Principles of Macroeconomics
Trade enhances the economic well-being of a nation in the sense that
trade results in an increase in total surplus
A price ceiling is
a legal maximum on the price at which a good can be sold
Rent-control laws dictate
a maximum rent that landlords may charge tenants
Minimum-wage laws dictate
a minimum wage that firms may pay workers
The unique point at which the supply and demand curves intersect is called
equilibrium
Which of the following is not an example of a public policy?
equilibrium laws
Social Security payments are
excluded from GDP because they do not reflect the economy's production
For the economy as a whole,
expenditure must equal income
A macroeconomist is interested in
explaining why the unemployment rate is higher
The North American Free Trade Agreement
reduced trade restrictions among Canada, Mexico and the United States
When a society cannot produce all the goods and services people wish to have, the economy is experiencing
scarcity
The consumption component of GDP includes spending on
durable goods, nondurable goods, and services
Economists build economic models by
making assumptions
The GDP deflator is the ratio of
nominal GDP to real GDP multiplied by 100
A price floor is
All of the above are correct
GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society is
GDP per person
Which of the following is a way to compute GDP?
Add the market values of all final goods and services
GDP is not a perfect measure of well-being; for example,
All of the above are correct
Suppose the equilibrium price of a tube of toothpaste is $2, and the government imposes a price floor of $3 per tube. As a result of the price floor,
All of the above are correct
Which of the following is a subject that economists study?
All of the above are correct
Which of the following products would be considered scarce?
All of the above are correct
Which of the following is an example of a market?
All of the above are examples of markets
Which of the following is not an example of the principle that trade can make everyone better off?
All of the above are examples of the principle that trade can make everyone better off
Suppose an economist develops a theory that higher food prices arise from higher gas prices. According to the scientific method, which of the following is the economist's next step?
Collect and analyze data
How is net national product (NNP) calculated?
Depreciation losses are subtracted from the total income of a nation's citizens
Suppose the government has imposed a price floor on the market for soybeans. Which of the following events could transform the price floor from one that is not binding into one that is binding?
Farmers use improved, draught-resistant seeds, which lowers the cost of growing soybeans
Which of the following statements about GDP is correct?
GDP is to a nation's economy as household income is to a household
Which of the following is a principle concerning how people interact?
Markets are usually a good way to organize economic activity
Ms. Lane borrowed $1,000 from her bank for one year at an interest rate of 10 percent. During that year, the price level went up by 15 percent. Which of the following statements is correct?
Ms. Lane's repayment will give the bank less purchasing power than it originally loaned her
After OPEC raised the price of crude oil in the 1970's, which of the following was the most important reason that there were shortages of gasoline?
The effects of a price ceiling on gasoline prices imposed by the US government
Social Security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social Security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which of the following statements is correct?
The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI
Suppose the government has imposed a price ceiling on laptop computers. Which of the following events could transform the price ceiling from one that is not binding into one that is binding?
The number of firms selling laptop computers decreases
Which of the following is included in the calculation of GDP?
The purchase of tutoring services from a tutor who holds citizenship outside the country but resides within the country
Suppose the quality of beef changes over time, but the quality change goes unmeasured for the purpose of computing the consumer price index. In which of the following instances would the bias resulting from the unmeasured quality change be least severe?
The quality of beef deteriorates and beef becomes more expensive relative to other goods
With which of the Ten Principles of Economics is the study of international trade most closely connected?
Trade can make everyone better off
When can two countries gain from trading two goods?
Two countries could gain from trading two goods under all of the above conditions
Rachel cuts her sister's hair for free. When she cuts the hair of her customers in her shop, she charges $10. When is Rachel's haircutting included in GDP?
When she cuts her customers' hair, but not her sister's
A tariff is a tax placed on
an imported good and it raises the domestic price of the good above the world price
A transfer payment is
a form of government spending that is not made in exchange for a currently produced good or service
Which of the following is an example of a durable good?
a hair dryer
Suppose buyers of vodka are required to send $5.00 to the government for every bottle of vodka they buy. Further, suppose this tax causes the effective price received by sellers of vodka to fall by $3.00 per bottle. Which of the following statements is correct?
all of the above
The incidence of a tax falls more heavily on
all of the above
Trade between countries
allows each country to consume at a point outside its production possibilities frontier
Economic models
are usually composed of diagrams and equations
A shortage results when a
binding price ceiling is imposed on a market
A surplus results when a
binding price floor is imposed on a market
A market includes
both buyers and sellers
Which of the following is included in GDP?
