According to the application, shocks to aggregate demand are easily anticipated.
Economics tells us what to choose given the tradeoffs.
The multiplier is always larger than one because the marginal propensity to consume is
always larger than one.
Aggregate demand and aggregate supply must be combined to determine the price level
and the “real” GDP.
The aggregate demand curve is downward sloping because of the law of demand.
An increase in wages will shift the supply curve up and to the left.
Using sharp increases or decreases in taxes rather than deficits is a better way to prevent
distortions in an economy.
If the money growth is 7% a year, the growth of real output is 3% a year, and velocity is
constant, then the rate of growth of prices is 10%.
Normative economics answers the question, “What ought to be?” Positive economics
predicts the consequences of alternative actions, answering the questions, “What is?” or
“What will be?”
A “market” is an arrangement that allows people to exchange things.
A country with a central bank that is not independent of external political pressure is a
country that tends to have higher inflation.
The opportunity cost of 1 wristwatch is 4 wall clocks in Japan and 2 wall clocks in
Germany. If the nations split the difference between the willingness to pay and the
willingness to accept, the terms of trade are 3 wristwatches per wall clock.
If after adding investment (I) to the consumption (C) function, we find that the C + I
line is parallel to the consumption function, then:
A) investment is a constant.
B) investment equals consumption.
C) investment is less than consumption.
D) investment exceeds consumption.
Increases in net investment generally result in
A) lower levels of capital stock and lower levels of depreciation.
B) lower levels of capital stock and higher levels of depreciation.
C) higher levels of capital stock and higher levels of depreciation.
D) higher levels of capital stock and lower levels of depreciation.
________ is/are the knowledge and skills acquired by a worker through education and
experience and used to produce goods and services.
A) Human capital
B) Natural resources
C) Physical capital
D) Technological progress
The increase in spending that occurs because domestic goods become cheaper relative
to foreign goods when the price level falls is known as the
A) interest rate effect.
B) international trade effect.
C) price effect.
D) wealth effect.
Figure 11.3
In Figure 11.3, the multiplier effect resulting from a change in investment spending is
represented as the distance between points
A) C0 and C1.
B) y0 and y1.
C) a0 and a1.
D) a1 and y1.
A possible reason a nation might impose a protectionist policy such as a tariff is to
A) increase the level of imports.
B) protect an infant industry from foreign competitors.
C) encourage specialization in the good in which the nation has a comparative
advantage.
D) slow domestic production.
According to the accelerator theory of investment, an increase in the expected future
growth rate of real GDP will cause:
A) current investment spending to decrease.
B) current investment spending to increase.
C) future investment spending to increase.
D) future investment spending to decrease.
According to purchasing power parity, if it takes five times as many Russian rubles to
buy a basket of goods in Russia as it takes U.S. dollars to buy a basket of goods in the
United States, then:
A) there is a lower rate of inflation in Russia than in the United States.
B) the law of one price no longer holds.
C) the equilibrium exchange rate should be five rubles per dollar.
D) the equilibrium exchange rate should be one ruble per five dollars.
An appreciation of a country’s currency is likely to:
A) decrease its GDP.
B) increase its GDP.
C) decrease exports and decrease imports.
D) decrease exports but not change imports.
Daily Output of Russia and Panama
Table 18.1
Refer to Table 18.1. Russia has a comparative advantage in
A) hats.
B) gloves.
C) both hats and gloves.
D) neither hats nor gloves.
The law of demand states that the quantity demanded of a product increases as:
A) consumer income rises.
B) the prices of other products fall.
C) the price of the product rises.
D) the price of the product falls.
Monetary neutrality implies that a decrease in the money supply will:
A) increase real GDP.
B) not affect unemployment.
C) not affect the price level.
D) decrease real interest rates.
When economists assume that people are rational and respond to incentives, they mean:
A) people act with kindness.
B) people are altruistic.
C) people act in their own self-interest.
D) none of the above
During the 1970s homeowners in California borrowed money at 10 percent interest
rates per year because the growth rate in the value of housing prices exceeded:
A) 10 percent per year, and they believed that the trend would continue.
B) 10 percent per year, and they believed that the trend would end soon.
C) 4 percent per year, and they believed that the trend would continue.
D) 30 percent per year, and they believed that the trend would continue.
Figure 4.3
Figure 4.3 illustrates the supply and demand for blue jeans. If the actual price of blue
jeans is $30, there is:
A) excess demand of 40 pairs of blue jeans.
B) excess supply of 40 pairs of blue jeans.
C) excess demand of 50 pairs of blue jeans.
D) excess supply of 50 pairs of blue jeans.
Suppose the consumption function is represented as follows: C = 200 + 0.75Y. If Y
increases by $100, then consumption would increase by:
A) $70.
B) $75.
C) $80.
D) $90.
Why is the line between frictional and structural unemployment sometimes hard to
draw?
Explain what is meant by the term “monetizing the deficit.”
Define the term “export.”
Are there any reasons why reducing the inflation rate to zero would be a bad policy for
the Fed to pursue? Explain.
Explain why contracts are beneficial to markets.
Why is it difficult to make accurate and valid comparisons of real GDP or GNP for
different countries, and how do the World Bank and the IMF deal with these
difficulties?