A good that takes up a very large percentage of the consumer’s budget will tend to have
a. an elastic demand.
b. a perfectly elastic demand.
c. an inelastic demand.
d. an upward-sloping demand curve.
e. very many substitutes.
The record of all transactions with foreign nations that involve the exchange of
merchandise goods and services or unilateral gifts is called the
a. capital account.
b. current account.
c. balance of trade.
d. balance of payments.
As the outstanding debt of a nation becomes very large relative to the size of the
economy,
a. the borrowing cost of the government will decline.
b. lenders will have no choice but to hold the outstanding bonds and to buy the new
ones as they are offered.
c. a country like the United States will have no choice but to default on the payments to
bond holders.
d. if the country has a central bank, it will almost certainly resort to money creation to
service the debt rather than directly default.
International trade can be mutually advantageous because it
a. encourages the adoption of sound institutions and policies.
b. reduces the competitiveness of domestic industries and, thereby, makes it easier for
the domestic producers to raise their prices.
c. permits the trading partners to take advantage of reductions in per-unit costs in
industries where economies of scale are important.
d. does all of the above.
e. does both a and c.
People are more likely to purchase a consumer ratings magazine that reviews new
automobiles before buying a new car than they are to purchase a consumer ratings
magazine that reviews pens and pencils before buying a new pen or pencil. Which of
the following best explains this behavior?
a. Because the consumer ratings magazine must have a higher price for the issue
reviewing pens and pencils.
b. Because the value of the information, in terms of avoiding a mistake on the purchase,
is much higher for an automobile than for a pen or pencil, it is more worthwhile to
gather this information.
c. Because people generally do not know which products are reviewed by these
consumer magazines.
d. None of the above explain this behavior.
Which of the following is true?
a. Tax rates do not influence economic growth.
b. Countries with high marginal tax rates have generally had higher rates of economic
growth than those with low tax rates.
c. Countries with low marginal tax rates have generally had higher rates of economic
growth than those with high tax rates.
d. Countries that impose high marginal tax rates at low-income thresholds generally
have high rates of economic growth.
Which of the following contributed to the crisis of 2008?
a. a doubling of the price of imported oil during 2007-2008
b. a sharp increase in the price of housing during 2008
c. inclement weather in 2008
d. falling resource prices and a reduction in the cost of production
The total indebtedness of the federal government in the form of outstanding
interest-earning bonds is the
a. budget deficit.
b. budget surplus.
c. national debt.
d. trade deficit.
Gross domestic product equals the sum of
a. all income earned by domestic producers of goods and services minus indirect
business taxes and depreciation during the year.
b. the purchases of final goods and services produced domestically during a year.
c. the amount received by firms for consumer goods and services.
d. incomes received by households minus the sale of factor services supplied
domestically.
Poor people, who receive income assistance from the government, often do not work
because
a. they face very high implicit marginal tax rates.
b. they are usually not physically able to work.
c. they have no desire for additional money.
d. the government forces them to stay at home and take care of their children.
The United States is a net importer of capital. This means
a. that U.S. citizens own more foreign assets than foreigners own U.S. assets.
b. that citizens of other countries are buying more U.S. assets than Americans are
buying abroad.
c. only that U.S. citizens own foreign assets.
d. only that foreign citizens own U.S. assets.
e. that citizens of other countries are buying fewer U.S. assets than Americans are
buying abroad.
If the dollar depreciates relative to the Peso, it can be said that
a. Mexican citizens no longer respect the United States.
b. the dollar falls in value within the United States.
c. it takes fewer dollars to buy Pesos.
d. the Peso appreciates relative to the dollar.
If the exchange rate has been $2.00 per British pound but now falls to $1.60 per British
pound, there will be
a. more U.S. imports from Great Britain because the price of pounds has fallen.
b. more exports to Great Britain because the price of pounds has risen.
c. fewer exports to Great Britain because the price of the pound has risen.
d. more U.S. exports to Great Britain since the price of the dollar has fallen.
e. no change in either exports or imports.