both the market value of rental housing services and the market value of owner-occupied housing services
In a market economy, supply and demand determine
both the quantity of each good produced and the price at which it is sold
Policymakers use taxes
both to raise revenue for public purposes and to influence market outcomes
The inflation rate is calculated
by determining the percentage change in the price index from the preceding period
In a market economy, supply and demand are important because they
can be used to predict the impact on the economy of various events and policies
Which of the following is not included in GDP?
carrots grown in your garden and eaten by your family
Over time, people have come to rely more on market-produced goods and services and less on goods and services they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has
caused measured GDP to rise
Economists view the fact that Florida grows oranges, Texas pumps oil, and California makes wine as
confirmation of the virtues of free trade
Real GDP is the yearly production of final goods and services valued at
constant prices
Refer to Figure 4-10. The movement from Point A to Point B represents a(n)
decrease in the quantity supplied
An increase in the price of a good will
decrease quantity demanded
A decrease in the price of a good will
decrease quantity supplied
Tax incidence
depends on the elasticities of supply and demand
In building economic models, economists often omit
details
Critics of free trade sometimes argue that allowing imports from foreign countries causes a reduction in the number of domestic jobs. An economist would argue that
foreign competition may cause unemployment in import-competing industries, but the effect is temporary because other industries, especially exporting industries, will be expanding.
By definition, imports are
goods produced abroad and sold domestically
By definition, exports are
goods produced domestically and sold abroad
The United States has imposed taxes on some imported goods that have been sold here by foreign countries at below their cost of production. These taxes
harm the United States as a whole, because they reduce consumer surplus by an amount that exceeds the gain in producer surplus and government revenue
A circular-flow diagram is a model that
helps to explain how participants in the economy interact with one another. helps to explain how the economy is organized. both are correct
Grapes are considered intermediate goods
if the purchaser uses them to make wine to sell others but not if the purchaser eats them
The underground economy
includes otherwise legal transactions that go unreported or unrecorded
U.S. GDP
includes production of foreigners working in the U.S. but excludes production by U.S. residents working in foreign countries
Refer to Figure 4-1. The movement from point A to point B on the graph shows a(n)
increase in quantity demanded
If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal, GDP
increases
A statement describing how the world should be
is a normative statement
A statement describing how the world is
is a positive statement
GDP
is used to monitor the performance of the overall economy and is the single best measure of a society's economic well-being
The consumer price index is used to
monitor changes in the cost of living over time
Reports on the current consumer price index are released every
month
The burden of a luxury tax falls
more on the middle class than on the rich
Babe Ruth, the famous baseball player, earned $80,000 in 1931. Today, the best baseball players can earn more than 400 times as much as Babe Ruth earned in 1931. However, prices have also risen since 1931. We can conclude that
one cannot determine whether baseball stars today enjoy a higher standard of living than Babe Ruth did in 1931 without additional information regarding increases in prices since 1931
The adage, "There is no such thing as a free lunch," means
people face tradeoffs
The use of theory and observation is more difficult in economics than in sciences such as physics due to the difficulty in
performing an experiment in an economic system
The presence of a price control in a market for a good or service usually is an indication that
policymakers believed that the price that prevailed in that market in the absence of price controls was unfair to buyers or sellers
In a competitive market free of government regulation,
price adjusts until quantity demanded equals quantity supplied
The signals that guide the allocation of resources in a market economy are
prices
The quantity supplied of a good is the amount that
sellers are willing and able to sell
A payroll tax is a
tax on the wages that firms pay their workers
In markets, prices move toward equilibrium because of
the actions of buyers and sellers
The production possibilities frontier illustrates
the combinations of output that an economy can produce
A COLA automatically raises the wage when
the consumer price index increases
Which of the following would likely be studied by a macroeconomist rather than a microeconomist?
the effect of an increase in the minimum wage on an economy's overall rate of unemployment
Congressman Smith cites the "jobs argument" when he argues in favor of restrictions on trade; he argues that everything can be produced at lower cost in other countries. The likely flaw in Congressman Smith's reasoning is that he ignores the fact that
the gains from trade are based on comparative advantage
The CPI is a measure of the overall cost of
the goods and services purchased by a typical consumer
What basket of goods and services is used to construct the CPI?
the goods and services that are typically bought by consumers as determined by government surveys
A logical starting point from which the study of international trade begins is
the principle of comparative advantage
National income is defined as
the total income earned by a nation's permanent residents in the production of goods and services
A production possibilities frontier can shift outward if
there is a technological improvement
The demand for a good or service is determined by
those who buy the good or service
The supply of a good or service is determined by
those who sell the good or service
GDP is defined as the
value of all final goods and services produced within a country in a given period of time
The quantity demanded of a good is the amount that buyers are
willing and able to purchase
Rent controls can cause
all of these are possible results of rent controls
