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According to the application, shocks to aggregate demand are easily anticipated. Economics tells us what to choose given the tradeoffs. Answer: FALSE The multiplier is always larger than one because the marginal propensity to consume is always larger than one. […]

All of the following are examples of outside lags associated with fiscal policy, except: A) the time it takes for individuals to increase consumption when personal taxes are lowered. B) the time it takes for businesses to increase investment when […]

Refer to Figure 15.2. The economy is at full employment and the unemployment rate is at the natural rate at point A) a. B) . C) c. D) d. Consider two individuals, Willy and Blythe, who produce carrots and apples. […]

The length of time that Congress takes to formulate a tax bill to help the economy is part of the: A) inside lag. B) outside lag. C) identification lag. D) inside-outside lag. Federal discretionary spending consists of: A) interest payments […]

If K = $200, t = 30 years, i = 5%, the present value (PV) of a payment to be received in 30 years is: A) $190.48. B) $46.27. C) $864.39. D) none of the above Economists say that the […]

When the unemployment rate is greater than the natural rate, wages and prices will fall eventually. The marginal propensity to consume is the increase in consumption brought about by an increase in wealth. Answer: FALSE The aggregate demand curve is […]

To measure the effect of debt in an economy, economists use a standard measure which involves the ________ relative to the GDP. A) stock market activity B) outstanding government bonds C) stock of debt D) capital stock of equipment If […]

Recall Application 3, “Are They Really Dumping?” to answer the following questions: Based on what you learned from the application, can a firm that exports to the U.S. be charged with dumping even though the price it sells at home […]

Suppose the demand for hot dogs decreases. In the short run, firms that produce hot dogs will experience a fall in prices, which will induce them to A) increase production and increase the number of workers. B) decrease production and […]

If you want to purchase a new sports car in four years for $75,000, how much would you need to have in your bank account now, so after four years you will have $75,000 to buy the car? Assume your […]

A country facing a balance of payments deficit will change the pegged value of its currency; this is called a revaluation. Additional Application INFLATION-INDEXED BONDS IN THE UNITED STATES Are there bonds that can protect your investments from inflation? In […]

M1 is larger than M2. Banks can obtain funds to make loans by borrowing reserves from other banks through the federal funds market. Answer: TRUE Fred wants to trade peanut butter for bread. Sally wants to trade bread for jelly. […]

The opportunity cost of something is the gain you receive as a result of your sacrifice. When the federal government runs a budget deficit, it is possible for current taxpayers to pass the tax burden to future generations. Answer: TRUE […]

Table 6.10 Refer to Table 6.10. If 1999 is the base year, then the inflation rate (i.e., the growth rate of the price index) between 2000 and 2001 is: A) about 11 percent. B) about 13 percent. C) about 9 […]

If the marginal propensity to import is 0.2, then a $1,000 increase in income will: A) increase imports by $20. B) increase imports by $200. C) increase exports by $20. D) increase exports by $200. Best Buy, a retailer of […]

Recall Application 2, “Increased Political Independence for the Bank of England Lowered Inflation Expectations,” to answer the following questions: According to the application, there is evidence that supports the conjecture that: A) more central bank independence is associated with lower […]

Which of the following is an example of a supply shock? A) a surprise increase of the money supply B) an increase in government spending C) a sharp increase in the price of oil D) an increase in the price […]

If the number of wine producers decreases, A) the demand for wine increases. B) the demand for wine decreases. C) the supply of wine increases. D) the supply of wine decreases. Capital gains are the profit earned from the sale […]

An individual worked for an airline that went out of business because the airline was unable to meet new federal safety standards. While the individual is unemployed, she will be classified as: A) frictionally unemployed. B) naturally unemployed. C) cyclically […]

If increases in government spending on infrastructure projects “crowd out” private investment spending, this will lead to A) higher levels of real income and wages in the future. B) no effects on real income and wages in the future. C) […]

Table 11.1 Refer to Table 11.1. If exports decrease by 30, what is the new equilibrium level of output? A) 1,700 B) 2,300 C) 6,800 D) 9,200 Trade results from A) comparative advantage. B) absolute advantage. C) self-sufficiency. D) diminishing […]

Figure 4.5 illustrates a set of supply and demand curves for hamburgers. An increase in supply and an increase in demand are represented by a movement from A) point d to point . B) point d to point a. C) […]

The multiplier for investment represents the ratio of the change in income to the change in investment spending. According to Keynesian economics, prices and wages determine the level of output in the economy. Answer: FALSE Inflation distorts the operation of […]

Classical economists assumed: A) involuntary unemployment exists. B) there is never full employment. C) the wage rate adjusts to maintain labor market equilibrium. D) the wage rate cannot adjust to equate the quantity of labor demanded with quantity of labor […]

A key assumption of most economic analysis is that people act rationally and in their own self-interest. A nation’s exports are NOT impacted by the multiplier effect. Answer: FALSE The opportunity cost of going to a particular college is not […]

During periods of poor economic performance, real GDP A) declines and unemployment rises. B) declines and unemployment declines. C) declines but unemployment typically does not change. D) is unchanged but unemployment rises sharply. Figure 4.6 Figure 4.6 illustrates a set […]

Production inputs such as steel rods have prices that adjust very quickly. People acting in their own self interest try to gain at the expense of others in exchange leads to someone necessarily losing in a voluntary exchange. Answer: FALSE […]

Recall Application 1, “Absolute Advantage and Comparative Disadvantage in Latvia,” to answer the following questions: According to the Application, which good does Latvia have comparative advantage on? A) timber B) grain C) milk D) livestock Recall Application 3, “The Financial […]

When the Fed conducts an open market sale, it leads to a higher level of investment and output in the economy. People will buy more of a normal good when their income decreases. Answer: FALSE Capital deepening will occur as […]

Recall Application 4, “Coping with the Financial Chaos Caused by the Mortgage Crisis,” to answer the following questions: According to Application 4, the purchase of short term commercial paper from nonfinancial corporations is a function of the Fed that was […]

During hyperinflations, the velocity of money generally increases because A) money is no longer a good store of value, so people spend it slowly. B) money is better store of value, so people spend it immediately. C) economic agents have […]

The Federal Reserve is a privately-operated commercial bank. Recall Application 2, “Economic Equality May Sustain Economic Growth,” to answer the following questions: According to the Application, intangible capital measurements is based on expenditures on research and development, marketing, design and […]

Which of the following is an example of a Federal Reserve action that increases the money supply? A) an increase in the required reserve ratio B) a decrease in the discount rate C) an increase in the federal funds rate […]

Refer to Figure 15.2. Adjustment from a short-run equilibrium to the long-run equilibrium is represented by a movement from point ________ to point ________. A) a; e B) a; c C) e; D) a; A supply curve is defined as […]

Which of the following is considered a cost of unemployment? A) higher crime, suicide and divorce rates B) severe psychological costs to the job loser C) wasted resources because a worker is not being utilized D) All of the above […]

Economists will always reach the same conclusion in their positive analyses. The inside lags for monetary policy are relatively long compared to those for fiscal policy. Answer: FALSE If one variable A falls as the other variable B falls, then […]

Imports are products produced in the home country and sold in another country. The World Trade Organization was formed to enforce GATT and other international trade agreements. Answer: TRUE Recall Application 3, “The Effectiveness of Committees,” to answer the following […]

Opportunity cost is the difference between the nominal and real cost of some action. In a closed economy, when the government runs a budget deficit, national saving is reduced, interest rates rise, and investment falls, holding all else constant. Answer: […]

Recall Application 2, “How Fast to Sail?” to answer the following questions: Based on the Application, the marginal benefit of sailing a ship faster is: A) more cargo delivered per year. B) more fuel cost incurred. C) less fuel costs […]