When prices in the goods and services market are below the level anticipated,
a. output will temporarily exceed the economy’s long-run potential.
b. output will temporarily fall short of the economy’s long-run potential.
c. output will be equal to the economy’s long-run potential.
d. the actual rate of unemployment will be less than the natural rate of unemployment.
Ceteris paribus, a decrease in the price of a good will cause the
a. quantity demanded of the good to decrease.
b. quantity supplied of the good to increase.
c. producer surplus derived from the good to decrease.
d. supply of the good to decrease.
Analysis of the economic status of poor people reveals that
a. most are poor because they did not have the opportunity to obtain training and a
quality education.
b. most had poor parents, grandparents, and great-grandparents, suggesting that poverty
is inherited.
c. the poverty population is very homogeneous regarding opportunity, cultural
disadvantages, alcoholism, and other personal contributing factors.
d. poverty is a complex issue; the poor are a heterogeneous population, and the causes
of poverty are multidimensional.
A nation with cheap, efficient communications is likely to be
a. richer, ceteris paribus, because transaction costs will be lower and trade greater.
b. richer only if production of goods is cheaper, too, since trade itself cannot create
value.
c. poorer since it spends so much on communication instead of true productivity.
d. spending too much on communications, which adds nothing to the value of output.
Advocates of the crowding-out effect maintain that the large budget deficits during the
recession of 2008-2009
a. stimulated output and employment, leading to a quicker recovery.
b. will lead to a slower recovery than would have been the case if government
borrowing had been more restrained.
c. led to lower interest rates, stimulating private investment and consumption.
d. will lead to lower future taxes and more private spending as the economy recovers.
Which of the following would cause prices and real GDP to rise in the short run?
a. Short-run aggregate supply shifts right.
b. Short-run aggregate supply shifts left.
c. Aggregate demand shifts right.
d. Aggregate demand shifts left.
In 2002, President Bush enacted a 30 percent tariff on imported steel. The primary
beneficiaries of this tariff were
a. U.S. steel companies and employees.
b. U.S. automobile companies and employees.
c. foreign steel companies.
d. foreign steel workers.
e. both a and b above.
Patent laws that allow the inventor to maintain monopoly rights to an invention increase
the price of the product and
a. increase the profitability of inventive activities, thereby speeding up technological
developments.
b. increase the profitability of inventive activities, thereby slowing down technological
developments.
c. decrease the profitability of inventive activities, thereby speeding up technological
developments.
d. decrease the profitability of inventive activities, thereby slowing down technological
developments.
Market prices are
a. conveyors of information.
b. determined by the interactions of supply and demand in voluntary exchange.
c. indicators of the relative scarcity of resources and products.
d. all of the above.
In the United States the degree of individual income mobility (that is, the degree to
which people move from higher to lower or lower to higher income groupings) is
a. rigid in both directions.
b. flexible in both directions.
c. flexible upward but rigid downward since high income perpetuates itself from
generation to generation.
d. flexible downward but rigid upward since most low-income people never rise
significantly above the poverty level.
Air travel from New York to Miami costs $300 and takes 6 hours. A bus ticket between
the cities costs $150 and takes 56 hours. Other things constant, the minimum value of
one’s time that would induce a rational individual to fly rather than drive would be
a. $1 per hour.
b. $3 per hour.
c. $5 per hour.
d. $50 per hour.
In a price-taker market, economic losses indicate that
a. some firms are using unfair tactics to harm others.
b. some firms have miscalculated, producing goods that are less valuable than the
resources used to make them.
c. the situation is normal and firms need to make no adjustments.
d. the firms in the industry are not minimizing their cost; they should expand output in
order to fully realize the economies of scale in the industry.
If Sophia’s tax liability increases from $10,000 to $15,000 when her income increases
from $30,000 to $40,000, her marginal tax rate is
a. 33 percent.
b. 35 percent.
c. 50 percent.
d. 60 percent.
