of tax, which of the following groups of people will be hurt the most?
people who hold currency and coins in their wallet, purse, or at home
Suppose a new study predicts that the price of hybrid cars is expected to decrease in the near future. As a result, we would expect
producers to increase supply of hybrid cars today.
Which is NOT a type of law or regulation that is known to sometimes increase the unemployment rate?
product safety regulations
When people suffer from money illusion, an increase in the money supply:
raises real GDP in the short run.
A major hurricane hitting the East Coast of the United States is an example of a:
real shock.
One reason for an increased female labor force participation rate is that the birth control pill has:
reduced women's opportunity cost of working.
Inflation is painful to stop because stopping it:
requires decreasing the growth rate of the money supply, which typically leads to lower growth overall.
in the United States, the largest asset that is used as a means of payment is
savings deposits.
An increase in spending growth will cause the economy's aggregate demand curve to:
shift to the right.
During the Great Depression, the long-run aggregate supply curve:
shifted to the left.
When a "bubble" arises, asset prices are driven by:
shifts in market psychology and successive waves of irrational exuberance.
Immediately following a decrease in the supply of a product, a _____ occurs, which puts _____ pressure on prices.
shortage; upward
If demand decreases, ceteris paribus, the quantity exchanged will be _____ at the new market equilibrium point.
smaller
The natural rate of unemployment is defined as the rate of:
structural plus frictional unemployment.
A worker repairing VHS cassette-tape players was laid off because most of his customers have started using DVD players and streaming services. This worker is now:
structurally unemployed.
A real price is the price:
that has been corrected for inflation.
Quantitative easing refers to:
the Fed buying long-term government bonds and securities.
In the United States, bank notes are issued by:
the Federal Reserve.
Which of the following elements reduces structural unemployment?
the enhancement of worker retraining programs
According to the quantity theory of money, the primary cause of inflation is:
the growth rate of the money supply.
The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with:
the quantity theory of money.
Intertemporal substitution tends to amplify business cycles because:
the returns to work are higher in booms than in recessions, so people work more during booms and less during recessions.
If the economy is in a long-run equilibrium, but then consumer spending falls due to fears about job security, after the long-run adjustment to the change, inflation is _____ and real growth is _____.
the same; the same
Labor adjustment costs tend to amplify business cycles because:
the uncertainty of recessions tends to increase people's job search time, while greater certainty decreases search time during booms.
Over the weekend, Bella can do one of three things, ranked as most to least desirable: (1) go to the beach, (2) study economics, or (3) work. Bella's opportunity cost of going to the beach is:
the value of studying economics.
Suppose that a man spends a dollar on an ice cream cone. The dollar he spends becomes income to the ice cream store owner, who spends it on paper. The dollar the ice cream store owner spends then becomes income to a worker at the paper factory, who uses it to help pay for gas. This process of the dollar being spent, becoming income, and then being spent repeatedly on final goods and services is the basis of the concept of:
the velocity of money.
Tax accountants tend to work more hours in the months before individual and corporate tax returns are due than in the months right after tax returns are due. This is an example of:
time bunching.
Sticky wages amplify negative shocks if:
wages do not fall quickly when there are declines in economic activity
Labor adjustment costs are higher if:
workers face higher uncertainty about the permanence of changes in different industries.