Additional Application NEETS ARE THE NEW DISCOURAGED WORKERS IN JAPAN Who are the new discouraged workers in Japan? In Japan, there is growing concern about young people who are not joining the labor force. Young workers who have given up […]

One way to prove the Ricardian equivalence is true is to show that when the government deficit increases, (the) ________ also increase(s). A) private sector saving B) country’s imports C) consumption expenditures D) money supply A bank’s reserves A) are […]

Minimum wage laws are examples of: A) price ceilings. B) equilibrium prices. C) price floors. D) minimum supply prices. During the Kennedy Era, the tax cut implemented resulted in: A) stimulating economic growth. B) facilitating a recession. C) driving the […]

If the multiplier = 2.5, the MPS would be A) 0.25. B) 0.4. C) 0.6. D) 0.75. If the economy is in long run equilibrium at full employment, the level of overall economic activity: A) is positively affected by changes […]

A product produced in a foreign country and purchase by residents of the home country is an import. The opportunity cost of a table is 5 chairs in nation A and 1 chair in nation B. If the nations specialize […]

If sellers have an expectation of higher future prices: A) the current supply of that good will decrease. B) the current demand for that good will increase. C) the current supply of that good will increase. D) the current demand […]

Recall Application 2, “Economic Equality May Sustain Economic Growth,” to answer the following questions: After reading the application, one can conclude that all countries that experience economic growth also experience improved income equality. If the unemployment rate is above the […]

Figure 4.3 illustrates the demand for tacos. An increase in price of tacos would bring about a movement from A) point a to point c. B) point c to point a. C) D2 to D0. D) D0 to D1. Recall […]

When it comes to pollution, economists believe that the government must: A) allow firms to pollute as long as they bear the full cost of their pollution. B) never allow pollution to exist. C) allow firms to pollute as long […]

Commercial banks: A) conducts monetary policy. B) are nonprofit organizations that lend and borrow funds. C) are financial intermediaries that lend funds and accept deposits. D) print all the money used in the US. Refer to Figure 18.4. With an […]

An increase in the demand for labor means that A) the demand for labor increases as a result of an increase in the real wage rate. B) the demand for labor increases as a result of a decrease in the […]

Investments are actions that incur costs in the future but provide expected benefits today. Real business cycle theory emphasizes that shocks to technology can play a big part in causing economic fluctuations. Answer: TRUE The rate of interest that a […]

Changes in demand will often be met with changes in output rather than changes in prices because of formal and informal contracts. Taxes are the only mechanism by which the federal government earns money. Answer: FALSE Unemployment occurs even during […]

The principle that “as one input increases while the other inputs are held fixed, output beyond some point will exhibit increases at a decreasing rate” is known as the: A) marginal principle. B) principle of opportunity cost. C) principle of […]

Insurance companies can reduce risk by accepting premiums from A) many people to insure against independent events. B) few people to insure against independent events. C) many people to insure against dependent events. D) few people to insure against dependent […]

The price of a stock is equal to the present value of expected future dividend payments. A restriction on imports is likely to reduce further restrictions on trade. Answer: FALSE Higher tax rates lower the value of the spending multiplier […]

Assume there is no government or foreign sector. If the multiplier is 5, a $10 billion increase in investment will cause equilibrium output to increase by: A) $5 billion. B) $10 billion. C) $50 billion. D) $200 billion. Figure 9.5 […]

The amount of income that households keep after paying taxes is A) national income. B) personal income. C) personal disposable income. D) value added income. Which of the following situations will arise in the domestic market following the imposition of […]

The real-nominal principle can be stated as A) production generates income. B) only final goods and services should be counted in GDP. C) what matters to people is the purchasing power of money or income. D) only the manufacture of […]

Recall the Application about the market for meteorites to answer the following question(s). According to the Application, people in Morocco bring meteorites picked up in the desert to local dealers, who then sell them to the public through Websites. If […]

Excess demand in an unregulated market will cause the price of a product to fall. During recessions, the full utilization of the capital stock raises labor productivity. Answer: FALSE Governments sometime create an excess demand for a product by setting […]

If the yen to dollar exchange rate moves from 105 to 115 yen per dollar, then the dollar has ________ and the yen has ________. A) depreciated; depreciated B) depreciated; appreciated C) appreciated; depreciated D) appreciated; appreciated Recall Application 2, […]

Excess reserves in a bank are the difference between required reserves and the bank’s total net worth. When prices rise, increases in real income are greater than increases in nominal income. Answer: FALSE The notion of opportunity cost allows the […]

Flexible exchange rates require the coordination of economic policies between countries. All topics concerning taxes are within the realm of macroeconomics. Answer: FALSE A country that experiences population growth (holding K constant) will experience real GDP growth. Answer: TRUE When […]

Replacing the personal income tax with a consumption tax would: A) favor wealthy and high income individuals. B) favor poor and low income individuals. C) increase overall federal revenues from taxation. D) favor all taxpayers equally, regardless of their personal […]

The crowding-in effect implies that a decrease in government purchases causes: A) interest rates to fall, which decreases investment. B) interest rates to fall, which increases investment. C) interest rates to rise, which decreases investment. D) interest rates to rise, […]

According to the Application, moving from a country with relatively weak civil liberties to one with relatively strong civil liberties, the economic rate of return on World Bank development projects A) increases by about 15 percentage points. B) more than […]

The Fed has immense power and there are no limits to the extent to which it can effectively control the economy. The government can use contractionary fiscal policies to prevent a wage-price spiral. Answer: TRUE Taxation and government spending are […]

An increase in the marginal propensity to import will cause the aggregate expenditure line to: A) become flatter. B) become steeper. C) shift upwards. D) shift downwards. Suppose that in the time it takes for him to bake a cake, […]

Figure 7.2 Refer to Figure 7.2. According to classical economists if the wage rate is: A) $12, the wage rate will decline to eliminate the surplus. B) $12, the wage rate will increase to eliminate the shortage. C) $7, the […]

The economic theory that emphasizes the role of difficulties in coordinating economic affairs as a cause of economic fluctuations is known as A) Keynesian economics. B) investment cycle theory. C) real business cycle theory. D) technology shock theory. The weekly […]

The reason why economists do not need details regarding the topography of a region when determining driving directions is because the topography is irrelevant to complete your objective of getting to a certain place. The Bretton Woods exchange rate system […]

Which of the following is not a transfer payment? A) Social Security benefits B) corporate dividends C) Medicaid D) government welfare payments Arguments against the balanced budget amendment include which of the following? A) A balanced budget amendment would exert […]

Estate and gift taxes account for a very small portion of total tax revenues collected by the federal government because taxes are levied only on large estates. The only way governments can finance a deficit is by printing new money. […]

The entire short-run production function shifts upward if: A) diminishing returns are close to zero. B) the stock of capital increases. C) the quantity of labor increases. D) productivity decreases. If the marginal propensity to consume is 0.75 and marginal […]

The Federal Reserve is under the supervision of Congress. The investment rule states that you should invest in a project if the present value of the future payments from the project is less than or equal to the cost you […]

The income-expenditure model assumes that the aggregate supply curve is horizontal at a given price level. An inside lag is the time period it takes for the stabilization policies to take effect after they have been implemented. Answer: FALSE The […]

If a project costs $600 today and returns $630 next year, the highest interest rate at which the project should still be undertaken is five percent. An increase in checking account balances equals the initial deposit multiplied by total reserves. […]

If a competitive market operates perfectly, it relies on A) the number of people buying goods. B) the laws of supply and demand. C) how many products can be produced for sale. D) how much people are willing to pay […]

Explain how each of the following policy actions by the Federal Reserve would affect the quantity of money supplied: (a) a decrease in the required reserve ratio (b) an increase in the discount rate (c) the Fed purchases government bonds […]

