Intro to Econ 211 - Lehman Final Exam

Refer to Figure 18-9. The amount of revenue collected by the government from the tariff is a. $200. b. $400. c. $500. d. $600.

a. $200.

Refer to Figure 18-9. Without trade, the equilibrium price of carnations is a. $8 and the equilibrium quantity is 300. b. $6 and the equilibrium quantity is 200. c. $6 and the equilibrium quantity is 400. d. $4 and the equilibrium quantity is 500.

a. $8 and the equilibrium quantity is 300.

Over time, GDP may increase as the result of either (i) expansion in the quantities of goods produced or (ii) higher prices. Which of the following is true? a. (i) will generally increase living standards, but (ii) will not. b. (ii) will generally increase living standards, but (i) will not. c. Both (i) and (ii) will generally increase living standards. d. Neither (i) nor (ii) will generally increase living standards.

a. (i) will generally increase living standards, but (ii) will not.

Refer to the table above. Between 2014 and 2015, the real output of this economy increased by approximately a. 1.9 percent. b. 2.4 percent. c. 4.1 percent. d. 6.7 percent.

a. 1.9 percent.

Which of the following is a positive economic statement? a. A tax on butter will reduce the quantity of butter sold. b. The rich do not pay enough in taxes. c. People in poor countries should not work for less than $5 per hour. d. All of the above are positive economic statements.

a. A tax on butter will reduce the quantity of butter sold.

Which one of the following is a positive economic statement? a. An increase in the minimum wage will reduce employment. b. The minimum wage should be increased. c. Social justice will be served by increasing the minimum wage. d. Thoughtful people oppose an increase in the minimum wage.

a. An increase in the minimum wage will reduce employment.

Refer to Figure 18-10. As a result of the tariff, there is a deadweight loss that amounts to a. B. b. E. c. D + F. d. B + D + E + F.

a. B.

In the figure above, the recession phase of the business cycle can be represented by point(s): a. CDE. b. BCD. c. EFG. d. A and E.

a. CDE.

Which of the following is a correct statement? a. Fiscal policy is the use of tax and spending policies by Congress and the president. b. Fiscal policy involves the control of the money supply by the Federal Reserve Bank. c. Monetary policy involves the control of the money supply by Congress and the president. d. Monetary policy is the use of tax and spending policies by the Federal Reserve Bank.

a. Fiscal policy is the use of tax and spending policies by Congress and the president.

Refer to Figure 18-10. Producer surplus with trade and without a tariff is a. G. b. C + G. c. A + C + G. d. A + B + C + G.

a. G.

Which of the following helps explain why the aggregate demand curve slopes downward? a. If the price level increases, the purchasing power of the fixed quantity of money decreases, causing people to buy less. b. If the price level increases, the purchasing power of the fixed quantity of money increases, causing people to buy more. c. If domestic prices increase, we substitute domestic goods for imported goods. d. If domestic prices decrease, we substitute imported goods for domestic goods.

a. If the price level increases, the purchasing power of the fixed quantity of money decreases, causing people to buy less.

Which of the following does the law of demand specifically imply? a. If the product price increases, quantity demanded will decrease. b. If consumer income increases, quantity demanded will increase. c. If the product price increases, quantity demanded will increase. d. If consumer income increases, quantity demanded will decrease. e. If supply increases, demand will increase.

a. If the product price increases, quantity demanded will decrease.

In Zimbabwe and Botswana, elephants can be owned by local tribes and trade in ivory is legal, while in countries such as Kenya, it is illegal to trade in ivory and elephants cannot be privately owned but are protected by the government. Which of the following is true regarding the change in the elephant populations since 1979 in these countries? a. In Zimbabwe and Botswana, elephants are near the verge of extinction, while in Kenya, the population of elephants is growing rapidly. b. There has been a similar decline in the population of elephants in all of these countries. c. There has been a similar increase in the population of elephants in all of these countries. d. In Zimbabwe and Botswana, elephant populations have more than doubled, while in Kenya, the population of elephants has fallen to less than one-third of its previous level.

a. In Zimbabwe and Botswana, elephants are near the verge of extinction, while in Kenya, the population of elephants is growing rapidly.

Which of the following about inventory changes and GDP is true? a. Inventory investment adds to GDP because it represents goods produced during the current period. b. Inventory investment is subtracted from GDP because the goods were not sold during the period. c. Inventory investment does not affect GDP because the goods were not sold during the period. d. Inventory investment does not affect GDP because it does not represent goods produced during the period.

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

If price rises, what happens to quantity supplied of a product? a. It increases. b. It decreases. c. It does not change. d. Quantity supplied is constant, but supply increases.

a. It increases.

Which of the following occurs when a shortage occurs in the market for a good? a. Quantity demanded exceeds quantity supplied and the market mechanism pushes the price up, which in turn encourages more production and less consumption. b. Quantity supplied exceeds quantity demanded and the price falls, which encourages more production and less consumption. c. Quantity demanded exceeds quantity supplied and the market mechanism pushes the price down, which encourages more production and less consumption. d. Quantity supplied exceeds quantity demanded and the price rises, which encourages more production and less consumption.

a. Quantity demanded exceeds quantity supplied and the market mechanism pushes the price up, which in turn encourages more production and less consumption.

Rent controls tend to cause persistent imbalances in the market for housing because a. Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage. b. Quantity demanded exceeds quantity supplied but price cannot fall to remove the surplus. c. Quantity supplied exceeds quantity demanded but price cannot rise to remove the shortage. d. Quantity supplied exceeds quantity demanded but price cannot fall to remove the surplus.

a. Quantity demanded exceeds quantity supplied but price cannot rise to remove the shortage.

In Figure 18-3, in the absence of trade, the domestic price of soybeans is Pn. If the world price of soybeans is Pw, which of the following will occur when the United States begins to trade internationally? a. The domestic price of soybeans will rise, and domestic consumption will fall. b. Both the domestic price of soybeans and domestic consumption will rise. c. Both the domestic price of soybeans and domestic consumption will fall. d. The domestic price of soybeans will fall, and domestic consumption will rise.

a. The domestic price of soybeans will rise, and domestic consumption will fall.

Which of the following explains why higher prices in the goods and services market will lead to an upward sloping short-run aggregate supply curve? a. The higher prices will temporarily improve profit margins because many of the cost components of firms will be fixed in the short run and, thereby, stimulate additional output.. b. The higher prices will reduce the purchasing power of the fixed quantity of money and, thereby, stimulate additional output. c. The higher prices will expand the economy's resource base and, thereby, stimulate additional output. d. The higher prices will improve technology and, thereby, stimulate additional output.

a. The higher prices will temporarily improve profit margins because many of the cost components of firms will be fixed in the short run and, thereby, stimulate additional output..

For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany can produce one watch for every 100 pounds of cheese it produces. Which of the following is true with regard to opportunity costs in the two countries? a. The opportunity cost of producing watches is lower in Denmark. b. The opportunity cost of producing cheese is lower in Denmark. c. The opportunity cost of producing watches is identical in both countries. d. It is impossible to compare opportunity costs because the two countries use different currencies. e. In Germany the opportunity cost of producing one pound of cheese is one watch.

a. The opportunity cost of producing watches is lower in Denmark.

What impact would a severe drought that destroys the wheat crop in several areas of the United States have on the market for wheat? a. The supply of wheat would fall. b. The supply of wheat would rise. c. The demand for wheat would fall. d. The demand for wheat would rise.

a. The supply of wheat would fall.

Suppose the market equilibrium price of corn is $5 per bushel, and the government sets a price ceiling of $4 per bushel. What is the most likely result of this action? a. There will be a shortage of corn. b. There will be a surplus of corn. c. There will be a decrease in the quantity of corn demanded as the result of the price ceiling. d. There will be an increase in the quantity of corn supplied as the result of the price ceiling.

a. There will be a shortage of corn.

The population (age 16 and over) of Pageland is 50 million; 4 million are unemployed, and 36 million hold jobs. What are the rates of unemployment and labor force participation of Pageland? a. Unemployment is 10 percent, and labor force participation is 80 percent. b. Unemployment is 10 percent, and labor force participation is 75 percent. c. Unemployment is 11 percent, and labor force participation is 80 percent. d. Unemployment is 11 percent, and labor force participation is 90 percent.

a. Unemployment is 10 percent, and labor force participation is 80 percent.

Which of the following events will leave GDP unchanged? a. You purchase 100 shares of Wal-Mart stock at $15 per share. b. You pay $1,500 to repair the damage done to your car by an uninsured motorist. c. You decide to work ten more hours per week at your job to pay for the repairs performed on your car. d. You purchase a brand new car at a dealer showroom.

a. You purchase 100 shares of Wal-Mart stock at $15 per share.

Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true? a. Your real wage fell. b. Your nominal wage fell. c. Both your nominal and real wages decreased. d. Although your nominal wage fell, your real wage increased. e. Both nominal and real wages increased.

a. Your real wage fell.

If cable TV service and satellite TV service are substitutes, a. a decrease in the price of cable will decrease the demand for satellite TV. b. an increase in the price of cable will decrease the demand for satellite TV. c. an increase in the price of cable will generally have no effect on the demand for satellite TV. d. an increase in the price of cable will shift the demand curve for satellite TV to the left.

a. a decrease in the price of cable will decrease the demand for satellite TV.

Assume the United States can use a given amount of its resources to produce either 20 airplanes or 8 automobiles and Japan can employ the same amount of its resources to produce either 20 airplanes or 10 automobiles. The U.S. should specialize in a. airplanes. b. automobiles. c. both goods. d. neither good.

a. airplanes

A vertical long-run aggregate supply curve indicates that a. an increase in the price level will not expand an economy's output capacity in the long run. b. outputs greater than the long-run supply constraint cannot be achieved. c. an increase in the price level will permit the economy to achieve a higher level of output. d. an increase in the price level will promote technological change and more rapid economic growth.

a. an increase in the price level will not expand an economy's output capacity in the long run.

Other things constant, which of the following would most likely cause the supply of garden hoses to decrease? a. an increase in the price of plastic used to make garden hoses b. a technological advance that lowers the cost of producing garden hoses c. the occurrence of a very dry year with little rain d. a decrease in the price of grass seed

a. an increase in the price of plastic used to make garden hoses

Economists usually use the term "recession" to refer to a. any slowdown in the growth of real GDP. b. zero real GDP growth. c. two or more consecutive quarters of declining real GDP. d. a reduction in nominal GDP lasting more than six months.

a. any slowdown in the growth of real GDP.

Because the height of the demand curve measures the marginal value of the good to consumers, the fact that a demand curve slopes downward to the right illustrates that a. as more of a product is consumed, consumers will value additional units less. b. as more of a product is consumed, consumers will value additional units more. c. the value of additional units of the good is unrelated to the amount consumed. d. the cost of production for a good generally rises as more of it is produced.

a. as more of a product is consumed, consumers will value additional units less.

Which of the following groups would most likely benefit from unanticipated inflation? a. borrowers b. lenders c. creditors d. pensioners

a. borrowers

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy? a. buy U.S. securities on the open market b. force the Treasury to reduce the national debt c. raise the discount rate d. increase the reserve requirements

a. buy U.S. securities on the open market

Other things constant, an increase in the real interest rate will a. cause consumers to reduce their purchases of durable items like appliances and automobiles. b. induce businesses to increase their level of investment and expand capital formation projects. c. make borrowing money more attractive. d. increase the natural rate of unemployment.

a. cause consumers to reduce their purchases of durable items like appliances and automobiles.

Refer to Figure 18-8. If this country allows free trade in wagons, a. consumers will gain more than producers will lose. b. producers will gain more than consumers will lose. c. producers and consumers will both gain equally. d. producers and consumers will both lose equally.

a. consumers will gain more than producers will lose.

The period of declining growth in real GDP between the peak of the business cycle and the trough is called the a. contractionary phase. b. boom. c. expansionary phase. d. stationary phase.

a. contractionary phase.

The type of unemployment caused by changes in the business cycle is a. cyclical unemployment. b. natural unemployment. c. frictional unemployment. d. structural unemployment.

a. cyclical unemployment.

Other things constant, a decrease in consumer income will a. decrease the demand for large-screen television sets. b. increase the demand for large-screen television sets. c. cause a movement along the demand curve for large-screen television sets, but it will not shift the demand curve. d. have no impact on the quantity demanded or the demand curve for large-screen television sets.

a. decrease the demand for large-screen television sets.

Other things constant, an increase in the demand for motorcycles will a. decrease the price of motorcycles. b. decrease the quantity of motorcycles bought and sold. c. decrease the demand for motorcycle workers and lower their wages. d. increase the demand for motorcycle workers and increase their wages

a. decrease the price of motorcycles

In a typical college town, when students go home for the summer, the demand for many items such as pizza and beer a. decreases, which is a shift to the left of the demand curves for these goods. b. decreases, which is a shift to the right of the demand curves for these goods. c. increases, which is a shift to the left of the demand curves for these goods. d. increases, which is a shift to the right of the demand curves for these goods.

a. decreases, which is a shift to the left of the demand curves for these goods.

The recessionary phase of the business cycle is characterized by a. decreasing real output and increasing unemployment. b. decreasing real output and declining unemployment. c. increasing real output and increasing unemployment. d. increasing real output and declining unemployment.

a. decreasing real output and increasing unemployment.

When economists say the demand for a product has increased, they mean the a. demand curve has shifted to the right. b. price of the product has fallen, and consequently, consumers are buying more of it. c. cost of producing the product has risen. d. amount of the product that consumers are willing to purchase at various prices has decreased.

a. demand curve has shifted to the right.

If consumer purchases of a good are not very sensitive to the price of the good, this is illustrated by a a. demand curve that is relatively flat (more horizontal). b. demand curve that is relatively steep (more vertical). c. supply curve that is relatively flat (more horizontal). d. supply curve that is relatively steep (more vertical).

a. demand curve that is relatively flat (more horizontal).

High and variable rates of inflation will a. distort the information delivered by market prices and create uncertainty that restrains economic growth. b. encourage people to spend more time producing and less time trying to protect their wealth. c. decrease the risks that accompany the undertaking of long-term investment projects. d. promote economic growth and the efficient use of resources.

a. distort the information delivered by market prices and create uncertainty that restrains economic growth.

The economic way of thinking suggests that if the government imposed a $500 tax on owners of red automobiles, a. fewer red automobiles would be produced and sold. b. more red automobiles would be produced and sold. c. there would be no change in the number of red automobiles produced and sold. d. red automobiles would cease to exist.

a. fewer red automobiles would be produced and sold.

Which of the following will increase economic freedom? a. freedom to enter and compete in markets b. high tariff rates c. high taxes d. rapid and unpredictable inflation

a. freedom to enter and compete in markets

Jacqueline, a brilliant new Ph.D. in economics, has turned down many job offers because she hopes eventually to teach at one of the top ten universities in her field. The type of unemployment she is experiencing is a. frictional b. structural c. seasonal d. cyclical e. underemployment

a. frictional

The type of unemployment resulting from the fact that labor market information is less than perfect is called a. frictional unemployment. b. natural unemployment. c. cyclical unemployment. d. structural unemployment.

a. frictional unemployment.

Of the following goods, which is most likely to be quite inelastic? a. gasoline b. Chevrolet automobiles c. fresh tomatoes d. provolone cheese

a. gasoline

The theory of comparative advantage suggests that nations should produce a good if they a. have the lowest opportunity cost. b. have the lowest wages. c. have the most resources. d. can produce more of the good than any other nation.

a. have the lowest opportunity cost.

In the Keynesian model, the multiplier effect refers to the fact that a change in spending (aggregate demand) will a. increase the money supply. b. cause prices to rise by some multiple of the initial increase in spending. c. cause nominal output to rise by some multiple of the initial increase in spending. d. reduce prices by some multiple of the increase in spending.

a. increase the money supply.

Corn and soybeans are alternatives that could be grown by most farmers. If government subsidies for ethanol lead to higher corn prices, this will a. increase the supply of corn. b. increase the supply of soybeans. c. decrease the supply of soybeans. d. decrease the supply of corn. e. have no effect on the supplies of corn and soybeans.

a. increase the supply of corn.

If consumer purchases of a good are not very sensitive to the price of the good, economists say the demand for the good is relatively a. inelastic. b. elastic. c. robust. d. inverse.

a. inelastic.

If the quantity of a good supplied is not very sensitive to the price of the good, economists say the supply of the good is relatively a. inelastic. b. elastic. c. robust. d. inverse.

a. inelastic.

According to Adam Smith, individual self-interest a. is a powerful force for economic progress when it is directed by competitive markets. b. is a powerful force for economic progress when individuals are wisely directed by a strong central government. c. is a major factor in retarding the economic progress of humankind. d. could be either a positive or negative force for economic progress, depending on the moral influences of political leaders.

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

The opportunity cost of choosing an alternative a. is the value of the highest valued alternative forgone as the result of the choice. b. includes only the amount of time spent on whatever is chosen. c. includes only the money cost of the option. d. is irrelevant for most choices individuals face.

a. is the value of the highest valued alternative forgone as the result of the choice.

If an economy is operating at a point inside the production possibilities curve, a. its resources are not being used efficiently. b. the curve will begin to shift inward. c. the curve will begin to shift outward. d. This is a trick question because an economy cannot produce at a point inside the curve.

a. its resources are not being used efficiently.

