Sometimes the government deals with externalities by creating laws to regulate
behavior instead of using taxes to correct the market failure. So, requiring auto
manufacturers to install a device called a catalytic converter which removes some
toxins from exhaust may be preferable to a gas tax that reduces driving levels. This
route is often preferred because:
a. c and e.
b. it requires less technological development.
c. it doesn’t penalize drivers of clean cars.
d. only car drivers pay for the externality.
e. the cost of the externality is unknown.
If an economy is producing at full employment, it means that:
a. there are idle resources in this economy.
b. the production is not efficient.
c. the economy is producing along its production possibilities curve.
d. the economy is producing at a point that is to the left of the production possibilities
curve.
e. the economy is producing at a point that is to the right of the production possibilities
curve.
The M1 definition of the money supply includes:
a. currency in circulation and checkable deposits.
b. Federal Reserve Notes, gold certificates, and checkable deposits.
c. Federal Reserve Notes and bank loans.
d. None of these.
As shown in Exhibit 7-2, the rate of inflation for Year 3 is:
a. 5 percent.
b. 10 percent.
c. 20 percent.
d. 25 percent.
Keynes once remarked that, in the long run, we’re all dead. He was responding to the
conventional wisdom of classical economics who argued that:
a. the supply curve should remain vertical in the long run.
b. World War I was fought to free Britain from economic ruin.
c. depression was only a short-run, temporary departure from full-employment
equilibrium.
d. funeral plots need to be determined by the market.
e. market-based realities cause the estate tax to be too high.
Which of the following would appear on the asset side of a commercial bank balance
sheet?
a. Loans.
b. Checkable deposits.
c. Savings deposits.
d. Net worth.
If the United States were to adopt a policy of free trade with European countries and
Japan, this policy would:
a. help the United States and hurt the other countries because the United States has a
larger population.
b. help all of the countries involved because every country would have a comparative
advantage in the production of some goods.
c. hurt all of the countries involved because all the countries are capable of producing
anything that could be produced in one of the other countries.
d. help the United States and hurt the other countries because the United States has
more natural resources than the other countries.
If the marginal propensity to consume (MPC) is 0.80, the value of the spending
multiplier is:
a. 2.
b. 5.
c. 8.
d. 10.
Exhibit 4-7 Demand and supply schedules for movie tickets PriceQuantity
DemandedQuantity
Supplied
$10 200 500
8 240 470
6 370 420
4 390 390
2 410 310 In Exhibit 4-7, the equilibrium price of a movie ticket is:
a. $10.
b. $8.
c. $6.
d. $4.
e. $2.
If an economy keeps increasing its capital stock, then over time its production
possibilities curve will:
a. not move.
b. shift to the left.
c. shift to the right.
d. disappear because scarcity ceases to exist.
e. demonstrate massive job loss for workers.
Suppose a person with an income of $20,000 pays a tax of $2,000. If the tax is
progressive, then how large of a tax will a person with an income of $40,000 pay?
a. Exactly $2,000.
b. Between $2,000 and $4,000.
c. Exactly $4,000.
d. More than $4,000.
Deadweight loss results from:
a. equilibrium.
b. underproduction.
c. overproduction.
d. none of the above are correct.
e. Either b or c.
Exhibit 5-7 GDP data (billions of dollars) Personal consumption expenditures $5,207
Interest 425
Corporate profits 735
Government spending 1,406
Depreciation 830
Rental income 146
Gross private domestic investment 1,116
Compensation of employees 4,426
Exports 870
Imports 965
Indirect business taxes 553
Proprietors’ income 520
Personal taxes 886
Social Security taxes 432
Transfer payments 376 In Exhibit 5-7, personal income (PI) is:
a. $6,254 billion.
b. $6,495 billion.
c. $6,013 billion.
d. $7,082 billion.
e. $7,637 billion.
Suppose the consumer price index (CPI) for Year X is 130. This means the average
price of goods and services is:
a. currently $130.
b. 130 percent more in Year X than in the base year.
c. 130 percent more in the base year than in Year X.
d. priced at 30 percent more in Year X than in the base year.
Assume that the production of a good imposes external costs upon third parties. If the
price and quantity of this good is set by supply and demand the price will be too:
a. high and quantity too low for efficient resource allocation.
b. low and quantity too low for efficient resource allocation.
c. low and quantity too high for efficient resource allocation.
d. high and quantity too high for efficient resource allocation.
The primary benefits derived from tariffs usually accrue to the:
a. domestic consumers of goods protected by the tariffs.
b. foreign producers of goods protected by the tariffs.
c. domestic producers of export goods.
d. domestic suppliers of goods protected by the tariffs.
Exhibit 12-4 Marginal tax rate lines
In Exhibit 12-4, if A represents state and local taxes and B represents federal income
taxes, what is the result of imposing both types of taxes?
a. regressive tax.
b. progressive tax.
c. proportional tax.
d. ability-to-pay tax.
Consumer surplus measures the value between the price consumers are willing to pay
and the:
a. producer surplus price.
b. deadweight gain price.
c. actual price paid.
d. preference price.
Assume the marginal propensity to consume (MPC) is 0.75 and the economy is in
recession with real GDP $1 trillion below full-employment real GDP. To achieve full
employment, aggregate demand (AD) must be increased $2 trillion. Following
discretionary fiscal policy, government spending should be increased:
a. $0.25 trillion.
b. $1 trillion.
c. $0.5 trillion.
d. $2 trillion.
Exhibit 2-10 Production possibilities curve data A B C D E
Capital goods 0 1 2 3 4
Consumption goods 25 23 19 13 0 Suppose an economy is faced with the production
possibilities table shown in Exhibit 2-10. If this economy chooses the combination of
goods at point A,
a. only capital goods are being produced.
b. every resource in the economy is utilized in the production of capital goods.
c. no capital goods are being used as factors of production.
d. every resource in the economy is being used in the production of consumption goods.
e. no consumption goods are being produced.