Recall the Application about the increase in Chinese demand for pecans to answer the following question(s). Between 2006 and 2009, Chinese imports of U.S. pecans increased from 9 million pounds per year to 88 million pounds per year, and as […]

An economy’s capital stock is increased when individuals and institutions use savings to increase capital investment in stocks and bonds. The notion of opportunity cost allows the measurement of tradeoffs. Answer: TRUE The interest rate quoted in financial markets is […]

Recall Application 4, “Coping with the Financial Chaos Caused by the Mortgage Crisis,” to answer the following questions: According to Application 4, the solution that the Fed came up with to prevent the collapse of Bear Stearns was to: A) […]

In a business cycle, the period following a trough is called an expansion. An economy is better off with an increase in the stock of capital. Answer: TRUE A tax cut of $10 billion will have less effect on the […]

Table 3.1 Table 3.1 illustrates Willy and Blythe’s hourly production for apples and carrots. Based on the table, Willy’s opportunity cost of 1 apple is: A) 1 carrot. B) 2/3 carrot. C) 4 carrots. D) 6 carrots. If the nominal […]

The long run aggregate supply curve is vertical. Fiscal actions to eliminate a recession are likely to decrease the federal budget deficit. Answer: FALSE Markets exist to facilitate exchange between people. Answer: TRUE Net interest payments made by the government […]

In order to reduce the high inflation of the late 1970s, Paul Volcker A) increased the growth of the money supply, thereby decreasing interest rates. B) decreased the growth of the money supply, thereby decreasing interest rates. C) decreased the […]

The Fed’s management of public expectations is sometimes hindered by its own: A) inside lags. B) difficulty in communicating the direction of future policy actions. C) internal disagreements about the course of future monetary policy. D) inability to conduct effective […]

The federal income tax on wages is the largest source of revenue for the federal government. A principle is a self-evident truth that most people readily understand and accept. Answer: TRUE An import quota is the same as an import […]

With the use of growth accounting, which of the following helps explain why the growth rate in the United States has been positive during the 1900s? A) the increase in capital per worker B) the reduction in oil prices C) […]

Education can contribute to economic growth through: A) a better integration of technology and workers’ skills. B) the faster discovery of new technologies. C) the faster adaptation of existing technologies. D) all of the above. Figure 19.3 Refer to Figure […]

The unemployment that occurs as a result of the normal functioning of the labor market is called cyclical unemployment. Nominal wage increases will cause real wage increases. Answer: FALSE The price system always works instantaneously. Answer: FALSE The larger the […]

What government agency has the option to purchase government bonds issued by the U.S. Treasury? A) the IRS B) the Federal Reserve C) the Commerce Department D) the Congressional Budget Office Let C = 550 + 0.8y and I = […]

Price level is held constant when moving along the planned expenditures curve. Recall Application 3, “Oil Supply Disruptions, Speculation and Supply Shocks,” to answer the following questions: Oil price speculators cause an increase in the price of oil both now […]

The reason why economists do not need details regarding the topography of a region when determining driving directions is because economics is because economics desires unrealistic assumptions. The deposit insurance is provided by a private corporation. Answer: FALSE The definition […]

The production function is the mathematical representation of the technological relationship between: A) output and government policy. B) inputs and output. C) government policy changes and inflation. D) the rate of capital accumulation and national output. Discouraged workers are workers […]

Suppose that an economy is experiencing continuously rising prices. If 2000 is the base year, then the real GDP in 1990 is ________ the nominal GDP. A) less than B) equal to C) greater than D) There is insufficient information […]

What matters to people is the face value of money or income. In the circular flow diagram, households and the firms interact in two markets: the product and the factor markets. Answer: TRUE The opportunity cost of a table is […]

If the quantity of money demanded is less than the quantity of money supplied, then the A) interest rate stays the same. B) interest rate will increase. C) interest rate will decrease. D) effect on the interest rate is indeterminate. […]

The federal budget acts as an automatic economic stabilizer because the President has the power to authorize additional discretionary spending. Governments occasionally get involved in creating a market equilibrium by setting a maximum price that is less than the equilibrium […]

Long-run money neutrality means that an increase in the money supply has no effect on real interest rates, investment, or output in the long run. When decisions are made regarding inflation using the rule-of-thumb, decision makers assume that inflation next […]

Prisoners in World War II POW camps traded products for other products, a process referred to as A) barter. B) rationing. C) central planning. D) advantage exchange. Refer to Figure 8A.1. Capital deepening occurs as long as A) total saving […]

The Mexican financial crisis of 1994 was not caused by: A) improved tourism from the U.S. to Mexico. B) the country experiencing increasingly larger trade deficits. C) the rising Mexican inflation rate. D) a loss of confidence in the economy […]

If a country is experiencing inflation, nominal GDP is always greater than real GDP. Capital deepening is the only mechanism by which economies can grow. Answer: FALSE Accurate predictions for exchange rates can be determined by considering purchasing power parity. […]

The marginal propensity to save (MPS) is equal to A) 1 – MPC. B) MPC – 1. C) MPC + 1. D) 1 + MPC. Recall Application 1, “Creating the U.S. Federal Fiscal System Through Debt Policy,” to answer the […]

Corporate income is taxed twice. Unlike social insurance taxes, income taxes are paid on wages only. Answer: FALSE When there is imperfect competition, the role of government is to take control of production. Answer: FALSE The actual unemployment rate can […]

Recall Application 1, “Don’t Forget the Costs of Time and Invested Funds,” to answer the following questions. From the Application, the opportunity cost of your invested capital is: A) the interest you could get if you invested in in a […]

The labor supply curve is based on the decision of: A) workers on how many hours to work and how much to enjoy as leisure. B) firms on how many workers to hire. C) firms on how many goods and […]

The absolute value of the tax multiplier is equal to the absolute value of the government spending multiplier. The market demand curve shows the relationship between the price and the quantity demanded by all consumers, everything else being equal. Answer: […]

If the economy is in equilibrium at full employment, a decrease in aggregate demand will: A) decrease the price level and leave the level of output unchanged in the short run. B) increase the price level and leave the level […]

Hyperinflation refers to an inflation rate which exceeds 5 percent per month. Uncertainty about the future is likely to increase current consumption spending. Answer: FALSE An excess supply of dollars will cause an appreciation of the pound relative to the […]

If the Federal Reserve raises the discount rate, banks will be inclined to borrow additional reserves and the money supply will increase. When people who are not working start looking for jobs, the labor-force participation rate increases. Answer: TRUE Rule-of-thumb […]

Recall Application 1, “Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs,” to answer the following questions: According to the application, increasing life expectancy would affect the budget because: A) as the population grows older, the Social Security […]

Recall the Application about the lack of property rights in Peru, and why clear property rights are important for economic growth in developing countries, to answer the following question(s). Clear property rights give owners an incentive to make long-term investments […]

Along the short run supply curve, when the price level rises, there is an increase in aggregate quantity supplied. An excess demand for money drives interest rates down. Answer: FALSE The United States experienced a liquidity trap in the 1st […]

A “trade deficit” occurs when A) we sell more to other countries than we buy from them. B) we buy more from other countries than we sell to them. C) we sell more to one country than another. D) we […]

Figure 14.3 If the quantity of money demanded is less than the quantity of money supplied, then the interest rate will: A) change in an uncertain direction. B) rise. C) remain constant. D) fall. Bananas and apples are substitutes. When […]

Higher taxes is an example of an expansionary fiscal policy. According to the Application, all countries that are involved in a war will experience hyperinflation. Answer: FALSE In the determination of production of goods or services with respect to GDP, […]

Figur e 15.3 Refer to Figure 15.3 If this economy is initially in a recession, the change in price level which would bring the economy back to full employment would lead to a change in money demand, which is reflected […]