Countries with more economic freedom tend to invest a ____ share of their GDP and the productivity of that investment is ____ than for countries that are less free. (Fill in the blanks.) a. larger; higher b. larger; lower c. smaller; higher d. smaller; lower

a. larger; higher

During a boom, the actual rate of unemployment will be a. less than the natural rate of unemployment. b. greater than the natural rate of unemployment. c. equal to the natural rate of unemployment. d. unaffected by the economic expansion.

a. less than the natural rate of unemployment.

When considering the impact of institutions and policies on economic performance, it is most important to focus on a. long-term economic growth. b. short-term economic growth. c. business cycle fluctuations. d. the labor force participation rate of married women.

a. long-term economic growth.

Countries with lower levels of economic freedom tend to have a. lower levels of economic growth b. higher levels of per person income c. higher levels of investment d. all of the above

a. lower levels of economic growth

The basic difference between macroeconomics and microeconomics is that a. macroeconomics is concerned with the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents). b. macroeconomics is concerned with policy decisions, while microeconomics applies only to theory. c. microeconomics is concerned with the forest (aggregate markets), while macroeconomics is concerned with the trees (subcomponents). d. opportunity cost is applicable to macroeconomics, and the fallacy of composition relates to microeconomics.

a. macroeconomics is concerned with the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents).

In computing GDP, market prices are used to value final goods and services because a. market prices reflect the values of goods and services to the buyer. b. market prices do not change much over time, so it is easy to make comparisons between years. c. if market prices are out of line with how people value goods, the government sets price ceilings and price floors. d. None of the above is correct; market prices are not used in computing GDP.

a. market prices reflect the values of goods and services to the buyer.

Controlling the money supply to achieve desired macroeconomic goals is called a. monetary policy. b. cyclical policy. c. fiscal policy. d. industrial policy.

a. monetary policy.

Researchers have found that countries that were settled by Europeans who planned on staying permanently were a. more likely to protect private ownership rights and limit the power of the government. b. less likely to protect private ownership rights and limit the power of the government. c. more likely to protect private ownership, but less likely to limit the power of the government. d. less likely to protect private ownership, but more likely to limit the power of the government.

a. more likely to protect private ownership rights and limit the power of the government.

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 a. necessarily raises GDP. b. necessarily decreases GDP. c. doesn't change GDP because gambling is never included in GDP. d. doesn't change GDP because in either case his income is included.

a. necessarily raises GDP.

When the actual rate of unemployment is less than the natural rate of unemployment, the economy a. operates at an output greater than its long-run potential. b. operates at its maximum sustainable output. c. must also be experiencing stable prices (zero inflation). d. operates at an output less than its long-run potential.

a. operates at an output greater than its long-run potential.

Adam Smith believed that if people were free to pursue their own interests, a. public interest would be served quite well. b. less would be produced than if altruism were the guiding principle. c. they would generally apply their talents to unproductive activities that would generate little value to society. d. they would have little incentive to undertake productive activities

a. public interest would be served quite well.

The primary value of real GDP is its ability to measure year to year changes in a. real output. b. income inequality. c. real social welfare. d. the general level of prices.

a. real output.

A U.S. trade policy that restricts the sale of foreign goods in the U.S. market will a. reduce the demand for U.S. export goods since foreigners will be less able to buy our goods if they cannot sell to us. b. benefit producers in industries that export goods. c. increase the nation's income since it protects domestic jobs. d. enhance economic efficiency by allocating more resources to the areas of their greatest comparative advantage.

a. reduce the demand for U.S. export goods since foreigners will be less able to buy our goods if they cannot sell to us.

The aggregate supply curve indicates the a. relationship between prices and the aggregate quantity of goods and services purchased by consumers, investors, governments, and foreigners (net exports). b. relationship between prices and the natural rate of unemployment. c. relationship between the real wage rate and the quantity of labor supplied by households. d. quantity of goods and services producers will supply at different price levels.

a. relationship between prices and the aggregate quantity of goods and services purchased by consumers, investors, governments, and foreigners (net exports).

When the nation of Duxembourg allows trade and as a result becomes an importer of software, a. residents who produce software become worse off; residents who buy software become better off; and the economic well-being of Duxembourg rises. b. residents who produce software become worse off; residents who buy software become better off; and the economic well-being of Duxembourg falls. c. residents who produce software become better off; residents who buy software become worse off; and the economic well-being of Duxembourg rises. d. residents who produce software become better off; residents who buy software become worse off; and the economic well-being of Duxembourg falls.

a. residents who produce software become worse off; residents who buy software become better off; and the economic well-being of Duxembourg rises.

Economic choice and competitive behavior are the result of a. scarcity. b. poverty. c. public ownership of resources. d. private ownership of resources.

a. scarcity

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy? a. sell some of its holdings of government bonds b. decrease government expenditures c. urge the Treasury to sell more U.S. securities d. reduce the reserve requirements

a. sell some of its holdings of government bonds

The law of comparative advantage indicates that a. specialization and exchange will permit trading partners to maximize their joint output. b. a nation can gain from trade only if it is not at an absolute disadvantage in producing all goods. c. a nation can gain from trade only when its trading partners are not low-wage countries. d. countries should export products for which they are high-opportunity cost producers.

a. specialization and exchange will permit trading partners to maximize their joint output.

The value of a good is a. subjective. b. objective or intrinsic. c. determined by a government statistical agency. d. determined by its cost of production.

a. subjective.

Assume, for the U.S., that the domestic price of beef without international trade is lower than the world price of beef. This suggests that with trade, a. the U.S. has a comparative advantage in the production of beef over other countries and the U.S. will export beef. b. the U.S. has a comparative advantage in the production of beef over other countries and the U.S. will import beef. c. other countries have a comparative advantage over the U.S. in the production of beef and the U.S. will export beef. d. other countries have a comparative advantage over the U.S. in the production of beef and the U.S. will import beef.

a. the U.S. has a comparative advantage in the production of beef over other countries and the U.S. will export beef.

Refer to Figure 18-6. With no international trade, a. the equilibrium price is $12 and the equilibrium quantity is 300. b. the equilibrium price is $16 and the equilibrium quantity is 200. c. the equilibrium price is $16 and the equilibrium quantity is 300. d. the equilibrium price is $16 and the equilibrium quantity is 450.

a. the equilibrium price is $12 and the equilibrium quantity is 300.

The large amount of violence associated with the current drug trade is mostly caused by a. the fact that drug markets must operate outside the normal legal system. b. buyers and sellers often being under the influence of drugs at the time of the transaction. c. buyers and sellers who are often unfamiliar with conducting normal transactions within the legal system. d. the lack of quantity supplied and quantity demand being in balance in black markets because there is no equilibrium price in these markets.

a. the fact that drug markets must operate outside the normal legal system.

A rational decision maker takes an action if and only if a. the marginal benefit of the action exceeds the marginal cost of the action. b. the marginal cost of the action exceeds the marginal benefit of the action. c. the marginal cost of the action is zero. d. the opportunity cost of the action is zero.

a. the marginal benefit of the action exceeds the marginal cost of the action.

Your professor loves his work, teaching economics. He has been offered other positions in the corporate world that would increase his monetary income by as much as 25 percent, but he has decided to continue working as a professor. His decision to continue teaching rather than taking other positions would not change unless a. the marginal cost of teaching increased above the marginal benefit. b. the marginal benefit of teaching increased above the marginal cost. c. the marginal cost of teaching decreased. d. the marginal benefit of a corporate job decreased.

a. the marginal cost of teaching increased above the marginal benefit.

Gross domestic product is a. the market value of all goods and services exchanged within a country during a time period. b. the market value of all domestic assets, regardless of whether they are owned by citizens or foreigners. c. the compensation received during a period for labor services plus interest, rents, and corporate profits. d. the market value of final goods and services produced within a country during a time period.

a. the market value of all goods and services exchanged within a country during a time period.

The current demand for a good would decrease if a. the price of a complementary good rose. b. the price of a substitute good rose. c. consumers suddenly believed the price of the good would be sharply higher in the future. d. consumer income increased.

a. the price of a complementary good rose.

In Figure 18-2, in the absence of trade, the domestic price of shoes is Pn. Since many foreign countries have a comparative advantage in the production of shoes, when the United States begins to trade, the domestic price will fall to the world price. When this happens, what does the quantity Qc through Qp represent? a. the quantity of shoes that the United States imports b. an increase in the world consumption of shoes c. the quantity of shoes that the United States exports d. a reduction in the world consumption of shoes

a. the quantity of shoes that the United States imports

When economists say the supply of a product has decreased, they mean that a. the supply curve has shifted to the left. b. the product price has decreased, and as a consequence, suppliers are producing less of the product. c. producers are now willing to sell more of this product at each possible price. d. the supply curve has shifted to the right.

a. the supply curve has shifted to the left.

What would happen in the market for loanable funds if the government were to decrease or eliminate the tax rate on interest income? a. the supply of loanable funds would shift right and investment would increase. b. the supply of loanable funds would shift left and investment would decrease. c. the demand for loanable funds would shift right and investment would increase. d. the demand for loanable funds would shift left and investment would decrease.

a. the supply of loanable funds would shift right and investment would increase.

Producers are willing to offer greater quantities for sale at higher prices because a. they have the incentive to pay the increasing opportunity cost of resources necessary to attract them from alternative uses b. they will decrease their profits by expanding production at higher prices c. the government orders them to do so d. lower prices attract new firms, which have higher costs of production e. they hire superior quality, higher-priced resources as production expands

a. they have the incentive to pay the increasing opportunity cost of resources necessary to attract them from alternative uses

In economics, the term that refers to the time, effort, and other resources needed to search out, negotiate, and consummate an exchange is a. transaction costs. b. specialization costs. c. pecuniary costs. d. comparative costs.

a. transaction costs.

The largest component of GDP as measured by the expenditure approach is a. wages and salary earnings. b. personal consumption. c. net profits of corporations. d. gross private investment.

a. wages and salary earnings.

Which one of the following statements is most clearly inconsistent with the economic way of thinking? a. "If you give a person a fish, you feed him for a day; if you teach him to fish, you feed him for life." b. "If the government provides a good free to citizens, then the opportunity cost of the good is zero." c. "If you derive the same satisfaction from a hamburger as a chicken sandwich, it makes sense to have the cheaper alternative for lunch." d. "When it is cheaper to have someone else mow your lawn than to mow it yourself, hiring someone to do the job is consistent with economizing behavior."

b. "If the government provides a good free to citizens, then the opportunity cost of the good is zero."

Refer to the table above. Gross domestic product (GDP) for this historical year in the U.S. economy was equal to a. $7,761. b. $11,004. c. $13,557. d. $14,055

b. $11,004.

Assume that between 2005 and 2015, nominal GDP increased from $7 trillion to $12 trillion and that the price index rose from 100 to 133.3. What was GDP for 2015 expressed in terms of 2005 base-year prices? In other words, what was real GDP in 2015? (same concept as 24) a. $7.5 trillion b. $9.0 trillion c. $9.5 trillion d. $16.0 trillion

b. $9.0 trillion

Refer to the table above. During which of the above years in history was the purchasing power of the president's salary the highest? (divide PS by CPI; x 100) a. 1920 b. 1940 c. 1960 d. 1980 e. 2000

b. 1940

Suppose that the consumer price index at the end of Year 1 was 180 and by the end of Year 2 had risen to 189. What was the inflation rate during Year 2? a. 4.8 percent b. 5 percent c. 6 percent d. 9 percent e. none of the above

b. 5 percent

Suppose that you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years. If you expect that the inflation rate during the next five years will be 2 percent annually, what real rate of return do you expect to earn? a. 2 percent b. 5 percent c. 7 percent d. 9 percent

b. 5 percent

Refer to Figure 18-10. Consumer surplus with the tariff is a. A. b. A + B. c. A + C + G. d. A + B + C + D +E + F.

b. A + B.

What would be the effect of a decrease in the real interest rate and an increase in the expected inflation rate? a. Both changes would decrease aggregate demand. b. Both changes would increase aggregate demand. c. Both changes would increase short-run aggregate supply. d. Both changes would increase long-run aggregate supply.

b. Both changes would increase aggregate demand.

Which of the following would a Keynesian economist be most likely to stress? a. Supply creates its own demand. b. Businesses will not produce goods and services if they think consumers are pessimistic and unwilling to spend money. c. You cannot spend your way out of a recession. d. When the unemployment rate is high, wage rates will fall and restore unemployment to its natural rate. e. A dollar saved is a dollar earned; a high rate of saving is the key to economic growth and prosperity.

b. Businesses will not produce goods and services if they think consumers are pessimistic and unwilling to spend money.

Refer to Figure 18-10. Producer surplus with the tariff is a. G. b. C + G. c. A + C + G. d. A + B + C + G.

b. C + G.

Given freedom of movement for both goods and resources, if Florida producers specialize in oranges and Georgia producers specialize in peaches, then it would be reasonable to conclude that a. the opportunity cost of growing oranges is higher in Florida than in Georgia. b. Georgia has a comparative advantage in producing peaches. c. Florida has a comparative advantage in producing peaches. d. total output will be expanded when Georgia allocates more resources to producing oranges and Florida allocates more resources to producing peaches.

b. Georgia has a comparative advantage in producing peaches.

Which of the following is a positive economic statement? a. Government control of rent is a fair way to help poor people afford housing. b. Government control of rent keeps landlords from charging too much rent. c. Government control of rent decreases the number of new apartments constructed. d. Government control of rent is an injustice.

b. Government control of rent keeps landlords from charging too much rent.

Which of the following is often referred to as the basic postulate of economics? a. Individuals act only out of selfish motives. b. Incentives matter--individuals respond in predictable ways to changes in personal costs and benefits. c. The accuracy of the assumptions is the best test of an economic theory. d. The value of a good is objective; it is equal to the cost of producing the good.

b. Incentives matter--individuals respond in predictable ways to changes in personal costs and benefits.

Which of the following is a problem with using discretionary fiscal policy as an economic stabilization tool? a. Discretionary changes in fiscal policy can be easily anticipated by private decision makers. b. It is difficult to properly time discretionary changes in fiscal policy, and such changes have adverse secondary consequences. c. Discretionary fiscal policy is only effective during a recession. d. Discretionary fiscal policy is only effective during an economic boom.

b. It is difficult to properly time discretionary changes in fiscal policy, and such changes have adverse secondary consequences.

Which of the following transactions would be included in this year's GDP? a. Johnson purchases a five-year-old house from Smith. b. Johnson rents a five-year-old house from Smith. c. Johnson purchases 100 shares of AT&T stock from Smith. d. Johnson purchases an antique at Smith's garage sale.

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

Which of the following helps low income countries grow rapidly relative to high income countries? a. Low income countries are in a better position to save a larger share of their income. b. Low income countries can sometimes copy (or borrow at a low cost) technologies and practices that have been successful in high income countries. c. Low income countries generally have legal systems that protect property rights and enforce contracts in a more evenhanded manner than higher income countries. d. Low income countries generally have more favorable weather

b. Low income countries can sometimes copy (or borrow at a low cost) technologies and practices that have been successful in high income countries.

Refer to Figure 18-10. With trade and without a tariff, the price and domestic quantity demanded are a. P1 and Q1. b. P1 and Q4. c. P2 and Q2. d. P2 and Q3.

b. P1 and Q4.

Refer to Figure 18-10. With the tariff, the quantity of saddles imported is a. Q3 − Q1. b. Q3 − Q2. c. Q4 − Q1. d. Q4 − Q2.

b. Q3 − Q2.

Which of the following is true? a. Real GDP is a measure of income, but not output. b. Real GDP is a measure of output, but not income. c. Real GDP is a measure of inflation. d. Growth of output is necessary for the growth of income.

b. Real GDP is a measure of output, but not income.

According to Keynesian analysis, what happens in the economy illustrated in Figure 11-4 if government purchases increase by the amount necessary to theoretically achieve full employment? a. The AD curve shifts to the right, the SRAS curve shifts to the left, and long-run equilibrium is achieved. b. The AD curve shifts to the right, the price level increases, resources prices remain unchanged, and long-run equilibrium is achieved. c. The AD curve shifts to the right, the price level increases, and unemployment increases. d. The AD curve shifts to the left, the price level increases, and employment decreases. e. The SRAS curve shifts to the left, the price level decreases, and long-run equilibrium is achieved.

b. The AD curve shifts to the right, the price level increases, resources prices remain unchanged, and long-run equilibrium is achieved.

How will a reduction in the price of cotton influence the market for blue jeans? a. The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the left. b. The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right. c. The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the left. d. The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the right.

b. The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right.

Which of the following will be most likely to dampen the expansionary effects of an increase in government spending financed by borrowing? a. The budget deficit will cause business decision makers to become more optimistic. b. The increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall. c. The increase in government spending will cause the money supply to expand, thereby causing an inflationary boom. d. The additional borrowing will cause the central bank to buy more bonds, which will reduce aggregate demand.

b. The increase in demand for loanable funds as the result of borrowing will cause interest rates to rise and private investment to fall.

