Macroecomics Test 1

The result of free trade between nations is that

goods can be produced in the location where their opportunity cost is the lowest

Long-run growth refers to the

growth of the economy over several decades

Adam Smith used the idea of the invisible hand to refer to the ability of market economies to:

harness the power of individual self-interest for the good of society as a whole

In his book The Wealth of Nations, Adam Smith used the example of pin-making to illustrate the advantages of:

specialization

Fiscal policy attempts to

stabilize the economy through changes in taxation and government spending

GDP is equal to the

sum of total factor income earned by households from firms

The "inflation rate" that is reported in the news refers to

the annual percentage change in the consumer price index

GDP is a measure of

total spending on domestically produced final goods and services

The income that households have available for spending or saving is

disposable income

Which of the following is a normative statement? a. An increase in the price of cameras will decrease the number of cameras sold. b. A decrease in the price of digital cameras will decrease the demand for camera film. c. A camera makes a good wedding gift. d. The United States imports most of its cameras from Asia.

A camera makes a good wedding gift

Which one of the following statements is not true of a market economy? a. Productive resources are scarce. b. Every choice involves an opportunity cost. c. A central planning authority makes decisions about production and consumption. d. People will respond to incentives.

A central planning authority makes decisions about production and consumption

If a price floor is imposed above the equilibrium price in a market, what is the effect?

A surplus results

What is traded in factor markets?

land, labor, capital, and human capital

Transfer payments a. are payments by government to individuals for which no good or service is provided in return. b. are social security benefits. c. are unemployment benefits. d. All of the answers are correct.

D

Suppose you hear an economist make an assertion that, between the two countries, France has a comparative advantage in the production of chocolate and that Italy has a comparative advantage in the production of wine. Which of the following statements is another way of stating the same idea expressed in the assertion? a. French chocolate is better tasting than Italian chocolate. b. French wine is better tasting than Italian wine. c. France can produce chocolate at a lower opportunity cost than Italy can. d. France can produce wine at a lower opportunity cost than Italy can.

France can produce chocolate at a lower opportunity cost than Italy can

Which of the following statements is TRUE? a. The concept of supply and demand for a particular market can answer macroeconomic questions as well as it can answer microeconomic questions. b. Macroeconomics explains the behavior of large firms; microeconomics explains the behavior of small ones. c. The paradox of thrift refers to the fact that those who save money will lose it by making poor investment decisions. d. Macroeconomists study variables such as the overall levels of prices and output.

Macroeconomists study variables such as the overall levels of prices and output

If an economist argues that all countries gain from trade, what reasoning is most likely underlying her argument?

Production according to the principle of comparative advantage lowers overall costs and therefore allows both countries to have a higher standard of living

Which of the following statements regarding price floors is TRUE? a. Price floors always benefit consumers and harm producers. b. Price floors make markets more efficient, but they diminish profit levels. c. Price floors result in shortages. d. Price floors are intended to help certain people, but they have side effects that may harm others in predictable ways

Price floors are intended to help certain people, but they have side effects that may harm others in predictable ways

If air travel to Hawaii becomes less expensive, what is likely to happen in the market for hotel rooms in Hawaii?

The demand curve for hotel rooms will shift to the right

Which of the following would cause a surplus of newsprint? a. The supply of newsprint decreases, and the price does not change. b. The demand for newsprint decreases, and the price adjusts to the new equilibrium. c. The demand for newsprint decreases, and the price does not change. d. The supply of newsprint decreases, and the price adjusts to the new equilibrium.

The demand for newsprint decreases, and the price does not change

What is the result of a binding quota restriction on quantity?

The market-clearing price will be higher than the equilibrium price

Why do minimum wage laws in Italy and Spain result in a greater prevalence of workers being hired in unreported jobs "off the books" than do minimum wage laws in the United States?

The minimum wages in these countries are so far above the equilibrium wage that they have generated significant unemployment

If a price ceiling is imposed above the equilibrium price, what is the effect?

There is no visible effect on the market outcome

How would an increase in the price of cotton affect the market for cotton T-shirts at your university bookstore?