The cost savings from outsourcing often lead to ________ for consumers and ________ for the outsourcing company. A) lower prices; less output B) lower prices; more output C) higher prices; less output D) higher prices; more output Recall the Application […]

A(n) ________ is a trade policy by which a nation agrees to limit its exports of a good in order to avoid more restrictive trade policies. A) tariff B) voluntary export restraint C) import quota D) import ban Suppose that […]

Recall Application 1, “Falling Home Prices, the Wealth Effect, and Decreased Consumer Spending,” to answer the following questions: According to the application, from 1997-2006, the nationwide increase in home values averaged: A) 90 percent. B) 80 percent. C) 150 percent. […]

A large technological improvement will shift the short-run aggregate supply curve to the right. Excess supply in an unregulated market will cause the price of a product to fall. Answer: TRUE According to the real business cycle theory, technological progress […]

A reduction in the price level will shift the money demand curve to the right. In the United States, corporate profits are taxed twice. Answer: TRUE Recall Application 3, “The Broken Window Fallacy and Keynesian Economics,” to answer the following […]

A price index is: A) a measurement showing how the average price of a bundle of goods changes over time. B) a measurement showing the cost of a bundle of goods at a point in time. C) a sustained increase […]

Figure 4.7 If demand and supply rise in Figure 4.7, then the equilibrium: A) price rises. B) price falls. C) quantity rises. D) quantity falls. Firms consider the ________ wage when considering whether to hire additional units of labor. A) […]

The marginal output of labor is the amount of output that can be produced if one more unit of labor is added. The marginal propensity to consume is the slope of the consumption function. Answer: TRUE According to the quantity […]

Recall Application 2, “World Savings and the U.S. Current Account Deficits,” to answer the following questions: Since reaching a high in July 2008, the price of oil has been fluctuating at lower prices worldwide. Based on the argument provided in […]

The substitution effect of a price change implies that as the price of a good falls, people are likely to buy less of the good whose price has fallen. Spending on consumer durables decreases as the interest rate increases. Answer: […]

A(n) ________ in U.S. prices will cause an increase in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease An increase in government […]

Diminishing returns to labor implies that: A) as labor increases output increases. B) as output increases, labor increases. C) as labor increases, output decreases. D) as labor increases, labor productivity decreases. A single variable can be illustrated as: A) a […]

An increase in the supply of dollars: A) increases the dollar price of yen. B) decreases the dollar price of yen. C) increases the yen price of dollars. D) does not change the exchange rate between dollars and yen. Figure […]

Foreign investment can increase a country’s capital stock. When applying the marginal principle, you should pick the level at which the activity’s marginal benefit is less than its marginal cost. Answer: FALSE In the short run, it is likely that […]

If current unemployment is close to the natural rate of unemployment, the level of real GDP is likely to be close to the level of potential output. Fiat money refers to a monetary system in which gold backs up paper […]

An increase in the price level increases the speculative demand for money. Intermediate goods are not counted as part of gross domestic product. Answer: TRUE Inside lags in fiscal policy tend to take a long time, usually longer than the […]

Active fiscal policy is the main tool used by the Fed for economic stabilization. Insurance companies such as Farmers Insurance are considered as financial intermediaries. Answer: TRUE Economists who have studied economic growth find strong evidence of convergence. Answer: FALSE […]

A surplus is defined as A) the excess of total expenditures over total revenues. B) the excess of total revenues over total expenditures. C) government spending plus transfer payments. D) the sum of all past borrowing by the government. The […]

Daily Output of Japan and U.S. Table 18.2 Refer to Table 18.2. Japan has a comparative advantage in the production of: A) stereos. B) tractors. C) both stereos and tractors. D) neither stereos nor tractors. If the economy is experiencing […]

What is the motivation for individuals to hold money? A) to reduce risk B) to have liquidity C) to facilitate transactions D) all of the above Table 2.5 Comparing the minimum wages between 1974 and 2011 addresses the economic concept […]

Recall Application 2, “Two Approaches to Determining the Causes of Recessions,” to answer the following questions: According to the application, a recession is likely to be caused by a decrease in aggregate supply if: A) prices change but output does […]

Recall Application 4, “The Introduction of Cell Phones and the Bias in the CPI,” to answer the following questions: According to the application, the failure to include cell phones in the calculation of the CPI creates an upward bias on […]

The purpose of having the members of the Board of Governors of the Federal Reserve serve fourteen-year terms is to A) ensure that the governors become well-experienced at policymaking. B) insulate the governors’ policy decisions from the influence of presidential […]

Suppose that a sporting goods store had $800 of golf balls on its shelves at the beginning of 2012 and $1,300 at the end of 2012. The amount of inventory investment included in GDP would be A) $500. B) $800. […]

If the growth rate of money changes, there will be no long-run effects on real interest rates. A decrease in supply will cause the equilibrium price and quantity of a good to fall. Answer: FALSE Countries that devote a large […]

The federal revenue source that generates a little revenue but generates a lot of controversy is the: A) estate and gift tax. B) medicare tax. C) social security tax. D) corporate tax. Table 2.3 Refer to Table 2.3. The marginal […]

In the short run, the level of GDP is determined primarily by the aggregate supply. If supply of a product increases and demand for the product decreases, equilibrium price will definitely change. Answer: TRUE The George W. Bush administration inherited […]

The federal budget works as an automatic economic stabilizer because: A) budgetary lags are shorter than monetary lags. B) federal agencies can not be crowded out. C) it is activated by a constitutional amendment. D) it does not require explicit […]

Suppose that the quantity supplied of cars exceeds the quantity of cars demanded. We would expect that: A) the price of cars will increase. B) the price of cars will decrease. C) the supply will increase to meet the demand. […]

Expected Real Rates of Interest for Five Countries Source: Trading Economics, September, 2010Table 12.1Refer to Table 12.1. The expected real rate of interest for Australia is A) -1.4%. B) 1.4%. C) 6.9%. D) cannot be determined from the information provided. […]

Recall Application 3, “Sources of Growth in China and India,” to answer the following questions: According to the application, which country has a low GNP per capita relative to the U.S.? A) China B) India C) Both A and B […]

The price of a stock is equal to the present value of expected future dividend payments from the stock. Growth that cannot be explained by increases in capital and labor must be caused by technological progress. Answer: TRUE Recall Application […]

Assume that the consumption function is C = 100 + 0.8Y, income (Y) is $1,000 billion, and investment I is $50 billion, then the unplanned inventory change will be $ ________ billion. A) -50 B) 0 C) 50 D) 100 […]

Rational expectations of inflation means that when decisions are made regarding inflation, people use information rather than making assumptions that inflation will rise or decline in the future. Stocks and bonds are types of financial intermediaries. Answer: FALSE Economists assume […]

The marginal propensity to consume (MPC) is the fraction of additional income that is spent. An increase in the price level in the United States relative to the price level in Mexico will cause an appreciation of the dollar against […]

Other things being equal, the higher the interest rate, the larger investment spending. National policy always overrides free trade in matters of environmental concern. Answer: FALSE The substantial increase in clear property rights has severely impeded growth in many developing […]

Another term for full-employment output is: A) potential output. B) maximum output. C) perfectly competitive output. D) actual output. If government spending is $6.2 trillion while government revenue is $6.2 trillion, the government is said to have a A) budget […]

If the opportunity cost of a table is 5 chairs in nation A and 1 chair in nation B, it makes sense for nation B to produce chairs. Economists argue that individuals should continue to consume until total benefit equals […]

The corporate tax rate during the Kennedy Administration was lower than the corporate tax rate today. Banks will never hold any additional reserves beyond what is required. Answer: FALSE This year’s nominal GDP is this year’s output of final goods […]