Back in 2008, the box office receipts for the movie The Dark Knight were $997 million. By way of comparison, way back in 1975 the box office receipts for the movie Jaws were $470.6 million. If the Consumer Price Index was 53.8 in 1975 and 215.3 in 2008, which of the following is true? (same concept as 24) 463.07 - 874.72 a. The real inflation-adjusted receipts of The Dark Knight were almost four times greater than those for Jaws. b. The real inflation-adjusted receipts of Jaws were about 88 percent greater than those for The Dark Knight. c. The real inflation-adjusted receipts of The Dark Knight were more than three times those for Jaws. d. The real inflation-adjusted receipts of Jaws were about 33 percent greater than those for The Dark Knight.

b. The real inflation-adjusted receipts of Jaws were about 88 percent greater than those for The Dark Knight.

Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices. Which of the following is true? a. The short-run aggregate supply curve shifts leftward and the long-run supply curve shifts rightward. b. The short-run aggregate supply curve shifts rightward and there is a movement along the aggregate demand curve. c. The short-run aggregate supply curve does not shift and the long-run aggregate supply curve shifts rightward. d. The short-run aggregate supply curve shifts rightward but the long-run aggregate supply curve does not shift. e. The short-run aggregate supply curve shifts leftward and there is a movement along the aggregate demand curve.

b. The short-run aggregate supply curve shifts rightward and there is a movement along the aggregate demand curve.

Which of the following would be expected if the tariff on foreign-produced automobiles were increased? a. The domestic price of automobiles would fall. b. The supply of foreign automobiles to the domestic market would decline, causing auto prices to rise. c. The number of unemployed workers in the domestic automobile industry would rise. d. The demand for foreign-produced automobiles would increase, causing the price of automobiles to increase in other nations.

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

How will consumers generally react to an increase in the price of butter? a. They will purchase a larger quantity of butter. b. They will substitute other goods like margarine for the more expensive butter. c. They will reduce their purchases of substitute goods like margarine. d. They will continue purchasing the same quantity of butter at the higher price.

b. They will substitute other goods like margarine for the more expensive butter.

If U.S. net exports are negative, a. U.S. consumers are spending less on foreign goods than foreign consumers are spending on U.S. goods b. U.S. consumers are spending more on foreign goods than foreign consumers are spending on U.S. goods c. the government must promote imports to balance international trade d. U.S. consumers are spending more on foreign goods than they are spending on U.S. goods e. U.S. disposable income is low

b. U.S. consumers are spending more on foreign goods than foreign consumers are spending on U.S. goods

If air travel and bus travel are substitutes, a. an increase in the price of bus travel will decrease the demand for air travel. b. a decrease in the price of bus travel will decrease the demand for air travel. c. an increase in the price of bus travel will generally have no effect on the demand for air travel. d. an increase in the price of bus travel will shift the demand curve for air travel to the left.

b. a decrease in the price of bus travel will decrease the demand for air travel.

If the United Auto Workers union can obtain a substantial wage increase for auto workers, there will be a. a decrease in the supply of automobiles, which is a shift to the right of the supply curve. b. a decrease in the supply of automobiles, which is a shift to the left of the supply curve. c. an increase in the supply of automobiles, which is a shift to the right of the supply curve. d. an increase in the supply of automobiles, which is a shift to the left of the supply curve.

b. a decrease in the supply of automobiles, which is a shift to the left of the supply curve.

Which of the following is most important for long-run growth and a healthy economy? a. a low rate of household savings and a high rate of consumption b. a high rate of both savings and consumption c. a high rate of government expenditures financed by borrowing d. high tax rates and budget surpluses

b. a high rate of both savings and consumption

Supply-side economic policies are best viewed as a. a short-run countercyclical tool. b. a long-run strategy to promote economic growth. c. a strategy for the control of long-run inflation. d. a stabilization tool to smooth the ups and downs of the business cycle.

b. a long-run strategy to promote economic growth.

Within the AD/AS model, if consumers and investors become more optimistic about the future direction of the economy, a. aggregate demand will decrease. b. aggregate demand will increase. c. long-run aggregate supply will increase. d. long-run aggregate supply will decrease.

b. aggregate demand will increase.

Which of the following will reduce the supply of motorcycles? a. an increase in the population age 16 to 35, the primary consumers of motorcycles b. an increase in taxes imposed on motorcycle producers c. a technological improvement reducing the production costs of motorcycles d. a government study that reveals motorcycle riders, on average, live 10 years longer than those who don't ride motorcycles

b. an increase in taxes imposed on motorcycle producers

Which of the following will most likely increase the natural rate of unemployment? a. a decrease in the minimum wage b. an increase in unemployment benefits c. an increase in the number of people who stop looking for a job d. an increase in the proportion of prime-age workers as a share of the labor force

b. an increase in unemployment benefits

The price elasticity of demand for a commodity is determined primarily by the a. size of the consumer surplus. b. availability of good substitutes for the good. c. incomes of consumers. d. availability of complementary goods.

b. availability of good substitutes for the good.

Two products that are usually consumed jointly would be referred to as a. substitutes. b. complements. c. inferior goods. d. unrelated goods.

b. complements.

The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called a. price elasticity of demand. b. consumer surplus. c. the substitution effect. d. income elasticity of demand.

b. consumer surplus.

For an economy, aggregate demand equals a. consumption plus investment plus government purchases plus exports. b. consumption plus investment plus government purchases plus (exports minus imports). c. consumption plus investment plus (taxes minus transfers) plus (exports minus imports). d. consumption plus investment plus government purchases plus (imports minus exports).

b. consumption plus investment plus government purchases plus (exports minus imports).

"A reduction in gasoline prices caused the demand for gasoline to increase. The lower gas prices also led to an increase in demand for large cars, causing their prices to rise." These statements a. are essentially correct. b. contain one error; the lower gasoline prices would cause an increase in the quantity demanded of gasoline, not an increase in demand. c. contain one error; the lower gasoline prices would increase the quantity demanded of large cars, not the demand. d. contain two errors; the lower gasoline prices would cause the quantity of gasoline demanded (rather than the demand) to increase, and the lower gasoline price would cause an increase in quantity demanded (rather than the demand) for large cars.

b. contain one error; the lower gasoline prices would cause an increase in the quantity demanded of gasoline, not an increase in demand.

A decrease in aggregate demand and the subsequent cutbacks in production lead to a. frictional unemployment. b. cyclical unemployment. c. cost-push unemployment. d. structural unemployment. e. transitory unemployment.

b. cyclical unemployment.

At the beginning of a year, decision makers expect the general level of prices to increase at a 2 percent annual rate. The CPI increases from 150 to 154.5 during the year; this indicates that a. decision makers overestimated the rate of inflation during the year. b. decision makers underestimated the rate of inflation during the year. c. decision makers accurately forecast the rate of inflation during the year. d. the rate of inflation during the year was 4.5 percent.

b. decision makers underestimated the rate of inflation during the year.

Within the framework of the AD/AS model, if consumers and investors become more pessimistic about the future direction of the economy, this will lead to a(n) a. increase in aggregate demand. b. decrease in aggregate demand. c. increase in long-run aggregate supply (LRAS shifts to the right). d. reduction in the natural rate of unemployment.

b. decrease in aggregate demand.

If salsa and nacho chips are complements, an increase in the price of nacho chips would a. increase the price of salsa. b. decrease the demand for salsa. c. increase the demand for salsa. d. have no effect on the demand for salsa.

b. decrease the demand for salsa.

If consumer purchases of a good are highly sensitive to the price of the good, this is illustrated by a a. demand curve that is relatively flat (more horizontal). b. demand curve that is relatively steep (more vertical). c. supply curve that is relatively flat (more horizontal). d. supply curve that is relatively steep (more vertical).

b. demand curve that is relatively steep (more vertical).

When property rights are clearly defined and enforced, private owners will a. use their property for selfish ends because they have little or no incentive to consider the desires of others. b. develop and direct their property toward uses that others value highly because the market will generally reward them for doing so. c. have little or no incentive to take care of their property or conserve it for the future. d. be unable to derive personal gain if they are sensitive to the desires of others when deciding how to use their property.

b. develop and direct their property toward uses that others value highly because the market will generally reward them for doing so.

Taxes create deadweight losses because they a. reduce profits of firms. b. distort incentives. c. cause prices to rise. d. create revenue for the government.

b. distort incentives.

If consumer purchases of a good are highly sensitive to the price of the good, economists say the demand for the good is relatively a. inelastic. b. elastic. c. robust. d. inverse.

b. elastic.

If the quantity of a good supplied is highly sensitive to the price of the good, economists say the supply of the good is relatively a. inelastic. b. elastic. c. robust. d. inverse.

b. elastic.

The invisible hand principle indicates that competitive markets can help promote the efficient use of resources a. only if buyers and sellers really care, personally, about economic efficiency. b. even when each market participant cares only about their own self interest rather than about the overall efficiency of resource use. c. even if business firms fail to produce goods efficiently. d. if, and only if, businesses recognize their social obligation to keep costs low and use resources wisely.

b. even when each market participant cares only about their own self interest rather than about the overall efficiency of resource use.

The period of growth in real GDP between the trough of the business cycle and the next peak is called the a. recessionary phase. b. expansionary phase. c. contractionary phase. d. cyclical phase.

b. expansionary phase.

Other things constant, if the cost of labor goes up, the profits of firms will a. increase, and short-run aggregate supply will shift to the right. b. fall, and short-run aggregate supply will shift to the left. c. increase, and long-run aggregate supply will shift to the right. d. fall, and long-run aggregate supply will shift to the left.

b. fall, and short-run aggregate supply will shift to the left.

Which of the following reduced aggregate demand and thereby contributed to the historical episode known as the financial crisis of 2008? a. a rise in the value of the U.S. dollar b. falling housing and stock prices c. an increase in the real rate of interest d. optimism about future economic conditions

b. falling housing and stock prices

During a recession, the actual rate of unemployment will be a. less than the natural rate of unemployment. b. greater than the natural rate of unemployment. c. equal to the natural rate of unemployment. d. unaffected by the economic contraction.

b. greater than the natural rate of unemployment.

Refer to Figure 18-9. Before the tariff is imposed, this country a. imports 200 carnations. b. imports 400 carnations. c. exports 200 carnations. d. exports 400 carnations.

b. imports 400 carnations.

Which of the following will limit the money creation process to an amount less than the potential amount? a. bank pursuit of profits b. increase in currency holdings by the public c. business demand for loans d. increased use of credit cards

b. increase in currency holdings by the public

Megan just graduated from college. In order to devote all her efforts to college, she didn't hold a job. She is going to cruise around the country on her BMW motorcycle for awhile before she starts looking for work. As a result, the unemployment rate a. increases, and the labor-force participation rate increases. b. is unaffected, and the labor-force participation rate is unaffected. c. increases, and the labor-force participation rate decreases. d. increases, and the labor-force participation rate is unaffected.

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

Because of price controls in the former Soviet Union, people often waited in long lines for food and other necessities. Modern economic theory would indicate that, relative to price rationing, waiting in line is a. just as efficient. b. less efficient because the time spent waiting in line imposes an opportunity cost on the buyer that does not generate revenue for the seller. c. more efficient since waiting in line reduces the transaction costs of purchasing goods. d. more efficient since waiting in line reduces the cost of the goods to the consumer.

b. less efficient because the time spent waiting in line imposes an opportunity cost on the buyer that does not generate revenue for the seller.

The supply of resources, level of technology, and the quality of an economy's institutional arrangements (such as property rights and the rule of law) provide the constraint that determines the shape and position of the a. short-run aggregate supply curve. b. long-run aggregate supply curve. c. supply of loanable funds. d. aggregate demand curve

b. long-run aggregate supply curve.

Government policies that heavily tax some activities while subsidizing others and that fix or control interest rates will result in a. higher productivity of investment. b. lower productivity of investment. c. no change in the productivity of investment. d. a greater level of investment.

b. lower productivity of investment.

Economic analysis indicates minimum wage legislation has a. made it possible for any teenager who wants to work to earn almost 80 percent as much as an adult. b. made it easier for teenagers to find jobs that offer the opportunity for training. c. been an important source of increases in income since most workers earn at or near the minimum wage. d. reduced the on-the-job training opportunities available to teenagers.

b. made it easier for teenagers to find jobs that offer the opportunity for training.

Jim enjoys the feeling of wind in his hair enough to ride his motorcycle without a helmet, even though he fully realizes the greater potential for injury it creates by not wearing one in the unlikely event he is in an accident. To an economist, Jim is a. making an irrational choice. b. making a rational choice. c. not fully considering the personal costs and benefits of his decision. d. not responding to the incentives he faces.

b. making a rational choice.

Opportunity costs differ among nations primarily because a. nations employ different currencies. b. nations have different endowments of land, labor skills, capital, and technology. c. nations have different political institutions. d. work-leisure preferences vary considerably from one nation to another.

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

In an economy with persistent inflation, a. real GDP will grow faster than nominal GDP. b. nominal GDP will grow faster than real GDP. c. nominal and real GDP will grow at the same rate. d. nominal and real GDP will both fall.

b. nominal GDP will grow faster than real GDP.

Economists use the term ceteris paribus to indicate that a. supply and demand are in balance. b. other things are assumed to be constant. c. the analysis is true for the individual but not for the economy as a whole. d. their conclusions are based on normative economics rather than positive economic analysis.

b. other things are assumed to be constant.

In economics, man-made resources such as tools, equipment, and structures that are used to produce other goods and services are referred to as a. consumer goods. b. physical capital goods. c. marginal goods. d. infrastructures.

b. physical capital goods.

If resource prices are fixed and the product selling price rises, then a. profits will decrease. b. profits will increase. c. profits will remain constant. d. both profits and output will decrease.

b. profits will increase.

The Great Depression is thought by some to provide support for Keynes' view that a. government action was necessary to ensure interest rates remained at the equilibrium level. b. prolonged periods of unemployment would be present when demand is deficient, and would not automatically correct themselves. c. falling resource prices would bring the economy out of a recession caused by a fall in demand. d. lower interest rates would quickly restore the full employment equilibrium of an economy.

b. prolonged periods of unemployment would be present when demand is deficient, and would not automatically correct themselves.

When price is the rationing criterion, individuals have a strong incentive to a. ignore the wishes of others when making decisions about how to use their resources. b. provide services to others in exchange for income. c. avoid exchanges because in every exchange there will be one person who gains and another who loses. d. substitute promises for the consistent delivery of a quality product.

b. provide services to others in exchange for income.

Which of the following expenditures are not included in the consumption component of GDP? a. maid service b. purchase of a new home c. a new videocassette recorder d. a restaurant meal e. tax preparation service

b. purchase of a new home

Ceteris paribus, an increase in the price of a good will cause the a. quantity demanded of the good to increase. b. quantity supplied of the good to decrease. c. consumer surplus derived from the good to decrease. d. supply of the good to decrease.

b. quantity supplied of the good to decrease.

When a price floor is above the equilibrium price, a. quantity demanded will exceed quantity supplied, so there will be a shortage. b. quantity supplied will exceed quantity demanded, so there will be a surplus. c. the market will be in equilibrium. d. This is a trick question because price floors are generally set below the equilibrium price.

b. quantity supplied will exceed quantity demanded, so there will be a surplus.

Which of the following lists two things that both decrease the money supply? a. raise the discount rate and make open market purchases b. raise the discount rate and make open market sales c. lower the discount rate and make open market purchases d. lower the discount rate and make open market sales

b. raise the discount rate and make open market sales

A tax imposed on the sellers of a good a. raises both the price buyers pay and the net price received by sellers. b. raises the price buyers pay and lowers the net price received by sellers. c. lowers the price buyers pay and raises the net price received by sellers. d. lowers both the price buyers pay and the price received by sellers.

b. raises the price buyers pay and lowers the net price received by sellers.

If a local motorcycle repair shop buys a used Ducati motorcycle for $1,000, refurbishes it, and resells it for $2,500, the a. repair shop contributes value added equal to $1,500, but nothing is added to GDP. b. repair shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP. c. repair shop contributes nothing to production because only existing goods are involved. d. repair shop contributes value added equal to $2,500, but only $1,500 is added to GDP.

b. repair shop contributes value added equal to $1,500, and consequently $1,500 is added to GDP.

Suppose the demand curve for a good is highly elastic and the supply curve is highly inelastic. If the government taxes this good, a. buyers and sellers will each share 50 percent of the burden, regardless of the elasticities of the demand and supply curves. b. sellers will bear a larger share of the tax burden. c. the distribution of the burden will depend upon whether the buyers or the sellers are required to send the tax to the government. d. buyers will bear a larger share of the tax burden.

b. sellers will bear a larger share of the tax burden.

An adverse or negative supply shock, such as a spike in the price of crude oil, is a surprise occurrence that a. shifts the long-run aggregate supply curve to the right and increases output. b. shifts the short-run aggregate supply curve to the left and decreases output. c. temporarily increases aggregate demand. d. temporarily reduces aggregate demand.

b. shifts the short-run aggregate supply curve to the left and decreases output.

In a dynamic economy under ideal conditions, a. the unemployment rate should be near zero. b. some unemployment would be present due to workers temporarily being out of work while changing jobs. c. unemployment would tend to move upward slightly as prices increased. d. unemployment would tend to move slightly downward as unemployment compensation benefits increased.

b. some unemployment would be present due to workers temporarily being out of work while changing jobs.

Steve (now age 54) lost his job. He has very specialized skills that are no longer in demand because assembly-line automation made his job obsolete. Steve's unemployment is best classified as a. cyclical. b. structural. c. seasonal. d. frictional. e. voluntary.

b. structural.