The bonds held in the Social Security Trust Fund
a. are a valuable asset of the federal government.
b. will generate a future stream of net income for the federal government.
c. are an IOU from one government agency (the U.S. Treasury) to another (the Social
Security Administration).
d. are necessary to provide retirement benefits for future retirees.
The Social Security program is primarily a
a. compulsory retirement income program set up on sound insurance principles.
b. forced-savings program where workers save during their working years and receive
the principal and interest on these savings at retirement.
c. program designed to tax current workers in order to provide benefits for current
retirees.
d. voluntary savings program run by the government.
Under the rational expectations hypothesis, which of the following is the most likely
effect of a shift to a more expansionary monetary policy?
a. In the short run, the real rate of output will be unaffected, but in the long run, it will
increase.
b. In the short run, the real rate of output will increase, but in the long run, it will be
unchanged.
c. There will be a permanent increase in the real rate of output, but the inflation rate will
also be a little higher.
d. In the short run, the impact on the real rate of output is uncertain; in the long run, it
will remain unchanged.
Use the figure below to answer the following question(s).
Figure 5-2
Figure 5-2 illustrates the market for a product that generates an external cost. S1 is the
private market supply curve, while S2 is the supply curve including the external cost.
Which of the following is true?
a. Point a illustrates the competitive private market outcome, while point b illustrates
the outcome consistent with economic efficiency.
b. Point b illustrates the competitive private market outcome, while point a illustrates
the outcome consistent with economic efficiency.
c. The competitive private market outcome is consistent with the conditions for
economic efficiency.
d. The good will tend to be undersupplied relative to the conditions for economic
efficiency.
In the late 1800s, Bernard made buggy whips. Their quality was such that people came
from hundreds of miles to buy the whips. As mechanized transportation developed,
horse-drawn buggies largely disappeared and so did the demand for Bernard’s whips.
Would Bernard have been better off if these new modes of transportation had never
been invented?
Young John recently took a job with the U.S. Department of Agriculture. His supervisor
gave him an assignment and a two-week deadline. He finished the job in three days and
turned it in. Now his coworkers are mad at John. Why?
Suppose that your bank pays 5 percent interest on your savings account balance. Is this
the nominal or real interest rate? What would be your real interest rate?
During 1981-1985, the United States pursued a restrictive monetary policy that sharply
lowered inflation. At the same time, large budget deficits helped push real interest rates
to an all-time high. What would you expect to happen to the value of the dollar on the
foreign exchange market?
Frequently, politicians enact restrictive trade policies to protect domestic industries.
How does economic theory predict this will affect the efficiency of economic
organization?
If a third party pays for an individual to consume a good, how is the decision making of
consumers affected? How does this affect the actions of suppliers?
Suppose a person defects from Cuba (a country that generally disregards the use of
markets) to the United States and asks to see a market in action. Where would you take
her? Did you give her a complete showing of this market?
Explain the three lags that make it difficult to time changes in discretionary policy
properly.
Who is more likely to drive carelessly, Camila in her 1980 Ford with bad brakes or
Samantha, who has a 2005 BMW with all the most recent safety options?
It can be said that, ultimately, consumers are the driving force in answering the three
basic economic questions. Explain the consumer’s role in providing these answers.
Around Easter time, the price of eggs rises. Some consumers complain about this and
claim stores are ‘price gouging.’ Are there any positive functions played by the higher
price of eggs around Easter? What would happen if the price of eggs were not permitted
to rise by law?
What type of industry is the market for grocery products? Is over-capacity present?
James opened a baseball manufacturing operation, and initially the more balls he made,
the lower the per-unit cost. Now, as output expands, his per-unit costs are rising. He
concludes that diseconomies of scale have set in. Is he correct? Why?
If people are self-interested, why does anyone give money to public radio?
What are the effects of a tariff, and who benefits and who loses when tariffs are
imposed? What are the effects of a quota, and who benefits and who loses when quotas
are imposed?
There is an Italian soccer player who makes more than $10 million a year. Why?
Why is there more than one definition of the money supply? What is the difference
between them?