People are said to have rational expectations if they: A) use all available information in forming their expectations. B) assume that this year’s inflation rate will be equal to the average inflation rate over the past 10 years. C) merely […]

If the economy is experiencing inflation, then nominal GDP is always greater than real GDP. The Asian financial crisis of 1997 was avoided thanks to the coordination of large scale international lending. Answer: FALSE Citibank is a financial intermediary. Answer: […]

The principle that individuals and firms pick the activity level where the incremental benefit of that activity equals the incremental cost of that activity is known as the A) marginal principle. B) principle of opportunity cost. C) principle of diminishing […]

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are known as: A) sticky prices. B) fixed prices. C) regulatory prices. D) market prices. Refer to Figure 15.2. A decrease in wages is […]

Because the dK line is drawn as a straight line, then the Solow Model assumes that: A) the depreciation rate in the economy is constant. B) the total depreciation in the economy is constant. C) the total depreciation in the […]

Figure 19.3 Refer to Figure 19.3. The market equilibrium for yen is currently at Point A. A decrease in the price level in Japan causes a movement to Point ________. A) B B) D C) E D) C The time […]

Economic analysis includes commuting time as part of the cost of traffic congestion. The exchange rate of currencies between countries affects the prices of the goods purchased and sold between them. Answer: TRUE In the United States today, the government […]

One of the flaws of GDP is that it A) includes only transactions that take place in formal businesses. B) ignores transactions that do not take place in organized markets. C) includes measures of the underground economy. D) includes measures […]

If the consumption function is C = 100 + 0.8Y, then the Savings Function is: A) S = 100 + 0.8 Y. B) S = -100 + 0.8Y. C) S = -100 + 0.2Y. D) S = 100 + 0.2Y. […]

If the opportunity cost of 1 wristwatch is 4 wall clocks in Japan and 2 wall clocks in Germany, it makes sense for Germany to produce wristwatches. Labor market equilibrium occurs at a real wage where the demand for labor […]

Table 11.6 Refer to Table 11.6. If government spending increases by $100, equilibrium output increases by: A) $100. B) $200. C) $400. D) $800. Figure 10.2 Refer to Figure 10.2 to answer the question below. Points A, B, and C […]

Recall the Application about the possibility of increases in health-care expenditures crowding out consumption or investment spending to answer the following question(s). In 1950, health-care expenditures in the United States were 5.2 percent of GDP; by 2000, this share had […]

Figure 2.3 In Figure 2.3, point A: A) implies unemployment of some resources. B) is the optimum. C) cannot be produced. D) all of the above. As the real interest rate ________, the real investment spending ________. A) increases; increases […]

One of the key economic questions is “where should products be produced?” The balanced-budget multiplier is calculated as the government spending multiplier minus the tax multiplier. Answer: FALSE Macroeconomics helps explain economic fluctuations, why the economy shrinks and expands and […]

An increase in Swiss prices will cause A) an increase in the demand for U.S. dollars and an increase in the exchange rate of Swiss francs per dollar. B) a decrease in the demand for U.S. dollars and a decrease […]

Recall the Application about the time involved in including cell phones in the calculation of the CPI to answer the following question. According to this Application, the failure of including cell phones in a timely manner when calculating the CPI […]

If there is inflation, real interest rates will be greater than nominal interest rates. A “market” is an arrangement that enables people to exchange goods and services. Answer: TRUE In order to go to college, James incurs an opportunity cost […]

Refer to Figure 18.4. With a tariff or quota, what is the equilibrium price of gloves in Duckland? A) $8 B) $9 C) $10 D) $11 Inside lags associated with fiscal policy are due to all of the following, except: […]

Suppose that a natural disaster substantially increases the cost of producing cheese. We would predict that the equilibrium quantity of cheese will ________ and the equilibrium price of cheese will ________. A) increase; increase B) increase; decrease C) decrease; increase […]

The appreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents. A) more expensive; more expensive B) cheaper; cheaper C) more expensive; cheaper D) cheaper; more expensive Which of the following individuals […]

Recall Application 3, “The Broken Window Fallacy and Keynesian Economics,” to answer the following questions: In the Application, why might fixing a broken window not be good for society? A) because the money spent on fixing the broken windows could […]

GDP ignores transactions that take place in the underground economy. In the long run, the real rate of interest does not depend on monetary policy but the nominal rate of interest does. Answer: TRUE In the last few decades there […]

Assume that coffee and tea are substitutes. When the price of coffee increases A) the demand for tea decreases. B) the demand for tea increases. C) the supply of tea increases. D) the supply of tea decreases. The GDP equation […]

When the economy slows down and national income falls, the government will have ________ tax revenue to fund programs. A) more B) less C) about the same D) a rapid increase in A movement along the consumption function is the […]

The net international investment position of the United States measures A) U.S. holdings of foreign assets. B) foreign holdings of U.S. assets. C) U.S. holdings of foreign assets plus foreign holdings of U.S. assets. D) U.S. holdings of foreign assets […]

In the United States there are some methods to save which reduce taxes on savings. These include A) commodity purchases. B) stock purchases. C) retirement plans like 401Ks and 403Bs. D) money market accounts. In the United States in recent […]

The government uses the buying power of wages rather than face value or nominal value in reporting changes in “real wages” in the economy. The government spending multiplier is equal to the tax multiplier. Answer: FALSE The federal government has […]

Figure 19.1 Referring to Figure 19.1, if the exchange rate is currently 14 pesos per dollar, then we expect the dollar to ________ and the peso to ________. A) depreciate; depreciate B) depreciate; appreciate C) appreciate; depreciate D) appreciate; appreciate […]

A man is fired from his job because he was late for work too many times. While he is searching for another job he would be classified as: A) not in the labor force because his employer had a legitimate […]

If the capital stock remains fixed while the supply of labor increases, it is likely that: A) the new labor will be more productive than the old labor. B) the new labor will be less productive than the old labor. […]

When federal government spending amounts to less than tax revenues, the federal government runs a budget deficit. Money is anything that is regularly used in exchange. Answer: TRUE The government debt tends to rise when GDP rises, and tends to […]

If the Federal Reserve wanted to change the money supply in the economy, it would be least likely to A) buy bonds on the open market. B) sell bonds on the open market. C) change the level of reserves required […]

_______________________ Suppose: C = 100 + .75 (y-T) I = 200 G = 300 T = 300 _______________________ Table 11.5 Refer to Table 11.5. If both G and T decrease by 100, equilibrium output will: A) stay the same. B) […]

Social insurance taxes are paid by wages and investment income. Based in part on the budget surplus, in 2001 President Bush and Congress passed a permanent tax cut. Answer: FALSE Excess supply in an unregulated market will cause the price […]

The income-expenditure model focuses on changes in price levels. Social insurance taxes are paid by corporations based on their profits. Answer: FALSE The Keynesian short-run aggregate supply curve is vertical. Answer: FALSE Nominal GDP is calculated using a constant set […]

Full-employment output is: A) the level of output that is produced when the labor market is in equilibrium. B) the level of output that is produced when the unemployment rate is zero. C) the level of output that is produced […]

All economic activities are included in the GDP. As the price of a product falls, the demand for the product increases, ceteris paribus. Answer: FALSE On the “demand side” of a market, consumers indicate to producers what they are willing […]

An increase in supply of a product results when A) taxes on the product are increased. B) the companies that produce the product have higher materials costs. C) technological innovations are introduced in the manufacturing process. D) the government reduces […]

Additional Application MAKING THE FEDERAL RESERVE MORE TRANSPARENT What are the advantages and disadvantages of the Federal Reserve becoming more transparent about its actions and decisions and disclosing more information to the public? In recent years, the Fed has gradually […]