The political popularity of a tariff on imported goods that compete with products of a well-established domestic industry is a. surprising since one would expect the political power of consumers to override the interests of even a well-established domestic industry. b. surprising since one would expect the economic harm resulting from tariffs to be well understood by voters. c. not surprising since such a tariff would generally benefit an easily recognized interest group at the expense of uninformed, uninterested consumers. d. not surprising since the tariff enables domestic producers and consumers to gain at the expense of foreigners.

b. surprising since one would expect the economic harm resulting from tariffs to be well understood by voters.

In a country that is experiencing economic growth at 7 percent per year, per capita income will double in approximately a. seven years. b. ten years. c. fourteen years. d. twenty-one years.

b. ten years.

The wages of house painters will tend to rise when a. more people recognize that house painters have very low incomes. b. the alternative earning opportunities of house painters improve. c. house painters can no longer find good paying alternatives for their labor. d. unemployment in the economy is high and there are few alternative jobs available for house painters.

b. the alternative earning opportunities of house painters improve.

Goods are scarce because a. of greed; if human beings were not so selfish, goods would not be scarce. b. the desire for goods is far greater than their availability from nature. c. of competition; if people were not so competitive, it would be possible to satisfy people's desire for material goods. d. of private property; if things were not owned privately, scarcity could be eliminated.

b. the desire for goods is far greater than their availability from nature.

If a good is scarce, a. there will be shortages of it if the good is rationed by markets. b. the good will have a price in a market setting. c. there will be enough of the good freely available from nature to satisfy the human desire for it. d. all of the above are true.

b. the good will have a price in a market setting.

Which of the following activities is not counted in our calculations of GDP? a. the purchase of a hammer for household repairs b. the labor services of a volunteer group building a home for a poor widow c. the purchase of new, domestically-produced tires for your old foreign car d. a haircut received and paid for at a beauty salon

b. the labor services of a volunteer group building a home for a poor widow

People are willing to pay more for a diamond than for a bottle of water because a. the marginal cost of producing an extra diamond far exceeds the marginal cost of producing an extra bottle of water. b. the marginal benefit of an extra diamond far exceeds the marginal benefit of an extra bottle of water. c. producers of diamonds have a much greater ability to manipulate diamond prices than producers of water have to manipulate water prices. d. water prices are held artificially low by governments, since water is necessary for life.

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

In economics the term utility refers to a. the subjective benefit or satisfaction a person expects to receive from a choice or course of action. b. the number of possible uses for a resource. c. the fact that human desire for goods is unlimited while the resources available to meet those desires is limited. d. the highest valued alternative that must be sacrificed when a choice is made.

b. the number of possible uses for a resource.

Beginning in the early 1990s, private landowners in Zimbabwe have started fencing in large areas of land that contain black rhinos, which were on the verge of extinction. These private owners charge fees for a stay at the lodges on the property (eco-tourism) and also sell hunting safaris and photo safaris. As a result, a. the population of black rhinos has fallen substantially. b. the population of black rhinos has increased. c. many black rhinos are being poached. d. the incomes of residents in Zimbabwe has fallen substantially.

b. the population of black rhinos has increased.

Which of the following would be included as government purchases in GDP and the national income accounts? a. the government's interest payments on the national debt b. the purchase of baggage screening machines by the FBI and federal TSA c. unemployment insurance payments d. the Social Security tax revenues minus Social Security benefits paid to the elderly e. state government payments of Medicaid benefits to poor families

b. the purchase of baggage screening machines by the FBI and federal TSA

The primary source of earnings of commercial banks is income derived from a. the checking account services provided to customers. b. the use of deposits to extend loans and undertake investments. c. vault cash and deposits held with the Fed. d. services provided to the U.S. Treasury.

b. the use of deposits to extend loans and undertake investments.

Checking account deposits are counted as part of the M1 money supply because a. they earn interest income for the depositor. b. they are widely used as a means of making payment. c. banks hold currency equal to the value of their outstanding checking account deposits. d. they are ultimately the obligations of the Treasury.

b. they are widely used as a means of making payment.

To say that people make marginal decisions means that a. they usually wait until the last minute before making a decision to buy b. they weigh the additional costs and additional benefits of various activities before they make a decision c. most people just barely get by on the incomes they earn and live from day to day on the very edge of subsistence d. they consider the total cost and benefit of various activities before they make a purchase

b. they weigh the additional costs and additional benefits of various activities before they make a decision

Advocates of the crowding-out effect maintain that the large budget deficits during the recession of 2008-2009 a. stimulated output and employment, leading to a quicker recovery. b. will lead to a slower recovery than would have been the case if government borrowing had been more restrained. c. led to lower interest rates, stimulating private investment and consumption. d. will lead to lower future taxes and more private spending as the economy recovers.

b. will lead to a slower recovery than would have been the case if government borrowing had been more restrained

The crowding-out effect indicates that budget deficits a. will stimulate aggregate demand and, therefore, exert a strong impact on output and employment. b. will lead to additional borrowing and higher interest rates that will reduce the level of private spending. c. are highly appropriate when the threat of inflation is present. d. are highly appropriate when the threat of recession is present.

b. will lead to additional borrowing and higher interest rates that will reduce the level of private spending.

Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's willingness to pay was $100, Kendra's willingness to pay was $95, and Kristen's willingness to pay was $80. Consumer surplus for the three individuals is a. $15. b. $20. c. $35. d. $80.

c. $35.

(I) Other things constant, countries that invest more will grow more rapidly. (II) The private investment rate of the most economically free countries is nearly twice as much as that of the least free countries. a. I is true; II is false. b. I is false, II is true. c. Both I and II are true. d. Both I and II are false.

c. Both I and II are true.

Amanda decides to buy a dress that Hillary has for sale; they both agree on a price of $20 for the exchange. Which of the following best describes who gains and who loses from the trade? a. If the dress originally costs more than $20, Amanda gains and Hillary loses. b. If the dress originally costs less than $20, Hillary gains and Amanda loses. c. Both parties expect to gain from this transaction. d. If Hillary gains from the transaction, Amanda must lose an equal amount.

c. Both parties expect to gain from this transaction.

If prices in the United States rose, which of the following could be directly attributed to the international substitution effect? a. Americans reduce their purchases of Japanese cars. b. Australians buy more American surfboards. c. Europeans purchase fewer American-made personal computers. d. Americans sell more wheat to India.

c. Europeans purchase fewer American-made personal computers.

Which of the following is a shortcoming of GDP? a. GDP excludes changes in inventories. b. GDP includes an estimate of illegal transactions. c. GDP excludes nonmarket transactions. d. GDP excludes business investment spending.

c. GDP excludes nonmarket transactions.

Is saving good or bad for the economy? a. Bad, because an increase in the savings rate will adversely affect long-term growth. b. Bad, because high levels of consumption financed by borrowing will enhance future economic security. c. Good, because saving provides the investment capital required for businesses to expand and the economy to grow. d. Good, because if households simultaneously save more the overall result will be a reduction in aggregate demand.

c. Good, because saving provides the investment capital required for businesses to expand and the economy to grow.

If Harry only pays $25,000 to purchase a new car even though he would have been willing to pay as much as $35,000 for the car, this indicates that a. Harry is an irrational consumer. b. The seller earned a $10,000 profit on the sale of the car. c. Harry reaped $10,000 of consumer surplus from the transaction. d. The seller received $10,000 worth of producer surplus on the transaction.

c. Harry reaped $10,000 of consumer surplus from the transaction.

If price rises, what happens to supply of a product? a. It increases. b. It decreases. c. It does not change. d. Uncertain--economic theory has no answer to this question.

c. It does not change.

Which one of the following transactions would be included in GDP? a. Ms. Kim pays $50 for a used picture frame at a neighborhood garage sale. b. Mr. Doe donates $500 to his town's junior college scholarship fund. c. Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident. d. Ms. Smith pays $5,000 to purchase 100 shares of Microsoft stock.

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

Which type of unemployment is most closely connected with the saying "you can't teach an old dog new tricks"? a. Cyclical. b. Frictional. c. Structural. d. Voluntary. e. Seasonal.

c. Structural.

If Honda (a Japanese-based firm) produces a motorcycle in Ohio and exports it to Japan, in which country's GDP will the motorcycle be counted? a. Japan's, because Honda is a Japanese company b. Japan's because that is where the motorcycle is purchased c. The GDP of the United States because that is where the motorcycle was built d. Both Japan and the United States

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

Suppose there was a country with an adult (age 16 and over) population of 1,000, of which 100 were unemployed and 700 were employed. Which of the following is true? a. The employment population ratio is 87.5 percent. b. The labor force participation rate is 70 percent. c. The unemployment rate is 12.5 percent. d. There are 700 individuals in this country's labor force.

c. The unemployment rate is 12.5 percent.

In computing the consumer price index (CPI), a base year is chosen. Which of the following statements about the base year is correct? a. The base year is always the first year among the years for which computations are being made. b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is not necessary to designate a base year. c. The value of the consumer price index is always 100 in the base year. d. All of the above are correct.

c. The value of the consumer price index is always 100 in the base year.

If a government-imposed price floor legally sets the price of milk above market equilibrium, which of the following will most likely happen? a. The quantity of milk demanded will increase. b. The quantity of milk supplied will decrease. c. There will be a surplus of milk. d. There will be a shortage of milk.

c. There will be a surplus of milk.

Within the Keynesian model, if the marginal propensity to consume is 0.8, which of the following is true? a. When consumption increases by $5, income increases by $1. b. When consumption increases by $1, saving increases by $5. c. When investment increases by $1, income increases by $5. d. When investment increases by $1, saving increases by $5.

c. When investment increases by $1, income increases by $5.

Under a system of private property, could a 60-year-old owner of a tree farm benefit by planting and caring for a crop of Douglas firs, most of which will not be ready to cut for 50 years? a. No, the farmer will be dead before the crop will be ready for harvest. b. No, the value of the farmer's land will decline since he is taking it out of production for the next 50 years. c. Yes, the farmer will benefit because this action will increase the value of the land if and when the farmer decides to sell. d. Yes, but only if the project is subsidized by the government or private conservation groups.

c. Yes, the farmer will benefit because this action will increase the value of the land if and when the farmer decides to sell.

In a market economy, a. a larger income for one person means a smaller one for another. b. the government answers all the basic economic questions. c. a larger income for one person means it is possible for others to benefit also. d. economic output shrinks as we discover better ways of doing things.

c. a larger income for one person means it is possible for others to benefit also

Assume the demand curve for cookies is downward sloping. If the price of cookies falls from $1.50 to $1.25 per dozen, a. the demand for cookies will fall. b. the demand for cookies will rise. c. a larger quantity of cookies will be demanded. d. a smaller quantity of cookies will be demanded.

c. a larger quantity of cookies will be demanded.

The crowding-out effect suggests that a. expansionary fiscal policy causes inflation. b. restrictive fiscal policy is an effective weapon against inflation. c. a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit. d. a tax reduction financed by borrowing will increase the disposable income of households and, thereby, lead to a strong expansion in aggregate demand, output, and employment.

c. a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit.

Which of the following is most likely to increase the incentive to invest, produce, and employ others? a. an increase in government expenditures to provide subsidies for large banks that made bad investment decisions b. an increase in government expenditures that changes the composition of aggregate demand c. a reduction in tax rates d. an increase in payments to unemployed workers financed by borrowing

c. a reduction in tax rates

If an economy were experiencing a high rate of unemployment as the result of weak aggregate demand, a Keynesian economist would be most likely to recommend a. a reduction in taxes but coupled with a reduction in government expenditures of equal size to balance the budget. b. an increase in government expenditures but coupled with an increase in taxes of equal size to balance the budget c. a reduction in taxes coupled with an increase in government expenditures, leading to a budget deficit. d. maintenance of a balanced budget.

c. a reduction in taxes coupled with an increase in government expenditures, leading to a budget deficit.

Within the Keynesian model, if the output of an economy is less than the full-employment level, then a. a reduction in government expenditures will direct the economy back to full-employment equilibrium. b. a reduction in wage rates and resource prices will quickly restore full-employment equilibrium. c. a reduction in the real interest rate will soon restore full-employment equilibrium. d. output will tend to remain stuck below full-employment capacity unless aggregate expenditures increase.

c. a reduction in the real interest rate will soon restore full-employment equilibrium.

If consumer incomes go up and you are analyzing the market for Harley Davidson motorcycles, the effect on the demand for motorcycles, ceteris paribus, will be a. an upward movement along the demand curve for motorcycles. b. a downward movement along the demand curve for motorcycles. c. a rightward shift in the demand curve for motorcycles. d. a leftward shift in the demand curve for motorcycles.

c. a rightward shift in the demand curve for motorcycles.

The economic way of thinking is a. a set of historical generalizations that indicates what goods should be produced. b. a body of statistical data that indicates how an economy should be organized. c. a set of basic concepts that helps one understand human choices. d. a set of complex, highly abstract theories that provides persons skilled in statistics with the information necessary to tell others what choices they should make.

c. a set of basic concepts that helps one understand human choices.

Excess reserves are a. checking deposits that are included in the M1 money supply but not the M2. b. savings deposits that are included in the M2 money supply but not the M1. c. actual reserves held by banks that exceed the legal requirement. d. the portion of deposits that banks are required by the Fed to hold as reserves against their deposits.

c. actual reserves held by banks that exceed the legal requirement.

Real GDP refers to nominal GDP a. minus gifts to other countries. b. minus total unemployment compensation. c. adjusted for price changes. d. adjusted for unemployment changes.

c. adjusted for price changes.

Which of the following is not a government policy that can enhance economic growth? a. having free international trade b. keeping marginal tax rates low c. adopting regulations fixing interest rates at low levels to prevent usury d. protecting and enforcing private property rights and contracts

c. adopting regulations fixing interest rates at low levels to prevent usury

If an economy is growing, but experiences no inflation, this means a. aggregate demand increased, but aggregate supply did not. b. aggregate supply increased, but aggregate demand did not. c. aggregate demand and aggregate supply increased by the same amount. d. aggregate demand and aggregate supply decreased by the same amount

c. aggregate demand and aggregate supply increased by the same amount.

A minimum wage that is set above a market's equilibrium wage will result in a. an excess demand for labor, that is, unemployment. b. an excess demand for labor, that is, a shortage of workers. c. an excess supply of labor, that is, unemployment. d. an excess supply of labor, that is, a shortage of workers.

c. an excess supply of labor, that is, unemployment.

The immediate effect of a member bank's sale of U.S. government securities to the Fed is a. an increase in that bank's required reserves. b. a decrease in that bank's required reserves. c. an increase in that bank's excess reserves. d. a decrease in that bank's excess reserves.

c. an increase in that bank's excess reserves.

Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas? a. a decrease in inflation b. a decrease in unemployment c. an increase in the general level of prices d. an increase in the natural rate of unemployment

c. an increase in the general level of prices

Which of the following would lead to an increase in the demand for designer blue jeans? a. a decrease in the price of designer blue jeans b. a reduction in the price of the cotton used to produce the jeans c. an increase in the income of youthful Americans d. an increase in the price of the cotton used to produce the jeans

c. an increase in the income of youthful Americans

Two goods are considered substitutes if a. a decrease in the demand for one leads to a decrease in the supply of the other. b. an increase in the demand for one leads to a decrease in the supply of the other. c. an increase in the price of one leads to an increase in the demand for the other. d. a decrease in the price of one leads to an increase in the demand for the other, e. a decrease in the supply of one leads producers to switch to production of the other.

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

If the United States unilaterally removed all of its trade restrictions and moved toward a policy of free trade, international trade theory indicates that a. U.S. residents would gain, but people in other countries would be worse off. b. people in other countries would gain, but U.S. residents would be worse off. c. both U.S. residents and people in other countries would be able to achieve higher income levels. d. the average income level would be lower in both the United States and other countries.

c. both U.S. residents and people in other countries would be able to achieve higher income levels.

. It will be difficult to institute fiscal policy in a stabilizing manner because politicians will find a. it more attractive to raise taxes than to increase spending. b. it attractive to increase taxes during a recession, but they will be reluctant to reduce them during an expansion. c. budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion. d. budget surpluses attractive during a recession, but they will be reluctant to run budget deficits during an expansion.

c. budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion.

The persistence of budget deficits during the last several decades is not surprising because politicians will find a. budget surpluses more attractive than budget deficits. b. tax increases more attractive than increases in government expenditures. c. budget deficits more attractive than budget surpluses. d. reductions in government expenditures more attractive than tax reductions.

c. budget deficits more attractive than budget surpluses.

The current demand for automobiles would decrease if a. the price of gasoline fell. b. consumer income rose. c. consumers suddenly believed the price of automobiles would be sharply lower in the near future. d. consumers suddenly believed the price of automobiles would be sharply higher in the near future.

c. consumers suddenly believed the price of automobiles would be sharply lower in the near future.

If the government ran a major budget deficit, and there was no noticeable effect on the level of GDP, this could be taken as evidence of a. Laffer curve effect. b. structural deficit. c. crowding-out. d. monetary policy ineffectiveness.

c. crowding-out.

Refer to Figure 18-9. The imposition of a tariff on carnations a. increases the number of carnations imported by 100. b. increases the number of carnations imported by 200. c. decreases the number of carnations imported by 200. d. decreases the number of carnations imported by 400.

c. decreases the number of carnations imported by 200.