The supply curve for cotton T-shirts will shift to the left

Consider the market for kayaks. What happens when the process of manufacturing kayaks becomes less costly through the use of new technology?

The supply curve for kayaks will shift to the right

What best describes the competitive market?

There are many buyers and sellers of the same good

Which of the following is not a likely result of a quantity control in the form of a binding quota? a. economic inefficiency arising from missed opportunities b. illegal providers of the good or service who attempt to evade the quantity control c. a wedge between the demand price and the supply price d. a surplus of the good or service

a surplus of the good or service

Which of the following statements is TRUE? a. Deflation can worsen a recession by giving people an incentive to hold cash rather than to make productive investments. b. Price stability is not a desirable goal in a market economy because prices need to be flexible to reflect changes in supply and demand. c. Economic growth is the term used to describe those periods in which the overall price level is rising. d. Deflation is the term used to describe those situations in which shortages arise because the prices of goods are legally restricted to levels below equilibrium.

a. Deflation can worsen a recession by giving people an incentive to hold cash rather than to make productive investments

Which of the following statements is TRUE? a. Over the business cycle, the economy's level of output and its unemployment rate move in opposite directions. b. During recessions, the unemployment rate typically falls. c. During expansions, aggregate output typically declines. d. Because unemployment is a microeconomic variable, it does not have any correlation with the business cycle.

a. Over the business cycle, the economy's level of output and its unemployment rate move in opposite directions

Macroeconomics is the branch of economics studying:

fluctuations in the overall level of business activity.

The MOST important effect of a recession is its effect on the

ability of workers to find jobs

The purpose of an economic system is to

allocate scarce resources

The long-run effect of macroeconomic growth is to

allow for a higher standard of living

If the demand curve shifts to the left, and the supply curve does NOT change, then the equilibrium price

and quantity both will decrease

Economists generally agree that people are most likely to change their behavior when they:

are given incentives to do so

Exchanges taking place in a market system

are voluntary

The biggest portion of U.S. GDP is value added by

businesses

Why did Venezuela experience a shortage of basic food in 2006?

because the price of basic food was legally prevented from rising to its equilibrium level

Which of the following transactions would add to the value of U.S. GDP? a. A college student buys a used car. b. A college student sells her used textbooks back to the bookstore. c. A grocery store purchases new freezers made in the United States. d. A U.S. citizen buys a new television manufactured in Asia.

c. A grocery store purchases new freezers made in the United States.

The condition of scarcity means that

choices must be made in the allocation of productive resources

In the circular-flow diagram, when households purchase goods and services it is known as

consumer spending

The downward slope of the demand curve indicates that, all else equal

consumers will buy more of a good when its price decreases

The tools of monetary policy are

control over the interest rate and the quantity of money

Which of the following transactions does NOT represent an addition to U.S. GDP? a. A U.S. firm manufactures a bicycle sold to a U.S. consumer. b. A U.S. firm manufactures a bicycle sold to a Canadian consumer. c. A U.S. firm hires construction workers to expand its manufacturing facility. d. A German citizen buys stock in a U.S. company.

d. A German citizen buys stock in a U.S. company

Which of the following statements is true? a. A country cannot have a comparative advantage in producing a particular good unless it first has an absolute advantage in producing that good. b. Comparative advantage in producing a certain item arises from being the first country to manufacture that item. c. A country cannot have comparative advantage in producing a certain item if it incurs an increasing opportunity cost in producing the item. d. All countries can gain from trade if they all specialize in production according to comparative advantage.

d. All countries can gain from trade if they all specialize in production according to comparative advantage

Economists would most likely disagree with which of the following statements?a. People respond to incentives. b. Making a choice involves an opportunity cost. c. Markets move towards equilibrium. d. Resources and inputs used in production are unlimited.

d. Resources and inputs used in production are unlimited

Which of the following statements is TRUE? a. GDP overstates the true level of production, because goods that are sold as inputs to other firms are counted twice. b. Inventories of finished goods are not counted as investment, because they do not allow for future consumption. c. Changes in GDP tell us about economic growth, but they do not reveal anything about the pattern of the business cycle. d. Since GDP is equal to the total value of final goods and services produced in the economy in a given period, it must also equal the flow of money received by firms from their sales in the product market during the same time period.

d. Since GDP is equal to the total value of final goods and services produced in the economy in a given period, it must also equal the flow of money received by firms from their sales in the product market during the same time period.