Recall Application 4, “Coping with the Financial Chaos Caused by the Mortgage Crisis,” to answer the following questions: According to Application 4, which insurance company did the Fed take an 80 percent stake in and made an $85 billion loan […]

Investment is “crowded out” by an increase in government spending when A) an increase in government spending causes output and prices to rise, which in turn causes interest rates to rise. B) an increase in government spending causes output and […]

Capital gains are taxed at a different rate than income and this reduces revenues the government receives. All else equal, what would happen if capital gains taxes were eliminated? A) The government would not be able to spend money on […]

Money is an example of a scarce factor of production. Tradeoffs involve an exchange of one thing for another because resources are limited and can be used in different ways. Answer: TRUE Additional factors beyond supply and consumer purchasing desire […]

What would be a way for the Federal Reserve to stimulate a sluggish economy? A) print more money B) buy government bonds on the open market C) sell more government bonds D) encourage the stock market When referring to “marginal” […]

Table 11.2 Refer to Table 11.2. If aggregate output equals ________, there will be a $100 unplanned decrease in inventories. A) $200 B) $400 C) $600 D) $800 If real GDP was 100 in 2011 and 104.4 in 2012, the […]

The larger the marginal propensity to consume, the smaller the multiplier. If the required reserve ratio is 100%, the money multiplier is zero. Answer: FALSE The natural rate of unemployment is the unemployment rate during a period of full employment. […]

Why were cell phones not included in the CPI basket immediately after it was introduced? A) Most American families did not have cell phones when they were first introduced. B) The cell phones were all made in Japan, so they […]

The government sometimes creates an excess demand for a product by setting a maximum price at which the product may be sold to consumers. This is sometimes called a A) price ceiling. B) price floor. C) tax. D) subsidy. If […]

One example of a microeconomic question is, “Should unemployment benefits be increased?” A decrease in the cost of production will shift the supply curve down and to the right. Answer: TRUE For a given interest rate, a higher level of […]

Mexico pegged its exchange rate to the U.S. dollar in the 1980s A) to discourage foreign investment. B) in an attempt to abandon the peso and switch to U.S. dollars as currency. C) to signal investors that Mexico was serious […]

Tax changes that favor people who save will also tend to favor those with relatively higher incomes. Decreases in taxes shift the aggregate demand curve to the right. Answer: TRUE As a component of GDP, consumption expenditures refers to purchases […]

Table 2.1 A group of people has formed a house cleaning and yard maintenance business. The number of houses or yards that they can clean or maintain in any given day is depicted in Table 2.1. The opportunity cost of […]

The expectations augmented Phillips curve argues that unemployment varies with anticipated inflation. If a company’s total costs per day increase from $200 to $400 by adding another worker, but its additional benefits are $300, it is sensible to add that […]

A nation’s net exports consist of A) its exports plus its imports. B) its exports minus its imports. C) its exports plus all other nation’s imports. D) its imports plus all other nation’s exports. The efforts of nations to influence […]

Free trade makes the people of a country worse off. Firms react to a unplanned positive inventory investment by increasing output. Answer: FALSE Being self-sufficient in the production of everything we need is efficient. Answer: FALSE What matters to people […]

Figure 18.2 Refer to Figure 18.2. In autarky, the maximum amount of spears that Macadamia can produce is A) 40. B) 100. C) 120. D) 160. If incomes increase and hotdogs are inferior goods, then: A) the demand for hotdogs […]

GDP is: A) a measure of all spending in the economy on foreign and domestic goods and services. B) the total market value of all final goods and services produced within a country in a given year. C) the value […]

Those who supply ________ are holders of pounds seeking to exchange them for ________. A) dollars; pounds B) both pounds and dollars; dollars C) pounds; pounds D) pounds; dollars The reason why an increase in government expenditure has a more […]

COLA is an acronym that stands for: A) Cost of Living Adjustment. B) Cost of Living Annually. C) Cost of Living Alone. D) Cost of Living Account. Table 6.3 Refer to Table 6.3. The number of people not in the […]

Imagine two countries, Bruceland and Davidia. Bruceland is producing everything at a lower absolute cost than Davidia. If the two countries trade what is the reason? The Kennedy administration endorsed substantial tax cuts because: A) tax rates were very high, […]

If the exchange rate changes from 150 yen per U.S. dollar to 125 yen per U.S. dollar, then the U.S. dollar has appreciated. Personal disposable income is pre-tax income that flows directly to households. Answer: FALSE An increase in the […]

Assume that last year’s inflation rate is the same as the expectation of inflation for the next year. According to the expectations Phillips curve, if the inflation rate increases relative to the expected rate, the unemployment rate A) decreases. B) […]

The principle that states that the cost of something is equal to what is sacrificed to get it is known as the: A) marginal principle. B) principle of opportunity cost. C) principle of diminishing returns. D) reality principle. Suppose a […]

To determine the equilibrium price level and equilibrium level of real GDP, the aggregate demand and aggregate supply must A) be considered separately. B) intersect. C) be disregarded. D) be considered as a multiplier. The demand for money that arises […]

An open market ________ by the Fed increases interest rates and ________ output. A) sale; increases B) sale; decreases C) purchase; increases D) purchase; decreases Rising wages and input prices: A) cause the aggregate demand curve to shift to the […]

Figure 14.5 Refer to Figure 14.5. Assume the interest rate equals 8% and the money supply decreases from to . If the interest rate remains at 8%: A) money demand will increase. B) money demand will decrease. C) there will […]

If consumption is $25,000 when income is $26,000, and consumption increases to $25,900 when income increases to $28,000, the marginal propensity to consume is: A) 0.59. B) 0.65. C) 0.55. D) 0.45. Most econometric models predict that an interest rate […]

If the MPC = 0.75, the government spending multiplier would be A) 0.25. B) -7.5. C) 4. D) 25. The depreciation of the dollar will make U.S. goods ________ to foreigners and make imports ________ for U.S. residents. A) more […]

If the Fed wishes to increase long-term investment spending, it must: A) cut the current short-term interest rate. B) convince the public that the expected future short-term rates would be low. C) raise the short-term interest rates but lower the […]

Table 5.3 Refer to Table 5.3. Assume that this economy produces only two goods: Good X and Good Y. If year 1 is the base year, the value for this economy’s GDP Deflator in year 2 is: A) 113.8. B) […]

In the supply and demand for U.S. dollars in Europe, who is a supplier in that market? A) the Americans who want to invest in Europe B) the Europeans who want to invest in the U.S. C) the Americans who […]

Table 2.5 Refer to the table above. By what percentage did the federal minimum wage increase from 1974 to 2011? A) 72.41 percent B) 262.5 percent C) 362.5 percent D) 525.0 percent Answer: B If the tariffs on the textiles, […]

Which is not a way in which the federal government can finance its expenditure? A) issuing bonds B) creating money C) buying federal government securities D) tax revenues A White House proposal to increase infrastructure spending on roads, rail lines […]

The crisis in Mexico in 1994, Asia in 1997 and Argentina in 2002 were all caused by weak fundamentals. If the price level falls faster than the wage rate, then the real wage decreases. Answer: FALSE Unlike Classical economists, Keynes […]

Which of the following sequence of events would follow an open market purchase of bonds? A) interest rate investment aggregate demand real GDP B) interest rate investment aggregate demand real GDP C) interest rate investment aggregate demand real GDP D) […]

If autonomous consumption (Ca) increases, the slope of the consumption function becomes steeper. Acquiring knowledge and skills by participating in the production process is called “learning by doing.” Answer: TRUE A larger labor force will allow the economy to produce […]

A specialized worker does not spend time switching from one task to another. This is called: A) continuity. B) innovation. C) functionality. D) repetition. If the government collects taxes using a constant income tax rate t, then the adjusted marginal […]