The actual incidence of a tax a. depends on the statutory incidence. b. is entirely random. c. depends on the elasticities of supply and demand. d. falls entirely on buyers or entirely on sellers.

c. depends on the elasticities of supply and demand.

Supply-side economics stresses that high marginal tax rates a. are the key to maintaining a balanced budget. b. are an effective short-run countercyclical tool to promote recovery from a recession. c. discourage people from working harder and using their resources productively. d. encourage people to work, supply resources, and use them more efficiently.

c. discourage people from working harder and using their resources productively.

When policymakers impose price controls, they a. are usually following the advice of mainstream economists. b. usually improve the efficiency of economic activity. c. distort the signals that normally guide the allocation of resources. d. demonstrate a willingness to sacrifice equity in order to improve efficiency.

c. distort the signals that normally guide the allocation of resources.

A legal system that provides secure private property rights and unbiased enforcement of contracts a. is unnecessary for the smooth operation of markets. b. reduces the efficiency of markets. c. enhances the efficiency of markets. d. makes it easier for sellers to cheat or defraud consumers.

c. enhances the efficiency of markets.

When the quantity demanded and quantity supplied in a market are equal, the market is said to be in a. fixation. b. excess supply. c. equilibrium. d. excess demand.

c. equilibrium.

The use of government taxation and expenditures to achieve macroeconomic goals is called a. cyclical policy. b. monetary policy. c. fiscal policy. d. industrial policy.

c. fiscal policy.

Economists use the term "business cycle" to refer to a. the growth of small businesses into major corporations. b. changes in products that occur from improved technology. c. fluctuations in the level of real output and employment. d. periods of increases and decreases in the rate of inflation.

c. fluctuations in the level of real output and employment.

One difficulty of computing the value of GDP is that there are no market prices for a. exports and imports. b. business investments. c. government goods and services. d. resource values.

c. government goods and services.

After a natural disaster, such as a hurricane, the increased demand for certain items (like lumber, electric generators, and chainsaws) causes their prices to rise. These higher prices a. discourage the flow of these items into the area. b. encourage consumers to purchase the items even if they do not plan to use them. c. help to direct the items toward their highest valued uses. d. do all of the above.

c. help to direct the items toward their highest valued uses.

Mathematically, the marginal propensity to consume (MPC) is a. consumption divided by income. b. the change in consumption divided by the change in income. c. income divided by consumption. d. the change in income divided by the change in consumption.

c. income divided by consumption.

"If there is unemployment, the average wage rate will decline as the unemployed workers choose lower wages rather than going without a job. The demand curve for labor slopes downward and to the right so that more workers would be hired at the lower wage rate, restoring full employment." According to the Keynesian view, this quote is a. incorrect because widespread unemployment would cause wages to rise, not decline. b. incorrect because the demand for labor, other things constant, will not be negatively related to wages. c. incorrect because wages and prices tend to be highly inflexible downward when surpluses arise, thus contradicting the laws of supply and demand. d. essentially correct.

c. incorrect because wages and prices tend to be highly inflexible downward when surpluses arise, thus contradicting the laws of supply and demand.

If the public decides to hold less currency and more deposits in banks, bank reserves a. decrease and the money supply eventually decreases. b. decrease but the money supply does not change. c. increase and the money supply eventually increases. d. increase but the money supply does not change.

c. increase and the money supply eventually increases.

The supply-side effects of a reduction in taxes are the result of a. increases in the disposable income of households accompanying reductions in tax rates. b. the stimulus effects of increases in government expenditures. c. increased attractiveness of productive activity relative to leisure and tax avoidance. d. reductions in interest rates that generally accompany expansionary fiscal policy.

c. increased attractiveness of productive activity relative to leisure and tax avoidance.

In the context of aggregate supply, the long run is defined as the period during which a. some prices are set by contracts and cannot be adjusted. b. prices can change, but neither aggregate supply nor aggregate demand can shift. c. individuals have sufficient time to modify their behavior in response to price changes. d. quantity changes cannot occur in response to changes in relative prices.

c. individuals have sufficient time to modify their behavior in response to price changes.

The law of demand refers to the a. decrease in price that can be expected as more units of a product are demanded. b. increase in price that results from an increase in demand for a good of limited supply. c. inverse relationship between the price of a good and the quantity demanded. d. increase in the quantity of a good available when its price increases.

c. inverse relationship between the price of a good and the quantity demanded.

Countries that have a higher degree of economic freedom tend to a. invest a larger share of their output, but the productivity of that investment is lower than for economies that are less free. b. invest a smaller share of their output, but the productivity of that investment is higher than for economies that are less free. c. invest a larger share of their output and the productivity of that investment is higher than for the economies that are less free. d. invest a smaller share of their output and the productivity of that investment is lower than for economies that are less free.

c. invest a larger share of their output and the productivity of that investment is higher than for the economies that are less free.

New residential housing is counted in GDP as a(n) a. durable consumption good. b. household durable good. c. investment good. d. inventory expansion. e. long-term durable good.

c. investment good.

When a tax is imposed on a good, the actual incidence of the tax generally a. falls entirely on the buyer. b. falls entirely on the seller. c. is shared between the buyer and seller. d. is the same as the statutory incidence.

c. is shared between the buyer and seller.

Opening trade between two nations would a. shift their production possibilities curves outward. b. shift their production possibilities curves inward. c. leave the production possibilities unchanged and increase their consumption possibilities. d. leave the production possibilities unchanged and decreased their consumption possibilities.

c. leave the production possibilities unchanged and increase their consumption possibilities.

The economizing problem is essentially one of deciding how to make the best use of a. limited resources to satisfy limited wants. b. unlimited resources to satisfy limited wants. c. limited resources to satisfy virtually unlimited wants. d. unlimited resources to satisfy unlimited wants.

c. limited resources to satisfy virtually unlimited wants.

In the aggregate demand/aggregate supply model, an increase in a country's sustainable potential output is represented by an increase in a. prices. b. aggregate demand. c. long-run aggregate supply. d. an increase in the general level of prices.

c. long-run aggregate supply.

If the political leaders of a country want to promote economic growth, which of the following policy alternatives would be most effective? a. imposition of price controls on agricultural products in an effort to keep food cheap b. a public-sector investment program financed by highly progressive taxation c. low taxes, a monetary policy consistent with long-run price stability, and the abolition of price controls and trade restrictions d. expansionary monetary policy designed to keep interest rates low

c. low taxes, a monetary policy consistent with long-run price stability, and the abolition of price controls and trade restrictions

If a reform of the tax laws encourages greater saving by households, the result would be a. higher interest rates and greater investment. b. higher interest rates and less investment. c. lower interest rates and greater investment. d. lower interest rate and less investment

c. lower interest rates and greater investment.

The difference between microeconomics and macroeconomics is that a. microeconomics involves mathematical relationships, and macroeconomics is predominantly a verbal analysis. b. microeconomics deals with the principle of scarcity, and macroeconomics deals with the problem of poverty. c. microeconomics deals with narrowly defined units, and macroeconomics focuses on highly aggregated markets. d. microeconomics is normative, and macroeconomics is positive.

c. microeconomics deals with narrowly defined units, and macroeconomics focuses on highly aggregated markets.

If there is surplus of loanable funds, then a. the supply for loanable funds shifts right and the demand shifts left. b. the supply for loanable funds shifts left and the demand shifts right. c. neither curve shifts, but as the interest rate rises to equilibrium the quantity of loanable funds supplied increases and the quantity demanded decreases. d. neither curve shifts, but as the interest rate falls to equilibrium the quantity of loanable funds supplied decreases and the quantity demanded increases.

c. neither curve shifts, but as the interest rate rises to equilibrium the quantity of loanable funds supplied increases and the quantity demanded decreases.

The expression, "There's no such thing as a free lunch," implies that a. everyone has to pay for his own lunch. b. the person consuming a good must always pay for it. c. opportunity costs are incurred when resources are used to produce goods and services. d. no one has time for a good lunch anymore.

c. opportunity costs are incurred when resources are used to produce goods and services.

When economists say the quantity supplied of a product has increased, they mean the a. supply curve has shifted to the left. b. supply curve has shifted to the right. c. price of the product has risen, and consequently, suppliers are producing more of it. d. price of the product has fallen, and consequently, suppliers are producing less of it.

c. price of the product has risen, and consequently, suppliers are producing more of it.

Bill is willing to cut lawns for a minimum of $200 a week. He is, however, paid $250 for the same service by a lawn maintenance company. This is an example of a. consumer surplus. b. employment discrimination. c. producer surplus. d. the derivation of accounting profit.

c. producer surplus.

The curve that shows the relationship between the price of a good and the quantity that consumers are willing to purchase at each price is the a. supply curve. b. demand curve. c. production possibilities curve. d. consumption curve.

c. production possibilities curve.

Middlemen are individuals who a. add to the buyer's expense without performing a useful function. b. add to the seller's cost without performing a useful function. c. provide services that reduce the cost of transactions and help achieve additional gains from trade. d. act as a middle person between the top management of a business firm and the hourly employees who actually produce the goods and services.

c. provide services that reduce the cost of transactions and help achieve additional gains from trade.

A recession abroad would a. increase U.S. net exports and increase aggregate demand. b. increase U.S. net exports and increase aggregate supply. c. reduce U.S. net exports and reduce aggregate demand. d. reduce U.S. net exports and increase aggregate demand.

c. reduce U.S. net exports and reduce aggregate demand.

Trade restrictions like tariffs and quotas will a. protect American jobs and increase employment. b. ensure that more dollars stay in the United States. c. reduce the value of goods and services that we will be able to produce and consume. d. Make all Americans better off.

c. reduce the value of goods and services that we will be able to produce and consume.

An increase in the discount rate impacts the money supply because it a. makes it more attractive for commercial banks to borrow from the Federal Reserve. b. decreases the interest yield on new issues of U.S. securities. c. reduces the incentive of commercial banks to borrow from the Federal Reserve. d. increases the Federal Reserve's earnings and, thereby, expands the money supply

c. reduces the incentive of commercial banks to borrow from the Federal Reserve.

Which of the following is a key characteristic of economic freedom? a. subsidies and regulations that favor business b. large governments with central planning c. reliance on open markets and limited government d. import quotas that protect domestic businesses from rivals

c. reliance on open markets and limited government

When the nation of Econoland allows trade and as a result becomes an exporter of televisions, a. residents who produce televisions become worse off; residents who buy televisions become better off; and the economic well-being of Econoland rises. b. residents who produce televisions become worse off; residents who buy televisions become better off; and the economic well-being of Econoland falls. c. residents who produce televisions become better off; residents who buy televisions become worse off; and the economic well-being of Econoland rises. d. residents who produce televisions become better off; residents who buy televisions become worse off; and the economic well-being of Econoland falls.

c. residents who produce televisions become better off; residents who buy televisions become worse off; and the economic well-being of Econoland rises.

An unanticipated reduction in the level of prices in the goods and services market, which results in a temporary increase in real wage rates, will a. increase the natural rate of unemployment. b. reduce the natural rate of unemployment. c. result in an actual rate of unemployment that is less than the natural rate of unemployment. d. result in an actual rate of unemployment that is greater than the natural rate of unemployment.

c. result in an actual rate of unemployment that is less than the natural rate of unemployment.

Rent control applies to about two-thirds of the private rental housing in New York City. Economic theory suggests that the below-equilibrium prices established by rent controls would a. create a surplus of rental housing. b. promote a rapid increase in the future supply of housing. c. result in poor service and quality deterioration of many rental units. d. lead to a reduction in housing discrimination against minorities.

c. result in poor service and quality deterioration of many rental units.

Which of the following would be most likely to cause an increase in current aggregate demand in the United States? a. increased fear that the U.S. economy was going into a recession b. an increase in the real interest rate c. sharp increase in the value of stocks owned by Americans d. a recession in Canada, Mexico, and Western Europe

c. sharp increase in the value of stocks owned by Americans

If the price of coffee decreases, the demand curve for tea (a substitute good) will a. remain unchanged. b. shift to the right. c. shift to the left. d. do none of the above

c. shift to the left.

The student government associations at several universities have experimented with purchasing bicycles to leave around campus for everyone's use. Anyone who needs the bike can use it, and they are not allowed to lock the bike up or take it home, but rather must leave it on campus for someone else to use. Economic theory would predict that a. students will take better care of these commonly owned bicycles than they do their own bicycles. b. students will take equally as good care of these commonly owned bicycles as they do their own bicycles. c. students will not take as good of care of these commonly owned bicycles as they do their own bicycles. d. because universities have a lot of money, these bikes will be better maintained than the ones owned privately by college students who tend to have little money.

c. students will not take as good of care of these commonly owned bicycles as they do their own bicycles.

Federal budget deficits generally grow during recessions because a. both tax revenues and transfer payments decrease. b. both tax revenues and transfer payments increase. c. tax revenues decrease while transfer payments increase. d. tax revenues increase while transfer payments decrease. e. tax revenues decrease but transfer payments are unchanged.

c. tax revenues decrease while transfer payments increase

Economics is primarily the study of a. why people like to make money. b. the management of a business. c. the choices people make as the result of scarcity. d. how to make money in the stock market.

c. the choices people make as the result of scarcity.

"The money and resources currently being devoted to the War on Terrorism reduces the quantity of other goods that we are able to supply." This statement most clearly illustrates which of the following? a. the fallacy of composition. b. the idea that association is not causation. c. the concept of opportunity cost. d. the difference between positive and normative economics.

c. the concept of opportunity cost.

An increase in the Consumer Price Index indicates that a. the real income of households is increasing. b. the purchasing power of the dollar is increasing. c. the cost of buying the typical bundle of goods consumed by households is increasing. d. the real net worth of consumers is increasing.

c. the cost of buying the typical bundle of goods consumed by households is increasing.

The primary source of purchasing power used to buy imported goods is a. the monetary sector. b. the balance of payments deficit. c. the exports of a nation. d. taxation and other revenue-generating activities.

c. the exports of a nation.

"Now that Blake paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects a. the importance of secondary effects. b. the fallacy of composition. c. the law of comparative advantage. d. behavior inconsistent with economizing.

c. the law of comparative advantage.

Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, a. the demand curve for physicals shifts to the right. b. the supply curve for physicals shifts to the left. c. the quantity demanded of physicals increases and the quantity supplied of physicals decreases. d. the number of physicals performed will increase.

c. the quantity demanded of physicals increases and the quantity supplied of physicals decreases.

The opportunity cost of an action is a. the monetary payment the action required. b. the total time spent by all parties in carrying out the action. c. the value of the best opportunity that must be sacrificed in order to take the action. d. the cost of all alternative actions that could have been taken, added together.

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

Both the crowding-out and new classical models indicate that a. expansionary fiscal policy is a highly effective weapon with which to fight an economic downturn. b. restrictive fiscal policy is a highly effective weapon with which to control inflation caused by excess demand. c. there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand. d. fiscal policy can be used effectively to restrain inflation but it is largely ineffective as a weapon against recession.

c. there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand.

Refer to Figure 18-9. With trade and without a tariff, a. the domestic price is equal to the world price. b. carnations are sold at $8 in this market. c. there is a shortage of 400 carnations in this market. d. this country imports 200 carnations.

c. there is a shortage of 400 carnations in this market.

If domestic producers have a comparative advantage in producing a good, a. trade restrictions will be required before the producers can benefit from their comparative advantage. b. trade restrictions will still be required before the domestic producers can compete with low-wage producers abroad. c. they will be able to compete effectively in a competitive world market. d. the government should subsidize production of the good so the domestic producers will be able to achieve a larger share of the world market.

c. they will be able to compete effectively in a competitive world market.

If labor-intensive textile products could be produced more cheaply in low-wage countries than in the United States, the United States would gain if it a. levied a tariff on the goods produced by the cheap foreign labor. b. subsidized the domestic textile industry so it could compete in international markets. c. used its resources to produce other items while importing textiles from foreigners. d. levied a tax on the domestic textile products to penalize the industry for inefficiency.

c. used its resources to produce other items while importing textiles from foreigners.

Other things being constant, countries with higher rates of saving a. will have smaller GDPs than countries with lower rates of saving. b. will have higher rates of investment, but slower growth. c. will have higher rates of investment and growth. d. will be operating at less than full employment and potential output.

c. will have higher rates of investment and growth.

Refer to Figure 18-9. The size of the tariff on carnations is a. $8 per dozen. b. $6 per dozen. c. $4 per dozen. d. $2 per dozen.

d. $2 per dozen.

Refer to Figure 18-8. With trade, the price of wagons in this country is a. $8, with 70 wagons being produced in this country, 20 of which are exported. b. $8, with 90 wagons being produced in this country, 50 of which are exported. c. $5, with 40 wagons being produced in this country and another 30 wagons being imported. d. $5, with 40 wagons being produced in this country and another 50 wagons being imported.

d. $5, with 40 wagons being produced in this country and another 50 wagons being imported.

Raul borrowed $1,000 from Marta for a year and agreed to repay her $1,050 at the end of the year. If the inflation rate was 3 percent, what is the real rate of interest Marta received and Raul paid? a. 10 percent b. 5 percent c. 3 percent d. 2 percent e. −2 percent

d. 2 percent

The population (age 16 and over) of Econoland is 100 million; 5 million are unemployed, and 70 million hold jobs. The labor force participation rate in Econoland is a. 5 percent. b. 65 percent. c. 70 percent. d. 75 percent.

d. 75 percent.