Which of the following statements is TRUE? a. Trade deficits and trade surpluses are microeconomic phenomena. b. Open-economy macroeconomics is based on the assumption that there is no business cycle. c. Open-economy macroeconomics is based on the assumption that there is no trade between countries. d. There's no simple relationship between the success of an economy and whether it runs trade surpluses or deficits.

d. There's no simple relationship between the success of an economy and whether it runs trade surpluses or deficits.

The rate of growth of real GDP

depends on which year is used as the base year

Which of the following changes would cause a decrease in the demand for DVD rentals?

decrease in the price of movie admissions

An economic system is in __________ when no individual would be better off by making a different choice.

equilibrium

Which of the following is not a predictable result of a price ceiling? a. development of an illegal black market b. exorbitant profits for producers of the good c. a persistent shortage d. an inefficiently low quality of the good provided

exorbitant profits for producers of the good

Price indexes measure

fluctuations in the aggregate price level

In the simplified circular-flow model of the macro economy, the two sectors are

households and firms

GDP is a measure of both

income and output

If the price of a bale of cotton increases from $0.80 to $1.20, and a pound of Kenyan coffee decreases from $12 a pound to $10 a pound, we can expect a(n)

increase in the quantity demanded of Kenyan coffee

If coffee is a normal good, then an increase in consumer income will

increase the demand for coffee

The focal point of economic inquiry is

individual choice

If a country specializes according to its own comparative advantage and then trades with other nations

it can consume at a higher level than the domestic production possibility frontier

A binding price ceiling is designed to

keep the price below the equilibrium price

Consider gas stations. As a result of an economic recession and a decrease in consumer incomes, there will be a

leftward shift in the station's demand curve and lower gas prices

Disposable income is income earned by households in factor markets

minus taxes plus government transfers

GDP measured in current-year prices is

nominal GDP

A binding price floor is presented graphically as a(n)

price above equilibrium

A binding price ceiling is presented graphically as a(n)

price below equilibrium

A binding minimum wage is a type of

price floor

The upward slope of the supply curve indicates that

producers supply more of a good when its price increases

The medallion system used to license taxicabs in New York City is an example of a(n)

quota

What is the name given to the wedge that occurs between the supply price and the demand price of the transacted quantity, when a good is subject to quantity restrictions?

quota rent

A binding price floor is designed to

raise the price above the equilibrium price

Which of the following would enhance the level of efficiency in a market?

removing a binding price floor, allowing the price to return to its equilibrium level

A price above the equilibrium price will

result in quantity supplied being greater than quantity demanded

Which group would be most likely to benefit from a binding price floor imposed on wheat?

sellers of wheat that are seeking higher prices

The business cycle is the

short-run alternation between economic recessions and expansions

Economists typically depict the PPF as a bowed-out curve rather than as a straight line in order to show that

the opportunity cost of producing a good rises as more is produced

Which of the following is a macroeconomic variable? a. the overall level of output b. the price of legal services c. the price of medical services d. the seasonal fluctuation in rental prices for vacation homes

the overall level of output

A shortage is the result of when

the price of a good is held below the equilibrium price

Which of the following is a microeconomic variable? a. the overall level of prices b. the price of coffee c. the overall level of employment d. the current account

the price of coffee

When economists want to describe how much an economy can produce with a given amount of resources, they use a model known as

the production possibility frontier

Most individuals choose careers in which they specialize in producing only one type of good or service, yet as consumers they have access to a wide variety of goods and services. What principle allows for this?

trade

Overall output

typically declines during recessions

Households earn income in the form of

wages, dividends, interest, and rent

An opportunity cost arises:

whenever any choice is made

Economic theory asserts that people will behave in ways that

will enhance their own overall well-being

If the supply curve shifts to the left, and the demand curve does not change then the equilibrium price

will increase, and the quantity will decrease