The Obama stimulus package included fiscal policy actions designed to assist the economy in its recovery from recession. These fiscal policy actions would include ________ government spending and ________ taxes. A) increasing; decreasing B) decreasing; increasing C) increasing; Increasing D) […]

If a central bank is credible in its desire to fight inflation, it can deter the private sector from taking aggressive actions that drive up prices. When demand changes and the demand curve shifts, equilibrium price and equilibrium quantity change […]

Suppose your bank pays you 6% interest per year on your savings account. If prices increase by 3% per year over that time, approximately how much nominal value do you gain by keeping $100 in the bank for a year? […]

The marginal propensity to consume is always greater than unity. A government’s budget deficit or surplus is the difference between what it spends and what it collects in taxes in a year. Answer: TRUE In the short run, the price […]

Philip Cagan, a student of Milton Friedman, is best known for his work on: A) money and real GDP. B) hyperinflation. C) the quantity theory of money. D) measuring money supply. A reason that economists keep an eye on both […]

Which of the following is not counted in the GNP of the United States? A) the wage of a U.S. citizen who works in a foreign country for a foreign firm B) the interest earned by a U.S. bank on […]

When money is used to express the value of goods and services, it is functioning as a A) medium of exchange. B) store of value. C) unit of account. D) store of purchasing power. Suppose your bank pays you 4 […]

Suppose that real GDP starts at 200 and grows at a rate of 9 percent per year for two years. In the third year real GDP would be A) 183.49. B) 236. C) 237.62. D) 239.24. What was the U.S. […]

The multiplier in an open economy ________ the multiplier in a closed economy. A) is larger than B) equals C) is smaller than D) The multiplier can be smaller or larger, depending on the size of MPM and MPC. If […]

Decreases in the demand for products can be caused by which of the following? A) decreases in income B) decreases in population C) decreases in the prices of substitute goods D) all of the above Figure 19.2 Referring to Figure […]

If inflation is eight percent, a nominal interest rate of six percent translates into a real interest rate of two percent. The full-employment level of output represents that maximum output that a country can produce. Answer: FALSE According to the […]

A comparative advantage is the ability of one person or nation to produce a good at an opportunity cost that is lower than that of another person or nation. In a barter economy, the exchange of goods trade requires a […]

When Jimmy produces one guitar his costs total $250. When he produces two guitars his total costs are $400. This means that Jimmy’s marginal cost of producing the second guitar is $200. Active economic policies are more likely to destabilize […]

The most recent recession that the U.S. experienced started in: A) December 2007. B) November 2001. C) March 2001. D) December 2008. Figure 15.5 Refer to Figure 15.5. An increase in the price level, ceteris paribus, is represented by movement […]

Figure 18.1 Refer to Figure 18.1. After trade begins, ________ will specialize in the production of bicycles and ________ will specialize in the production of hang gliders. A) the United States.; the United States B) the United States; Canada C) […]

Recall Application 1, “The Chinese Yuan and Big Macs,” to answer the following questions: According to the application, the law of one price holds for Big Macs. The highest tax rate for individuals during the Kennedy Administration was lower than […]

Recall Application 2, “The Confucius Curve?” to answer the following questions: According to the application, the central idea for the Laffer curve is: A) cutting tax rates may increase tax revenues. B) cutting tax rates may increase GDP growth. C) […]

Recall the Application about the level of real wages for laborers in England from 1350 to 1550 to answer the following question(s). In 1348, the bubonic plague, also known as the Black Death, arrived in England from Asia and caused […]

Bananas and apples are substitutes. When the price of bananas rises, and a technological advance in apple production occurs at the same time A) the equilibrium price of apples rises and the equilibrium quantity of apples falls. B) the equilibrium […]

Additional Application INFLATION-INDEXED BONDS IN THE UNITED STATES Are there bonds that can protect your investments from inflation? In 1997, the U.S. Department of the Treasury created a new financial instrument called the Treasury Inflation-Protected Security, or TIPS. The key […]

A(n) ________ in U.S. interest rates will cause an increase in the demand for U.S. dollars and a(n) ________ in the (per dollar) exchange rate. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Figure 9.1 shows […]

Recall Application 3, “The Effectiveness of Committees,” to answer the following questions: The time it takes policymakers to recognize the need for and implement an economic policy to stimulate the economy is known as the outside lag. The ratio of […]

Interest payments on the national debt are not a problem because we owe all of it to ourselves. As a lender of last resort, the Fed avoids most financial crisis by providing liquidity to the financial system. Answer: TRUE If […]

Underground activities pertain to all illegal activities in the economy. When individuals or firms make an investment, they incur costs today in the hope of future gains. Answer: TRUE From 1948 to 2010, the United States has experienced only 4 […]

Recall Application 3, “The Financial System Under Stress: September 11, 2001,” to answer the following questions: To avoid a financial crisis after September 11, 2001, any policy by the implemented Fed must: A) be approved by the President of the […]

Recall Application 3, “The Effectiveness of Committees,” to answer the following questions: Supporters of stabilization policy argue that attempts to stabilize the economy can always be effective because of time lags. In the short run, higher taxes will lead to […]

Expansionary policies are policies designed to A) increase the level of real GDP. B) reduce the level of real GDP. C) decrease government spending. D) reduce the federal deficit. In order to prevent a wage-price spiral from emerging when the […]

Table 11.2 Refer to Table 11.2. At an aggregate output level of $600, the unplanned inventory change is: A) -$100. B) -$50. C) $0. D) $50. Table 6.13 Refer to Table 6.13. If 2000 is the base year, the inflation […]

As more efficient capital equipment becomes available, the demand for labor will ________, the real wage will ________, and the quantity of labor hired will ________. A) increase; increase; increase B) increase; remain the same; increase C) increase; remain the […]

Recall the Application about the behavior of prices in retail catalogs to answer the following question(s). Economist Anil Kashyap of the University of Chicago examined the prices of 12 selected goods from L.L. Bean, REI, and The Orvis Company, Inc. […]

If the Fed wished to decrease interest rates, it could A) increase the reserve requirement or conduct an open market sale. B) increase the reserve requirement or conduct an open market purchase. C) decrease the reserve requirement or conduct an […]

A bank has reserves of $40, loans of $110, deposits of $90, and owners’ equity of $60. Which of the following represents the bank’s total assets? A) $180 B) $110 C) $130 D) $150 Crowding out refers to A) an […]

Recall Application 3, “The Ends of Hyperinflations,” to answer the following questions: According to the Application, which of the following was Sargent’s explanation for why hyperinflations occurred? A) contractionary fiscal policy coupled with contractionary monetary policy. B) money creation and […]

If a technological advance makes it possible to produce bananas at a lower cost: A) the demand for bananas increases. B) the demand for bananas decreases. C) the supply of bananas increases. D) the supply of bananas decreases. Suppose that […]

If the government estimates that the marginal cost of building a bridge is $100 million, while the marginal benefit is $150 million, the marginal principle dictates that the government should: A) build the bridge. B) never build the bridge. C) […]

The outside lags related to monetary policy tend to be quite long. A decrease in the population of an economy is likely to lead to lower wages and a lower quantity of labor used. Answer: FALSE If the net international […]

If the government collects taxes using a constant income tax rate t, then an increase in t will result in: A) a higher disposable income. B) no change to disposable income. C) a lower disposable income. D) an unknown change […]

If the monthly unemployment rate increase mentioned in the Application wound up being a permanent and not temporary change, the best economic decision by the committee would most likely be to A) increase the money supply to stimulate the economy. […]

When using the formula PV = K/(1+i)t to calculate the present value of a future payment, a higher t implies: A) a lower present value. B) a higher future value. C) a higher present value. D) a lower future value. […]