Refer to Figure 18-10. Consumer surplus with trade and without a tariff is a. A. b. A + B. c. A + C + G. d. A + B + C + D + E + F.

d. A + B + C + D + E + F.

Which of the following properly describes the interest-rate effect of aggregate demand? a. A higher price level leads to higher money demand, higher money demand leads to higher interest rates, a higher interest rate increases the quantity of goods and services demanded. b. A higher price level leads to higher money demand, higher money demand leads to lower interest rates, a higher interest rate reduces the quantity of goods and services demanded. c. A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate reduces the quantity of goods and services demanded. d. A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate increases the quantity of goods and services demanded.

d. A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower interest rate increases the quantity of goods and services demanded.

Economists are generally opposed to tariffs or other restrictions on imported goods because of the negative secondary effects they create that more than offset the benefits to employment in the domestic industry. Which of the following could be considered a secondary effect of these trade restrictions? a. The price to consumers of the good in question will be higher as a result of the restriction, meaning consumers will be worse off. b. As consumers must spend more money to purchase the good, there will be employment losses in other domestic industries as consumers cut back on their spending on other things. c. Because there is a link between a country's imports and its exports, less imports from other countries will result in lower domestic employment in export industries. d. All of the above.

d. All of the above.

Which of the following attributes of trade explain why it is important for economic prosperity? a. Trade moves goods from people who value them less to people who value them more. b. Trade makes it possible to produce a larger output as a result of lower per unit costs that often accompany large-scale production. c. Trade makes it possible to produce a larger output as a result of gains from division of labor and specialization. d. All of the above.

d. All of the above.

Which one of the following transactions would be included in this year's GDP? a. Todd purchases a used CD at a neighborhood garage sale. b. Mrs. Rock purchases $500 of common stock of Quick-Gro Foods, Inc. c. Mr. I.V. League donates $300 to his town's junior college scholarship fund. d. An American buys a Honda manufactured at a plant in Ohio.

d. An American buys a Honda manufactured at a plant in Ohio.

Which of the following is true of the interaction of supply and demand? a. As the price increases, the quantity demanded and the quantity supplied will increase. b. As the price increases, the quantity demanded and the quantity supplied will decrease. c. As the price increases, the quantity demanded increases and the quantity supplied will decrease. d. As the price increases, the quantity demanded will decrease and the quantity supplied will increase. e. As the price increases, neither the quantity demanded nor quantity supplied will change.

d. As the price increases, the quantity demanded will decrease and the quantity supplied will increase.

Refer to Figure 18-10. The amount of government revenue created by the tariff is a. B. b. E. c. D + F. d. B + D + E + F.

d. B + D + E + F.

Suppose the lowest-wage state in the United States is West Virginia and the highest-wage state is New York. Which of the following would be true? a. If New York trades with West Virginia, consumers in New York will be worse off. b. If New York trades with West Virginia, wages in New York will fall until they equal the wages in West Virginia. c. New York would be better off if its state government imposed restrictions on the importation of goods made in West Virginia. d. Both New York and West Virginia will be better off if they are allowed to trade freely.

d. Both New York and West Virginia will be better off if they are allowed to trade freely.

Legislation to protect red-cockaded woodpeckers by making their trees off limits to loggers created incentives that resulted in the premature harvesting of trees the woodpeckers like to nest in. This is an example of which of the following? a. Association or correlation is not causation. b. the fallacy of composition. c. the use of ceteris paribus conditions in economic analysis. d. Good intentions do not always lead to desirable outcomes; the problem of secondary effects.

d. Good intentions do not always lead to desirable outcomes; the problem of secondary effects.

If the Fed injects additional reserves into the banking system through, say, an open market purchase of government securities, why will banks generally want to expand their loans and investments? a. Banks are legally required to expand loans when the Fed creates excess reserves. b. Maintaining reserves in excess of demand deposits is against the law. c. Banks fear the Fed will respond by removing the excess reserves thus creating a credit crunch and bank runs and panics. d. Loans and investments will generally earn more interest income for the banks than excess reserves, giving them an incentive to extend credit.

d. Loans and investments will generally earn more interest income for the banks than excess reserves, giving them an incentive to extend credit.

Refer to Figure 18-10. With the tariff, the domestic price and domestic quantity demanded are a. P1 and Q1. b. P1 and Q4. c. P2 and Q2. d. P2 and Q3.

d. P2 and Q3.

Which of the following most accurately indicates the political incentive to spend and/or tax? a. Politicians will find tax increases more attractive than increases in government expenditures. b. Voters will generally support higher taxes in order to eliminate budget deficits. c. Politicians are rewarded for raising taxes and punished for providing programs that benefit their constituents. d. Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes.

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

Which of the following individuals would be considered unemployed by the official government definition? a. George, a mathematician, who returned to graduate school after failing to find a job the last four months b. Gwen, a medical student, who is still in college and is not working c. Morgan, who is employed part-time but desires a full-time job d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant

d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant

Which of the following will most likely occur under a system of clearly defined and enforced private property rights? a. Resource owners will fail to conserve vital resources, even if they expect their supply to be highly limited in the future. b. Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned. c. Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources. d. Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

d. Resource owners will gain by discovering and employing their resources in ways that are highly valued by others.

Harold, a delivery man, washes and irons his own shirts. Sarah, his boss, sends her clothes to a laundry. Which is the most plausible economic explanation for this difference? a. Harold must enjoy ironing more than Sarah does. b. Harold must be better at ironing than Sarah is. c. The opportunity cost of ironing is greater for Harold. d. Sarah has a higher opportunity cost of laundering her clothes than Harold does.

d. Sarah has a higher opportunity cost of laundering her clothes than Harold does.

What do economists mean when they state that a good is scarce? a. There is a shortage or insufficient supply of the good at the existing price. b. It is impossible to expand the availability of the good beyond the current amount. c. People will want to buy more of the good regardless of the price of the good. d. The amount of the good that people would like exceeds the supply freely available from nature.

d. The amount of the good that people would like exceeds the supply freely available from nature.

A cold spell in Florida extensively reduced the orange crop, and as a result, California oranges commanded a higher price. Which of the following statements best explains the situation? a. The supply of Florida oranges fell, causing the supply of California oranges to increase as well as their price. b. The supply of Florida oranges fell, causing the supply of California oranges to decrease and their price to increase. c. The supply of Florida oranges fell, causing their price to increase and the demand for California oranges to increase. d. The demand for Florida oranges was reduced by the freeze, causing an increase in the price of California oranges and a greater demand for them.

d. The demand for Florida oranges was reduced by the freeze, causing an increase in the price of California oranges and a greater demand for them.

A business spends $10 million on new capital equipment, and during the same year, $7 million of its existing capital wears out. Which of the following is correct? a. The firm's gross investment is $7 million, and its net investment is $10 million. b. The firm's gross investment is $3 million, and its net investment is $7 million. c. The firm's gross investment is $7 million, and its net investment is $3 million. d. The firm's gross investment is $10 million, and its net investment is $3 million.

d. The firm's gross investment is $10 million, and its net investment is $3 million.

Suppose there was a sharp reduction in stock prices and a sharp increase in the world price of crude oil. Within the framework of the AD/AS model, how would these two changes influence the U.S. economy? a. The lower stock prices would increase SRAS, and the higher crude oil prices would reduce AD; as a result, there would be downward pressure on the general level of prices. b. The lower stock prices would reduce SRAS, and the higher crude oil prices would increase AD; as a result, there would be upward pressure on the general level of prices. c. The lower stock prices would increase AD, and the higher crude oil prices would increase SRAS; as a result, output would tend to increase. d. The lower stock prices would reduce AD, and the higher crude oil prices would reduce SRAS; as a result, output would tend to decline.

d. The lower stock prices would reduce AD, and the higher crude oil prices would reduce SRAS; as a result, output would tend to decline.

Suppose the United States reduced the tariff on television sets, allowing foreign-produced televisions to more freely enter the U.S. market. Which of the following would most likely occur? a. The price of televisions to U.S. consumers would increase, and the demand for U.S. export products would rise. b. The price of televisions to U.S. consumers would fall, and the demand for U.S. export products would fall. c. The price of televisions to U.S. consumers would increase, and the demand for U.S. export products would fall. d. The price of televisions to U.S. consumers would fall, and the demand for U.S. export products would rise.

d. The price of televisions to U.S. consumers would fall, and the demand for U.S. export products would rise.

Economists have argued that rent control is "the best way to destroy a city, other than bombing." Why would economists say this? a. They anticipate that low rents will cause low-income people to move into the city, reducing the quality of life for other people. b. They anticipate that rent control will benefit landlords at the expense of tenants, increasing inequality in the city. c. They anticipate that rent controls will cause a construction boom, which will make the city crowded and more polluted. d. They anticipate that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

d. They anticipate that rent control will eliminate the incentive to maintain buildings, leading to a deterioration of the city.

The argument that import restrictions save jobs and promote prosperity fails to recognize that a. there are no secondary effects of import restrictions. b. import restrictions will lower prices in the protected industries. c. import restrictions cannot create jobs in any industries. d. U.S. imports provide people in other countries with the purchasing power required for the purchase of U.S. exports.

d. U.S. imports provide people in other countries with the purchasing power required for the purchase of U.S. exports.

Which of the following would be classified as unemployed? a. mothers who choose to stay at home with their preschool-age children b. retirees who are no longer working at a job c. students attending school full time d. a 20-year old looking for her first job

d. a 20-year old looking for her first job

Which of the following is the most likely result of an increase in the minimum wage? a. an increase in the employment of unskilled workers b. a decrease in the number of workers seeking minimum wage jobs c. an increase in the demand for unskilled workers d. a decrease in the employment of unskilled workers

d. a decrease in the employment of unskilled workers

The law of comparative advantage indicates that a. a group of people will reduce their output when each good or service is supplied by the low opportunity cost producer. b. trading partners lose when they can acquire a good through trade cheaper than they can produce it. c. trade is most effective when people trade only among those in their own nation. d. a group of people can increase their output when each good or service is supplied by the low opportunity cost producer.

d. a group of people can increase their output when each good or service is supplied by the low opportunity cost producer.

International trade is advantageous because trade makes it possible for people in each country to a. import more than they export. b. export more than they import. c. employ more of their domestic resources producing things that are costly for them to produce domestically. d. acquire goods from foreigners more economically than they could be produced domestically. e. do all of the above.

d. acquire goods from foreigners more economically than they could be produced domestically.

As the general price level in an economy rises, the aggregate quantity demanded of goods and services falls because a. the prices of domestic goods have risen relative to foreign goods, causing exports to fall and imports to rise. b. higher interest rates caused by an increase in the demand for money balances causes a reduction in current investment and consumption. c. the value of money will fall, reducing the real wealth and, thus, the consumption of persons holding money balances. d. all of the above are correct.

d. all of the above are correct.

During the Prohibition period (when the production and sale of alcohol was illegal), a. the quality of alcohol sold became less reliable. b. the murder rate increased. c. gangsters dominated the alcohol trade. d. all of the above occurred.

d. all of the above occurred.

If drugs such as marijuana and cocaine were legalized, it would be likely that a. their prices would decrease. b. there would be a reduction in tainted or poor quality drugs. c. there would be less violence occurring in drug transactions. d. all of the above.

d. all of the above.

Private property rights involve a. the right to exclusive use of the property. b. legal protection against those who would seek to use or abuse the property without the owner's permission. c. the right to transfer, sell, exchange, or mortgage the property. d. all of the above.

d. all of the above.

Suppose that vegetarian lobby groups run large advertising campaigns that are successful in substantially lowering the consumption of beef. As a result of the substantially lower desire for beef, we would expect a. the price of beef to fall. b. the profitability of being a cattle rancher to fall. c. a reduction in the number and size of cattle herds--and thus the number of cows--in the long run. d. all of the above.

d. all of the above.

Which of the following will most likely increase aggregate supply in the long run? a. unfavorable weather conditions in agricultural areas b. an increase in the expected inflation rate c. higher real interest rates d. an increase in the rate of capital formation and technological advances

d. an increase in the rate of capital formation and technological advances

When the production possibilities curve is bowed out, resources are a. equally well-suited to production of both goods. b. not being used efficiently. c. not equally suited to the production of both goods. d. available in larger and larger quantities as more of one good is produced

d. available in larger and larger quantities as more of one good is produced.

Which of the following goods are most likely to be substitutes? a. potato chips and chip dip b. bread and peanut butter c. ketchup and French fries d. bananas and apples

d. bananas and apples

If a surplus exists in a market we know that the actual price is a. above equilibrium price and quantity supplied is greater than quantity demanded. b. above equilibrium price and quantity demanded is greater than quantity supplied. c. below equilibrium price and quantity demanded is greater than quantity supplied. d. below equilibrium price and quantity supplied is greater than quantity demanded.

d. below equilibrium price and quantity supplied is greater than quantity demanded.

Economic analysis assumes that a. individuals act only out of selfish motives. b. although individuals are at times selfish and at times unselfish, only their selfish actions may be predicted. c. people are basically humanitarian, and their actions are, therefore, impossible to predict. d. changes in the personal benefits and costs associated with a choice will exert a predictable influence on human behavior.

d. changes in the personal benefits and costs associated with a choice will exert a predictable influence on human behavior.

Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that a. increases in consumption will make it easier for households to deal with unanticipated future expenses. b. increases in consumption will provide more loanable funds for investment. c. you cannot have a strong economy if all or most households are spending just about everything they earn. d. consumer spending is less than two-thirds of GDP.

d. consumer spending is less than two-thirds of GDP.

If consumer tastes are changing more in favor of the consumption of a particular good the a. market demand curve will shift to the left. b. consumer will move up a given demand curve, decreasing the quantity demanded. c. consumer would move down a given demand curve, decreasing the quantity demanded. d. consumer would move down a given demand curve, increasing the quantity demanded. e. market demand curve would shift to the right.

d. consumer would move down a given demand curve, increasing the quantity demanded

Toby loses his job and immediately begins looking for another. Other things the same, the unemployment rate a. increases, and the labor-force participation rate decreases. b. increases, and the labor-force participation rate is unaffected. c. is unaffected, and the labor-force participation rate increases. d. decreases, and the labor-force participation rate is unaffected.

d. decreases, and the labor-force participation rate is unaffected.

Full employment a. exists when everyone in the economy has a job b. exists when everyone who wants a job has one c. exists when the unemployment rate is zero d. exists when everyone in the labor force has a job e. will always include some unemployment

d. exists when everyone in the labor force has a job

Refer to Figure 18-6. With trade, China will a. import 100 pencil sharpeners. b. import 250 pencil sharpeners. c. export 150 pencil sharpeners. d. export 250 pencil sharpeners.

d. export 250 pencil sharpeners.

Suppose the Swiss government subsidized its watch-making industry, enabling Swiss producers to undersell foreign watch producers. The law of comparative advantage indicates that watch-importing nations would best take advantage of the Swiss subsidization policy by a. setting a tariff high enough to just offset the subsidy granted to the Swiss watch-making industry. b. setting a declining quota on the import of Swiss watches such that the nation's domestic watch-making industry would continue to grow at the same rate as the rest of the economy. c. setting a tariff such that the prices of Swiss and domestic watches to the consumer are equal. d. gladly accepting the subsidy of the Swiss government, making the appropriate adjustment for the resources temporarily displaced from the domestic watch-making industry.

d. gladly accepting the subsidy of the Swiss government, making the appropriate adjustment for the resources temporarily displaced from the domestic watch-making industry.

A shortage occurs whenever a. quantity demanded exceeds quantity supplied at the equilibrium price. b. price is less than equilibrium price. c. quantity demanded is less than quantity supplied. d. goods are scarce. e. some of the people who need the product are not willing and able to buy it at the equilibrium price.

d. goods are scarce.

"Bill Gates has made billions of dollars producing and marketing computer software. Many workers and consumers must have suffered in order for Gates to amass such enormous wealth." The person who made this observation a. has failed to understand the principle of opportunity cost. b. has failed to comprehend the fallacy of composition. c. has failed to understand that specialization and voluntary exchange result in mutual economic gain. d. has utilized the economic way of thinking by thinking the gains of producers are made primarily at the expense of consumers and workers.

d. has utilized the economic way of thinking by thinking the gains of producers are made primarily at the expense of consumers and workers.

For the typical student, taking an introductory course in economics should a. turn the student into an economist. b. teach the student solutions to all social problems. c. teach the student all the answers to the most complex social questions. d. help the student learn to rationally analyze and systematically think about social problems. e. All of the above are correct.

d. help the student learn to rationally analyze and systematically think about social problems.

Frictional unemployment is the result of a. not enough jobs for everyone to be employed. b. unemployed workers' skills not matching those needed for the available jobs. c. a decline in the demand for labor, such as during a recession. d. imperfect information and temporary periods of unemployment while workers are changing jobs.

d. imperfect information and temporary periods of unemployment while workers are changing jobs.

Refer to Figure 18-8. With trade, this country a. exports 20 wagons. b. exports 50 wagons. c. imports 30 wagons. d. imports 50 wagons.

d. imports 50 wagons.