The absence of clear property rights A) is caused by capital deepening. B) is common in many developing nations. C) encourages creative destruction. D) all of the above Currency held by the public + demand deposits + travelers checks + […]

Suppose that in October the price of a cup of cafe latte was $2.50 and 400 lattes were consumed. In November the price of a latte was $2.00 and 600 lattes were consumed. What might have caused this change? A) […]

If the economy is in long-run equilibrium at full employment, lowering taxes leads to a higher price level and a higher level of real GDP. Along a Keynesian short-run supply curve, when the price level rises, there is an increase […]

Recall the Application about why the U.S. federal government took over the debt of the state governments in the late 1700s to answer the following question(s).According to this Application, in exchange for the federal government absolving their debts, the states […]

Most modern economic analysis is normative in nature, but involves questions with positive aspects. To determine an appropriate congestion tax, an economist has to assume that people respond to incentives. Answer: TRUE In the most simple model of the circular […]

Assuming all excess reserves are loaned out, if the reserve ratio is 8 percent, the money multiplier will be equal to A) 2. B) 8. C) 12.5. D) 16.67. Figure 4.6 Figure 4.6 illustrates a set of supply and demand […]

Recall the Application about how society will cope with increased demands for entitlement programs to answer the following question(s). This Application addresses the impact of increasing life expectancy and aging populations on the costs of government entitlement programs such as […]

Two goods are complements if an increase in the price of one good leads to an increase in demand for the other. Economists assume that individuals make informed decisions and act in their own self-interest. Answer: TRUE Ceteris paribus means […]

The main reason why the government enforces contracts and maintains a legal system that punishes those who violate contracts is: A) to facilitate exchange. B) to decrease imperfect competition. C) to decrease imperfect information. D) to increase uncertainty. Recall the […]

An increase in the reserve requirement A) increases the money supply, which leads to increased interest rates and a decrease in GDP. B) increases the money supply, which leads to decreased interest rates and a decrease in GDP. C) decreases […]

If GDP is higher than potential output, wages and prices will rise. Refer to Application 2, “Recovering From a Recession,” to answer the following questions: After reading the application, you can infer that the recession in 1973 was also caused […]

Transfer payments are excluded from GDP. The Mexican financial crisis of 1994 was due to international investors’ loss of confidence in the country. Answer: TRUE If the actual interest rate in the money market is higher than the equilibrium interest […]

Fiscal policy affects aggregate demand. Governments sometime create an excess supply of a product by setting a minimum price that is greater than the equilibrium price, resulting in a permanent excess supply of the product. This is known as a […]

If one variable declines as the other variable declines, the two variables are negatively related. The origin of a graph is the intersection of the two axes, where the value of both variables is zero. Answer: TRUE The term “crowding […]

Table 5.1 Refer to Table 5.1. Assume that this economy produces only two goods: Good X and Good Y. If year 1 is the base year, the value for this economy’s real GDP in year 3 is: A) $110. B) […]

Recall the Application about Austrian economist Henry Hazlitt and the Broken Window Fallacy to answer the following question(s). Hazlitt questioned whether a hoodlum breaking a store window was actually good for society.According to the Application, the argument that the broken […]

A Bank has excess reserves if the actual reserves that the bank holds is less than the required reserves. A decrease in population would shift the demand curve to the left. Answer: TRUE Money solves the problem of double coincidence […]

When considering a two-input production function, one of which is increasing while the other is fixed, at some point called the point of diminishing returns, output will increase at a decreasing rate. Slope is calculated as rise / run. Answer: […]

The cost of a bachelor’s degree in philosophy equals the tuition plus the cost of room and board. “Ricardian equivalence” is the proposition that it does not matter whether government expenditure is financed by taxes or by issuing debt. Answer: […]

If the Federal Reserve purchases newly issued government debt A) the effect is the same as borrowing from the public. B) existing money is destroyed. C) new money is created. D) the money supply decreases. Which one of the following […]

Suppose that the population of a country increases. Assuming that people in that country enjoy eating steak, we would predict that the equilibrium quantity of steak will ________ and the equilibrium price of steak will ________ in that country. A) […]

Figure 12.1 Refer to Figure 12.1. Which of the following causes a movement from Point A to Point B? A) an increase in the interest rate B) positive growth in the GDP C) negative growth in the GDP D) a […]

Adverse supply shocks can cause a recession with increasing price level. The cost of unanticipated inflation is arbitrary redistribution of income and wealth. Answer: TRUE When you have a job and your employer compensates you for your time with money, […]

The standard way to measure the effect of debt in an economy is the stock of debt relative to the GDP. When you use money to fill your car with gas every week, you are using money as a unit […]

An increase in the price level increases the transaction demand for money. When federal government spending exceeds tax revenues, the federal government runs a budget surplus. Answer: FALSE An increase in taxes will increase total planned expenditures for goods and […]

The marginal benefit of a worker to a firm is the value of the extra output that results when A) some workers are laid off and the remaining workers become more productive. B) an additional worker is hired. C) workers […]

Figure 19.1 Referring to Figure 19.1, Mexican goods will become more expensive in the United States if the exchange rate goes from ________ to ________ pesos to the dollar. A) 12; 11 B) 12; 13 C) 11; 13 D) 10; […]

Although government spending increased during the 1930s: A) the money supply increased too, so there was no net monetary expansion. B) the exchange rate rose too, so there was no net trade expansion. C) taxes increased too, so there was […]

If a person has a comparative advantage in some activity, she must have an absolute advantage in that activity as well. Recall Application 3, “Civil Liberties and the Efficiency of Government,” to answer the following questions: The returns to public […]

The relationship between the level of saving and the level of consumption is called the savings function. Labor supply curves are always upward-sloping. Answer: FALSE Hyperinflation can be thought of as a monetary policy phenomenon. Answer: TRUE The dollar will […]

The market demand curve is: A) downward sloping and is flatter than an individual’s demand curve. B) upward sloping and is flatter than an individual’s demand curve. C) downward sloping and is steeper than an individual’s demand curve. D) upward […]

Suppose a product suddenly loses popularity and the firms producing the product begin to realize large losses. As firms exit the market, the equilibrium price in the market will: A) increase and make the remaining firms stay in business. B) […]

If GDP is above potential output, then we expect to see A) increasing wages, causing the short-run aggregate supply curve to shift up. B) increasing wages, causing the short-run aggregate supply curve to shift down. C) falling wages, causing the […]

The velocity of money is the ratio of real GDP to the money supply. The Phillips curve is a graph showing the relationship between the rate of inflation and the unemployment rate. Answer: TRUE The multiplier increases as the MPC […]

According to the principle of diminishing returns, an additional worker decreases total output. To draw the consumption possibilities curve for a particular nation you need to know the output of the good for which the nation has a comparative advantage […]

During the late 1990s and early 2000s, the stock market and investment expenditure were linked through: A) the creation of over-the-counter stock markets, such as NASDAQ. B) the management of monetary policy, that guaranteed low interest rates. C) expectations, first […]

The nominal interest rate tells you: A) how fast the number of dollars in your bank account increases over time. B) how fast the purchasing power of your bank account increases over time. C) the number of dollars in your […]

In an effort to improve the central bank’s credibility in fighting inflation, the central bank in New Zealand: A) has been operating under a law that specifies that its only goal is to maintain stable prices. B) has been running […]

If a consumer can buy four DVDs for $44 and five DVDs for $50, then the marginal cost of the fifth DVD is: A) $10. B) $50. C) $11. D) $6. Figure 2.4 Joe runs a business and needs to […]

An increase in the benefit from undertaking an activity will result in an increase in the opportunity cost of that activity. The law of demand states that there is a negative relationship between price and quantity demanded, ceteris paribus. Answer: […]