Gross private domestic investment a. excludes all investment in the United States by foreign firms. b. includes all capital in the United States. c. includes net additions to the capital stock plus all new corporate stocks and bonds. d. includes business expenditures on new factories, tools, and machinery.

d. includes business expenditures on new factories, tools, and machinery.

If an improvement in the quality of education in the United States increases the productivity of labor, this will a. increase aggregate demand and decrease aggregate supply. b. increase short-run aggregate supply and reduce aggregate demand. c. decrease aggregate demand and increase short-run aggregate supply. d. increase both long-run and short-run aggregate supply.

d. increase both long-run and short-run aggregate supply.

An increase in the expected future price of a good will cause the current demand for the good to a. decrease, which is a shift to the left of the demand curve. b. decrease, which is a shift to the right of the demand curve. c. increase, which is a shift to the left of the demand curve. d. increase, which is a shift to the right of the demand curve.

d. increase, which is a shift to the right of the demand curve.

The expansionary phase of the business cycle is characterized by a. decreasing real output and increasing unemployment. b. decreasing real output and declining unemployment. c. increasing real output and increasing unemployment. d. increasing real output and declining unemployment.

d. increasing real output and declining unemployment.

Economic theory a. is a set of definitions, postulates, and principles assembled in a manner that helps make cause-and-effect relationships clear in economics. b. is like a guidebook in that it points out what to look for. c. provides economists with a common language and way of thinking about how the world works. d. is all of the above.

d. is all of the above.

Potential GDP a. is always less than actual GDP. b. is identical to actual GDP. c. measures inflation. d. is the output an economy could produce at full employment.

d. is the output an economy could produce at full employment.

The natural rate of unemployment a. is a temporary low rate that cannot be maintained. b. is fixed; it cannot be altered by public policy. c. is equal to the number of persons unemployed divided by the number in the labor force. d. is the unemployment rate accompanying the economy's maximum sustainable rate of output.

d. is the unemployment rate accompanying the economy's maximum sustainable rate of output.

Other things the same, an increase in the price level makes the dollars people hold worth a. more, so they are willing to spend more. b. more, so they are willing to spend less. c. less, so they are willing to spend more. d. less, so they are willing to spend less.

d. less, so they are willing to spend less.

The "loanable funds market" is a term used by economists to describe the a. demand for goods and services by households. b. market that includes resources such as labor and capital. c. supply of goods and services by firms. d. market that coordinates the borrowing and lending of individuals and firms.

d. market that coordinates the borrowing and lending of individuals and firms.

If Country A has an absolute advantage over Country B in the production of every commodity, a. mutual gains from trade between Country A and Country B would be impossible. b. Country B would be able to gain from trade but not country A. c. the joint output of the two countries could not be increased through specialization and exchange. d. mutual gains from trade would still be possible.

d. mutual gains from trade would still be possible.

Rather than seeking to balance the budget, Keynesian economists argue that the government's tax and spending policies should be determined by the a. demand for government-provided public goods. b. level of aggregate demand required to achieve full employment of resources. c. size and quality of the labor force. d. need to expand or contract the supply of money.

d. need to expand or contract the supply of money.

If there is shortage of loanable funds, then a. the supply for loanable funds shifts right and the demand shifts left. b. the supply for loanable funds shifts left and the demand shifts right. c. neither curve shifts, but as the interest rate rises to equilibrium the quantity of loanable funds supplied increases and the quantity demanded decreases. d. neither curve shifts, but as the interest rate falls to equilibrium the quantity of loanable funds supplied decreases and the quantity demanded increases.

d. neither curve shifts, but as the interest rate falls to equilibrium the quantity of loanable funds supplied decreases and the quantity demanded increases.

Because information is costly to acquire, a. people will rationally choose not to become fully informed when making decisions. b. people will generally choose to become as fully informed as possible when making decisions. c. people will generally choose to acquire no information that would be relevant to their decisions. d. none of the above are true.

d. none of the above are true.

An increase in the long-run aggregate supply curve indicates that a. the natural rate of unemployment has increased. b. unemployment has increased. c. the general level of prices has increased. d. potential real GDP has increased.

d. potential real GDP has increased.

When economists say the quantity demanded of a product has decreased, they mean the a. demand curve has shifted to the left. b. demand curve has shifted to the right. c. price of the product has fallen, and consequently, consumers are buying more of it. d. price of the product has risen, and consequently, consumers are buying less of it.

d. price of the product has risen, and consequently, consumers are buying less of it.

Because of a late night out with friends, Alyssa decided to sleep in rather than attend her 7:50 a.m. economics class. According to economic analysis, her choice was a. irrational, because economic analysis suggests you should always attend classes that you have already paid for. b. irrational, because oversleeping is not in Alyssa's self-interest. c. rational only if Alyssa has not missed any other classes during the current semester. d. rational if Alyssa values the additional sleep more highly than the extra benefit she expects to receive from attending the class.

d. rational if Alyssa values the additional sleep more highly than the extra benefit she expects to receive from attending the class.

Which of the following would be most appropriate for the measurement of differences in the average standard of living of people at different points in time? a. nominal GDP b. real GDP c. nominal GDP per capita d. real GDP per capita

d. real GDP per capita

A decrease in the price of leather used to make shoes would cause the a. demand for shoes to decrease. b. demand for shoes to increase. c. supply of shoes to decrease. d. supply of shoes to increase.

d. supply of shoes to increase.

When an economy is in long run equilibrium, a. it will be impossible to sustain the current rate of output in the future. b. the interest rate will decline. c. the foreign exchange value of the dollar will tend to appreciate. d. the actual and natural rates of unemployment will be equal.

d. the actual and natural rates of unemployment will be equal.

When deciding whether to buy a second car, the economic way of thinking indicates that the purchaser should compare a. the benefits expected from two cars with the cost of both. b. the additional benefits expected from a second car with the cost of the two cars. c. the dollar cost of the two cars with the potential income that the cars will generate. d. the additional benefits of the second car with the additional cost of the second car.

d. the additional benefits of the second car with the additional cost of the second car

In a voluntary exchange, if the seller of a product gains, a. the buyer will generally lose an amount greater than the gain to the seller. b. the buyer must lose an amount equal to what the seller gains. c. someone else must lose an equal amount. d. the buyer must also gain; mutual gain provides the foundation for exchange.

d. the buyer must also gain; mutual gain provides the foundation for exchange.

When a country allows trade and becomes an importer of steel, a. the losses of the domestic producers of steel exceed the gains of the domestic consumers of steel. b. the losses of the domestic consumers of steel exceed the gains of the domestic producers of steel. c. the gains of the domestic producers of steel exceed the losses of the domestic consumers of steel. d. the gains of the domestic consumers of steel exceed the losses of the domestic producers of steel.

d. the gains of the domestic consumers of steel exceed the losses of the domestic producers of steel.

The GDP deflator is designed to adjust nominal GDP for changes in a. the level of transfer payments. b. the quality of goods over time. c. the costs of economic bads such as pollution and crime. d. the general level of prices over time.

d. the general level of prices over time.

Which of the following provides the foundation of the case for free trade? a. the law of diminishing marginal utility b. the anti-dumping argument c. the industrial diversity argument d. the law of comparative advantage

d. the law of comparative advantage

In the aggregate demand and aggregate supply model, a. the factors that cause the individual demand curve to slope downward are the same as the factors that cause the aggregate demand curve to slope downward. b. the factors that cause the individual supply curve to slope upward are the same as the factors that cause the short-run aggregate supply curve to slope upward. c. the upward-sloping aggregate demand curve intersects the downward-sloping short-run aggregate supply curve to determine the economy's price level and GDP. d. the upward-sloping short-run aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy's price level and GDP.

d. the upward-sloping short-run aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy's price level and GDP.

Taxes adversely affect the allocation of resources because a. they do not always fall more heavily on the rich than on the poor. b. the taxes collected are not enough to finance government spending. c. not everyone pays taxes. d. they distort prices and thus distort the decisions of households and firms.

d. they distort prices and thus distort the decisions of households and firms.

Which of the following could be considered to be a secondary effect caused by making drugs such as marijuana, cocaine, heroin and meth illegal? a. The higher prices that result from making drugs illegal results in more property theft by users to afford the drugs. b. The usage of police and law enforcement resources to enforce drug laws leads to lower enforcement (and thus a higher amount) of other crimes. c. Without the ability to use the legal system to enforce contracts in these underground markets, violence between buyers and sellers often results when one party to a drug deal does not live up to their end of the bargain, thus the amount of violence in society increases by making drugs illegal. d. When supplying the demand for a product that has been decreed illegal by the government, the supplier has no incentive to refrain from other illegal and equally punishable behaviors, thus increasing crime by making drugs illegal. e. All of the above would be considered valid and important secondary effects of making drugs illegal.

e. All of the above would be considered valid and important secondary effects of making drugs illegal.

Which of the following is a likely consequence of a price ceiling that fixes the price of rental housing below the market equilibrium? a. It will be difficult to find housing for rent. b. More new apartments will be built. c. Some rental apartments will be converted into offices or sold for other uses rather than be rented. d. All of the above are true. e. Both a and c are correct.

e. Both a and c are correct.

In the figure above, the recovery phase of the business cycle can be represented by points: a. A. b. C. c. E. d. C to E. e. E to G

e. E to G

If a country is going to achieve a high economic freedom rating, it must a. follow rule of law principles and create a stable monetary environment. b. be a political democracy. c. refrain from the imposition of barriers that limit voluntary exchange. d. rely primarily on government expenditures and regulations (rather than markets) to allocate goods and resources. e. both a and c are true.

e. both a and c are true.

The difference between positive economic statements and normative economic statements is that a. positive statements are based on opinion while normative statements are based on fact b. positive statements are true and normative statements are often false c. positive statements are often false and normative statements are true d. positive statements are based on fact while normative statements are based on opinion e. both b and d.

e. both b and d.

Double counting in the expenditure approach to GDP refers to a. corporate income being taxed twice: once when it is earned and again when it is distributed to shareholders in the form of dividends. b. the amount of income taxes paid to states that is taxable by the federal government c. calculating GDP twice using the income and expenditures methods: double counting. d. adding the value of exports to GDP and then subtracting the value of imports e. counting the total value of a final output in addition to the value of the intermediate goods and inputs used to make it

e. counting the total value of a final output in addition to the value of the intermediate goods and inputs used to make it

When the Federal Reserve System wants to increase the money supply, what does it typically do? a. It purchases U.S. government securities. b. It increases the discount rate. c. It increases the required reserve ratio. d. It sells bonds on the open market.

a. It purchases U.S. government securities.

If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill? a. It will give the bank new reserves printed or created from nothing. b. It will write the bank a bad check that will bounce. c. It will transfer actual cash notes to the bank's vault. d. It will take reserves from another bank and shift them to this bank.

a. It will give the bank new reserves printed or created from nothing.

Which of the following is correct? a. The Federal Reserve is responsible for conducting monetary policy. b. The U.S. Treasury controls the money supply through its buying and selling of U.S. securities. c. The Treasury is a monetary agency with responsibilities very similar to those of the Fed. d. The Federal Reserve System issues U.S. securities.

a. The Federal Reserve is responsible for conducting monetary policy.

Which of the following is most likely to be a major source of growth in per capita GDP? a. a high investment/GDP ratio b. a high rate of inflation c. rapid population growth d. rapid growth in the money supply

a. a high investment/GDP ratio

Suppose the Fed buys $100,000 of U.S. Treasury bonds from Goldman-Sachs. If the reserve requirement is 10 percent, currency holdings by the public are unchanged, and banks choose to hold zero excess reserves both before and after the transaction, the total impact on the money supply will be a. an increase by $100,000. b. an increase by $1,000,000. c. a decrease by $100,000. d. a decrease by $1,000,000. e. unchanged.

a. an increase by $100,000.

Which of the following is the best definition of money? a. anything generally accepted as a medium of exchange for goods or repayment of debt b. anything that is a liability of the federal government c. anything that is a liability of a commercial bank d. the outstanding balances of households on credit cards

a. anything generally accepted as a medium of exchange for goods or repayment of debt

Which one of the following is the largest component of the money supply (M1) in the United States? a. demand and other checking deposits b. gold certificates c. credit cards and traveler's checks d. Federal Reserve notes

a. demand and other checking deposits

Which of the following would be most likely to cause the per capita income of less-developed countries to rise? a. development of strong labor unions b. more rapid population growth c. investment expenditures that enhance the human capital of labor force participants d. an international minimum wage law

a. development of strong labor unions

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the reserve requirements. b. buy U.S. securities on the open market. c. raise the discount rate. d. sell U.S. securities on the open market.

a. increase the reserve requirements.

When the money supply is expanding and prices rise rapidly, economic growth a. is slowed by the resulting unpredictability of the future level of prices. b. is enhanced as economic activity grows more rapidly. c. is enhanced because profits are higher so that capital investment is greater. d. is enhanced because existing debt is reduced in value, so people are willing to buy more goods.

a. is slowed by the resulting unpredictability of the future level of prices.

Country A and country B initially have the same per capita income. Suppose that A sustains an annual growth rate of 3.5 percent, while the annual growth rate of country B is 1.75 percent. The "rule of 70" indicates that after forty years, the per capita income of country A will be approximately ____ that of country B. a. one-half b. 70 percent greater than c. twice d. four times

a. one-half

When a country's real GDP is increasing at a faster rate than its population, a. per capita GDP will be rising. b. per capita GDP will be falling. c. per capita GDP will remain constant. d. none of the above.

a. per capita GDP will be rising.

In order to achieve a high rating on the Economic Freedom of the World index, a country must a. provide for the even-handed protection of private property and rely primarily on open markets and voluntary exchange to coordinate economic activity. b. use central planning to direct investment and resolve the three basic economic problems of what, how, and for whom goods will be produced. c. protect domestic businesses from foreign rivals who generally provide shoddy products. d. protect domestic workers from businesses that are unwilling to pay high wages and provide quality working conditions.

a. provide for the even-handed protection of private property and rely primarily on open markets and voluntary exchange to coordinate economic activity.

Obstacles that restrict trade, either domestic or international, will a. reduce output and income, and decrease the general living standard of the populace. b. help people achieve higher income levels. c. help promote high rates of economic growth. d. encourage domestic business firms to expand output so they can achieve larger gains from the adoption of mass production techniques.

a. reduce output and income, and decrease the general living standard of the populace.

Fiat money is money a. that has no intrinsic value and is not backed by any commodity such as gold or silver. b. that is not included as part of the M1 money supply but is backed by gold. c. that is backed by gold or silver held on reserve by the government. d. such as coins that are made from metal.

a. that has no intrinsic value and is not backed by any commodity such as gold or silver.

Which of the following lists two things that both increase the money supply? a. the Fed buys bonds and lowers the discount rate. b. the Fed buys bonds and raises the discount rate. c. the Fed sells bonds and lowers the discount rate. d. the Fed sells bonds and raises the discount rate.

a. the Fed buys bonds and lowers the discount rate.

Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of a. $100. b. $900. c. $1,000. d. $10,000.

b. $900.

. A bank receives a demand deposit of $10,000. The bank is now in a position to extend additional loans of $8,000. What is the legal required reserve ratio enforced by the Fed? a. 10 percent b. 20 percent c. 80 percent d. 90 percent

b. 20 percent

As debit cards become more popular, individuals will reduce their holdings of currency and leave higher balances in demand deposit accounts. Other things constant, how will this impact the money supply? a. Because more money is held as deposits at banks, the money supply will fall. b. Because more money is held as deposits at banks, the money supply will expand. c. Because debit card expenditures are counted in M2 but not M1, the M1 money supply will fall. d. Because debit card expenditures are counted in M1 but not M2, the M2 money supply will fall.

b. Because more money is held as deposits at banks, the money supply will expand.

In practice, money supply and short-term interest rates are determined by the a. Treasury and Commerce departments. b. Federal Open Market Committee. c. Board of Governors. d. House and Senate.

b. Federal Open Market Committee.

Which of the following is true? a. Marginal tax rates that take a large share of income will enhance the incentive of individuals to invest and engage in productive activities. b. High tax rates will tend to drive investment funds and highly productive citizens to other countries where tax rates are lower. c. As marginal tax rates increase, individuals get to keep a larger share of their earnings. d. Countries can gain by imposing higher tariffs and other barriers that will restrain international trade.

b. High tax rates will tend to drive investment funds and highly productive citizens to other countries where tax rates are lower.

Are outstanding credit card balances counted as part of the money supply? a. Yes; they are used to purchase things, and therefore, they are included in the money supply figures. b. No; money is an asset, while the credit card balances are a liability. Thus, they are not included in the money supply figures. c. Partly; credit card balances of $100 or less are included in the M1 money supply, but the money supply figures do not include balances in excess of $100. d. Partly; credit card balances are included in the M1 money supply, but not the M2 money supply.

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

How do high tariffs and other restraints on international trade affect a nation's prosperity? a. They increase employment and thereby promote the growth of real GDP. b. They prevent the nation from fully realizing the potential gains from specialization, exchange, and competition. c. They protect domestic producers and thereby promote economic growth. d. Both a and c are correct.

b. They prevent the nation from fully realizing the potential gains from specialization, exchange, and competition.

In the United States, the money supply (M1) consists of a. paper currency and coins. b. coins and paper currency outside of banks, demand deposits, other checkable deposits, and traveler's checks. c. paper currency, coins, demand deposits, and savings deposits. d. government bonds, currency, demand deposits, other checkable deposits, and traveler's checks.

b. coins and paper currency outside of banks, demand deposits, other checkable deposits, and traveler's checks.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the interest rate paid on excess reserves encouraging banks to extend more loans. b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. c. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. d. increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans.

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could a. increase the reserve requirements imposed on commercial banks. b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. c. sell U.S. government securities and other financial assets that it is currently holding. d. raise the interest rate on loans extended to banks and other financial institutions.

b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans.

The opportunity cost of holding money decreases when the interest rate a. increases, so people desire to hold more of it. b. decreases when the interest rate increases, so people desire to hold less. c. increases when the interest rate increases, so people desire to hold more of it. d. increases when the interest rate increases, so people desire to hold less of it.

b. decreases when the interest rate increases, so people desire to hold less.

Economic growth is likely to be faster when a. higher tax rates are imposed on high income individuals in order to provide greater cash payments to the poor. b. domestic markets are opened to foreign sellers and foreign investors. c. the supply of money is increased rapidly so individuals have more money to spend. d. dramatic and volitile changes in political and legal institutions occur often.

b. domestic markets are opened to foreign sellers and foreign investors.

Economic growth will a. reduce the future real GDP of an economy. b. expand the production possibilities of an economy. c. increase an economy's nominal income, but not its real income. d. increase real output, but the real income level of the country will decline.

b. expand the production possibilities of an economy.

A system that permits banks to hold less than 100 percent of their deposits as reserves is called a a. federal reserve system. b. fractional reserve banking system. c. partially funded deposit insurance system. d. gold standard banking system.

b. fractional reserve banking system.

Monetary and price instability will a. make it easier for both individuals and businesses to plan wisely for the future. b. generate uncertainty, and encourage investors and businesses to move their activities to countries with a more stable monetary environment. c. encourage businesses to invest and expand their future output. d. encourage domestic citizens to increase their rate of saving.

b. generate uncertainty, and encourage investors and businesses to move their activities to countries with a more stable monetary environment.

Which of the following is most important if the living standards of people residing in a country are going to improve? a. growth of population b. growth of per capita GDP c. growth of the money supply d. growth of government expenditures as a share of GDP

b. growth of per capita GDP

Open-market purchases by the Fed make the money supply a. increase, which tends to increase the value of money and reduce inflation. b. increase, which tends to decrease the value of money and increase inflation. c. decrease, which tends to decrease the value of money and increase inflation. d. decrease, which tends to increase the value of money and reduce inflation.

b. increase, which tends to decrease the value of money and increase inflation.

Investment in both physical and human capital tends to enhance economic growth because it generally a. increases consumption during the current period. b. makes it possible for individuals to produce more goods and services per hour worked. c. encourages firms to expand output by employing more low productivity workers. d. encourages workers to unionize and thereby fight for higher wages.

b. makes it possible for individuals to produce more goods and services per hour worked.

Money is used as a unit of account. This means a. money cannot store value for use in the future. b. money is used to measure the exchange value and costs of goods, services, assets and resources. c. money has little or no intrinsic value. d. the supply money in the U.S. economy is dependent on the quantity of gold held by the Federal Reserve.

b. money is used to measure the exchange value and costs of goods, services, assets and resources.

Which of the following would be most likely to improve the standard of living of a less-developed country? a. development of strong labor unions b. more foreign investment, attracted by the expectation of economic and political stability c. adoption of trade barriers (higher tariffs and quotas) by governments d. widespread use of government price controls to allocate goods and resources

b. more foreign investment, attracted by the expectation of economic and political stability

A legal system that protects private property and enforces contracts in an even-handed manner helps promote economic growth because it a. makes it possible for individuals to generate large incomes and profits, and to get ahead without cooperating with or helping others. b. provides people with a strong incentive to help others and to supply others with things that they value at a competitive price in order to profit. c. encourages people to use resources now rather than conserving them for the future. d. keeps the real wages of workers low and thereby makes it possible for business firms to supply goods and services cheaply.

b. provides people with a strong incentive to help others and to supply others with things that they value at a competitive price in order to profit.

The English economist, Thomas Malthus, believed that sustained growth of income per person would be impossible because of a. rapid growth of capital formation if population increased above the subsistence level. b. rapid growth of population if income increased above the subsistence level. c. rapid growth of government if income increased above the subsistence level. d. political democracy if income increased above the subsistence level.

b. rapid growth of population if income increased above the subsistence level.

The historical record indicates that foreign aid flowing from governments of developed nations to governments of less developed nations has a. played a major role in helping formerly poor countries grow rapidly and achieve high income levels. b. re-enforced corrupt governments and policies that stifle productive activities and restrain economic growth. c. helped poor countries escape counterproductive policies imposed by authoritarian political leaders. d. promoted economic growth, but slowed the movement toward political democracy.

b. re-enforced corrupt governments and policies that stifle productive activities and restrain economic growth.

Which of the following is primarily responsible for controlling the money supply in the United States? a. the U.S. Congress b. the Board of Governors of the Federal Reserve System c. the U.S. Treasury d. the Council of Economic Advisors

b. the Board of Governors of the Federal Reserve System

Decisions to buy or sell securities at the Fed are made by a. Congress. b. the Federal Open Market Committee. c. the Federal Deposit Insurance Corporation. d. the President's Council of Economic Advisors.

b. the Federal Open Market Committee.

The federal funds market is the market where a. the federal government raises funds to cover its budget deficit. b. the Federal Reserve System makes loans to commercial banks. c. commercial banks with excess reserves make loans to other commercial banks seeking reserves. d. commercial banks make loans to the Federal Reserve.

b. the Federal Reserve System makes loans to commercial banks.

Refer to Table 13-2. If the Last Bank of Cedar Bend is holding $10,000 in excess reserves, then the reserve requirement is a. 2 percent. b. 5 percent. c. 7 percent. d. 10 percent.

c. 7 percent.

(I) Governments that respect property rights and freedom of exchange while following monetary (and fiscal) policies consistent with relative price stability, establish the foundation for economic growth. (II) Governments have often diminished the economic prospects of a nation by levying high taxes, instituting price controls, and following inflationary monetary policies. a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false.

c. Both I and II are true.

Which of the following is true? a. Tax rates do not influence economic growth. b. Countries with high marginal tax rates have generally had higher rates of economic growth than those with low tax rates. c. Countries with low marginal tax rates have generally had higher rates of economic growth than those with high tax rates. d. Countries that impose high marginal tax rates at low-income thresholds generally have high rates of economic growth.

c. Countries with low marginal tax rates have generally had higher rates of economic growth than those with high tax rates.

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably a. selling government securities to banks to prevent recession. b. selling government securities to the public to prevent recession. c. buying government securities from the public to prevent recession. d. encouraging banks to exchange their Fed deposits for currency to prevent inflation.

c. buying government securities from the public to prevent recession.

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply to restrain inflation, it could a. increase the interest rate paid on excess reserves encouraging banks to extend more loans. b. decrease the interest rate paid on excess reserves encouraging banks to extend more loans. c. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans. d. increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

c. decrease the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans.

In order for barter trades to occur, there must be a a. singularity of interests. b. bargaining intermediary. c. double coincidence of wants. d. sufficient supply of cash.

c. double coincidence of wants.

An economy growing at a consistent rate of 5 percent per year will double its income in a. twenty-five years. b. twenty-one years. c. fourteen years. d. twelve years.

c. fourteen years.

When competition is present and private property rights secure, people will be encouraged to a. plunder and steal the resources of others. b. pay the lowest possible wages to the most productive workers. c. help others and provide them with things that they value in exchange for income and profit. d. Invest in other countries where markets are less competitive and property rights less secure.

c. help others and provide them with things that they value in exchange for income and profit.

Which of the following is the primary tool the Fed uses to control the supply of money? a. the discount rates b. the reserve requirements c. open market operations d. the 30-year home-mortgage interest rate

c. open market operations

Which of the following is most important for the achievement of long-term economic growth and a high level of per capita income? a. abundant natural resources b. foreign aid c. policies and institutions that encourage productive activities d. institutions and policies that control the growth of population

c. policies and institutions that encourage productive activities

The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called a. excess reserves. b. fractional reserves. c. required reserves. d. certificates of deposit.

c. required reserves.

When government regulations interfere with exchange and limit entry into various businesses and occupations, these regulations will a. help a country achieve more rapid economic growth. b. promote more efficient use of investment capital by entrepreneurs. c. retard economic progress. d. increase the profits of business firms. e. All of the above are correct.

c. retard economic progress.

The money multiplier will be a. larger if banks hold on to excess reserves but smaller if private citizens hold on to cash. b. smaller if banks hold on to excess reserves but larger if private citizens hold on to cash. c. smaller if either banks hold on to excess reserves or private citizens hold on to cash. d. larger if either banks hold on to excess reserves or private citizens hold on to cash. e. constant whether or not banks and citizens try to alter their holdings of excess reserves and cash.

c. smaller if either banks hold on to excess reserves or private citizens hold on to cash

In a competitive market economy, what determines whether an entrepreneur will continue in business or terminate the production of a new product? a. government regulations and subsidies b. licensing for product safety by industrial development agencies c. the profit or loss of the business d. the taxes paid to the government relative to the subsidies received

c. the profit or loss of the business

When individuals and businesses are permitted to trade freely over a larger market area, a. wages will decline to the level of the poorest country in the region. b. the monopoly power of business firms will increase. c. they will be able to produce a larger output and consume a more diverse bundle of goods. d. businesses will be able to earn higher profits, but the income levels of individuals will decline.

c. they will be able to produce a larger output and consume a more diverse bundle of goods.

Which of the following is true? a. In a competitive capital market, private investors have a strong incentive to evaluate projects carefully and allocate their funds toward those projects expected to yield the highest rates of return. b. In a competitive environment, profitable investment projects will tend to increase the wealth of the nation. c. When investment funds are allocated by governments (rather than capital markets), political clout rather than the expected rate of return will generally determine which projects are undertaken. d. All of the above are correct.

d. All of the above are correct.

Why do political instability and insecure property rights retard economic growth? a. Fear that private property will be confiscated by arbitrary government edicts substantially reduces the incentive to invest and create wealth. b. When property rights are insecure, foreign investors will be reluctant to invest in the country. c. Savings will tend to flow out of a country if individuals fear their property is insecure and could be confiscated by government. d. All of the above are correct.

d. All of the above are correct.

Which of the following is important if a country is going to achieve and sustain high rates of economic growth? a. investment in physical and human capital b. improvements in technology c. institutional and policy arrangements consistent with economic efficiency d. All of the above.

d. All of the above.

(I) A monetary policy that results in price stability will encourage the realization of gains from trade and thereby help promote economic growth. (II) High tariffs and restrictive quotas will encourage rapid economic growth. a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false.

d. Both I and II are false.

If the Fed raises the discount rate, what happens to reserves and the money supply? a. Reserves increase and the money supply decreases. b. Both increase because banks will borrow more from the Fed and make more loans to the public. c. Reserves decrease and the money supply increases. d. Both decrease because banks will borrow less from the Fed and make fewer loans to the public.

d. Both decrease because banks will borrow less from the Fed and make fewer loans to the public.

In 1960 the per capita GDP of Hong Kong was substantially less than that of Argentina and Venezuela. By 2005, the per capita income of Hong Kong was more than three times the figures for Venezuela and Argentina. This dramatic change occurred because a. Venezuela and Argentina lacked the natural resources of Hong Kong. b. the United States provided aid to Hong Kong but not to Argentina and Venezuela. c. Hong Kong was able to achieve and sustain a high rate of economic growth while the growth rates of Argentina and Venezuela were exceedingly low. d. Hong Kong was a developed country in 1960, but Argentina and Venezuela were not.

d. Hong Kong was a developed country in 1960, but Argentina and Venezuela were not.

Suppose you transfer $1,000 from your checking account to your savings account. How does this action affect the M1 and M2 money supplies? a. M1 and M2 are both unchanged. b. M1 falls by $1,000, and M2 rises by $1,000. c. M1 is unchanged, and M2 rises by $1,000. d. M1 falls by $1,000, and M2 is unchanged.

d. M1 falls by $1,000, and M2 is unchanged.

Which of the following compose the M2 money supply? a. currency only b. currency, demand deposits, other checkable deposits, and traveler's checks c. M1 plus large denomination time deposits and Eurodollar deposits d. M1 plus savings deposits, small-denomination time deposits, and money market mutual funds (retail)

d. M1 plus savings deposits, small-denomination time deposits, and money market mutual funds (retail)

If banks move a substantial portion of depositors' money from interest-earning checking accounts into money-market deposit accounts, how will the money supply measures be affected? a. M1 will become smaller, and M2 will become larger. b. Both M1 and M2 will increase in size. c. Both M1 and M2 will decrease in size. d. The size of M1 will be reduced, but M2 will be unchanged.

d. The size of M1 will be reduced, but M2 will be unchanged.

The recent growth records of Japan and Hong Kong during the last fifty years indicate that a nation can grow rapidly without a. securely defined property rights. b. adopting modern technology. c. significant capital formation. d. abundant domestic natural resources.

d. abundant domestic natural resources.

Which of the following is a key characteristic of economic freedom? a. institutions and policies supportive of voluntary exchange b. freedom to compete c. protection of people and their property from aggressors d. all of the above

d. all of the above

Which of the following would lead to a rapid growth of the money supply in the future? a. the use of large excess reserves by banks to extend additional loans b. a reduction in government expenditures to reduce the size of the federal deficit c. an increase in government expenditures financed by taxes d. an increase in the interest rate the Fed pays banks holding excess reserves

d. an increase in the interest rate the Fed pays banks holding excess reserves

The term "open market operations" refers to the a. loan-making activities of commercial banks. b. effect of expansionary monetary policy on interest rates. c. operation of competitive markets in the banking industry as the result of deregulation. d. buying and selling of government securities by the Federal Reserve.

d. buying and selling of government securities by the Federal Reserve.

The demand for money varies a. directly with both the price level and the level of real GDP. b. inversely with both the price level and the level of real GDP. c. inversely with the price level and directly with the level of real GDP. d. directly with the price level and inversely with the level of real GDP. e. inversely with the level of nominal GDP.

d. directly with the price level and inversely with the level of real GDP.

2. The primary benefit of a monetary system of exchange compared to a barter system is the increased a. ability to record transactions. b. time necessary to find trading partners. c. time devoted to shopping. d. efficiency in arranging transactions.

d. efficiency in arranging transactions.

If the Federal Reserve wants to increase the availability of money and credit, it can a. lower the discount rate. b. raise the reserve requirements. c. sell government bonds to the public. d. encourage banks to increase their prime lending rate.

d. encourage banks to increase their prime lending rate.

Which of the following is a driving force underlying economic growth? a. trade restrictions that protect domestic businesses from competition with foreign producers b. regulations that require businesses to obtain permission from the government before starting a new business c. tax increases that expand the revenues of the government d. entrepreneurial discovery and production of improved products

d. entrepreneurial discovery and production of improved products

As the number of goods and services increases, barter becomes a. easier because the chance of there being a double coincidence of wants increases. b. harder because the chance of there being a double coincidence of wants increases. c. easier because the chance of there being a double coincidence of wants decreases. d. harder because the chance of there being a double coincidence of wants decreases. e. easier because people have more choice.

d. harder because the chance of there being a double coincidence of wants decreases.

Which of the following is most likely to be a serious obstacle retarding the growth of less-developed nations? a. a lack of knowledge about modern technology b. a lack of natural resources c. slow population growth and legal systems that enforce private property rights and the pursuit of profit d. low capital formation as the result of a weak legal system that fails to protect private property rights

d. low capital formation as the result of a weak legal system that fails to protect private property rights

If real GDP is increasing more rapidly than population, a. population must be declining. b. the country will have to export more than it imports. c. the general level of prices must be increasing. d. per capita real GDP will be increasing.

d. per capita real GDP will be increasing.

The technological replacement of older products by newer improved ones in a market economy is called a. trickle-down economic growth. b. creative destruction. c. economies of scale. d. planned obsolescence.

d. planned obsolescence.

The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the a. federal deposit insurance premium. b. vault cash quota. c. excess reserve requirement. d. required reserve ratio.

d. required reserve ratio.

The discount rate is the interest rate a. commercial banks charge their low-risk customers for a loan. b. savings and loan associations pay for using savings deposit funds. c. the U.S. Treasury pays individuals who buy Treasury bonds in denominations of $10,000 or more. d. the Federal Reserve charges banking institutions for borrowing its funds.

d. the Federal Reserve charges banking institutions for borrowing its funds.

The main source of profit for financial institutions is a. their ownership of stocks in commercial corporations. b. their ownership of real assets received in foreclosures on loans to households. c. the fees charged for holding and servicing checking accounts. d. the difference between interest paid on deposits and interest received on loans. e. the difference between the cost of creating new money and the interest paid on loans.

d. the difference between interest paid on deposits and interest received on loans.

A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan between these two banks is a. zero. b. the prime rate. c. the discount rate. d. the federal funds rate. e. the required reserve ratio.

d. the federal funds rate.

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions a. decreases the money supply by $1,000. b. decreases the money supply by $200. c. does not change the money supply. d. increases the money supply by $200. e. increases the money supply by $800.

e. increases the money supply by $800.