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.
The opportunity cost of going to a particular college is not the same for everyone.
An unexpected increase in inventories has a positive effect on future production.
An open market sale of bonds by the Federal Reserve will lead to an increase of
reserves in banks.
Interest rates increase as the price level decreases in the economy.
A decrease in the price level will lead to a decrease in the interest rate.
If the Fed increases the money supply, it is trying to stimulate the economy.
What is the real value of money?
A) its face value
B) its compounded earnings in banks
C) the quantity of goods and services it can buy
D) the amount of it you have
Which of the following is not a question answered with normative economic reasoning?
A) If we had more money, should the college offer free parking for students?
B) As a result of the recent recession, should the college offer more financial aid
assistance?
C) If the college increased tuition, what is the estimated decline in enrollments?
D) Given the additional funding that we received, should the college cut tuition to
stimulate enrollments?
If the real business cycle theory were correct, then the recession that the U.S.
experienced in 2008 was caused by:
A) a negative shock in technology.
B) a sharp increase in the price of oil.
C) a positive shock in technology.
D) a war in the Middle East.
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 in their property, and are vital for the property owners to be able to borrow
funds.According to this Application, in Peru, producing palm oil is very profitable but
is a time consuming process. Producing coca paste, an ingredient in cocaine, is not as
costly or as time consuming as the production of palm oil. To switch Peruvian farmers
from producing an ingredient used for cocaine to producing the profitable and safe palm
oil would require
A) informal ownership of property.
B) cocaine being declared illegal in Peru.
C) improvements in finance and the ability to borrow funds.
D) governmental approval.
One of the most obvious clues to the relative scarcity of a product is
A) the variations in available sizes.
B) its current market price.
C) the limited selection of colors.
D) the quality of the product.
Government debt ________ the amount of savings available to firms and thus
________ the amount of capital in the economy.
A) increases; increases
B) decreases; increases
C) increases; decreases
D) decreases; decreases
Assuming that the economy is in the long run equilibrium at full employment, changes
in the money supply affect:
A) real GDP.
B) employment.
C) the price level.
D) all of the above.
The measured unemployment rate can be pushed below the natural rate, but:
A) only in the long run and only if the price level is constant.
B) only in the long run and not without inflation.
C) only in the short run and only if the price level is constant.
D) only in the short run and not without inflation exceeding expectations.
If Jack received a $1,000 bonus and his marginal propensity to save is 0.15, his
consumption rises by ________ and his saving rises by ________.
A) $150; $500
B) $850; $150
C) $150; $850
D) $1,000; $150
Recall Application 1, “Shifts in the Natural Rate of Unemployment,” to answer the
following questions:
According to the application, the observed Beveridge Curve relationship shifts when:
A) the technology used in matching worker and jobs improves.
B) the technology used in educating workers improves.
C) the economy experiences a recession.
D) more workers become discouraged.
Suppose that the CPI in Year 1 is 150 and the CPI in Year 2 is 200. The rate of inflation
between Year 1 and Year 2 is:
A) 14.28%.
B) 25%.
C) 33.33%.
D) 50%.
Federal revenue consists of taxes levied on:
A) personal income and sales.
B) incomes of residents and nonresidents.
C) both individuals and businesses.
D) estates and corporations.
According to classical economists, an increase in aggregate demand should result in:
A) an increase in the price level.
B) no change in the level of real GDP.
C) no reduction in the unemployment rate.
D) all of the above
A rich nation will trade with a poor nation because the:
A) rich nation has the absolute advantage in all products.
B) poor nation has the absolute advantage in all products.
C) poor nation has the comparative advantage in a product.
D) rich nation has the comparative advantage in all products.
All else equal, what will happen to the real exchange rate in the United States under
each of the following circumstances?
(a) the nominal exchange rate for the U.S. dollar depreciates
(b) domestic prices in the U.S. increase
(c) prices in the rest of the world rise
Taking some types of spending “off budget” means
A) not counting that spending as part of the official budget.
B) borrowing to finance it instead of using tax revenue.
C) eliminating that spending.
D) financing the spending by special one-time taxes.
The bank bailout package passed by the U.S. Congress called “TARP” was
implemented in order to:
A) restore public confidence on the financial system.
B) restore public confidence on the U.S. Treasury.
C) save the rich friends of politicians.
D) save the Federal Reserve System.
Additional ApplicationCOPING WITH A STOCK MARKET CRASH: BLACK
MONDAY, 1987How did the Fed successfully respond to the major stock market crash
in 1987?On October 19, 1987, known as “Black Monday,” the Dow Jones index of the
stock market fell a dramatic 22.6 percent in one day. Similar declines were felt in other
indexes and stock markets around the world. These
declines shocked both businesses and investors. In just 24 hours, many people and firms
found themselves much less wealthy. The public began to worry that banks and other
financial institutions—to protect their own
loans and investments—would call in borrowers’ existing loans and stop making new
ones. A sharp drop in available credit could, conceivably, plunge the economy into a
deep recession.Alan Greenspan had just become chairman of the Federal Reserve that
year. As a sophisticated economist with historical knowledge of prior financial crises,
he recognized the seriousness of the situation. He quickly issued
a public statement in which he said that the Federal Reserve stood ready to provide
liquidity to the economy and the financial system. Banks were told that the Fed would
let them borrow liberally. In fact, the Fed provided liquidity to such an extent that
interest rates even fell. As a result of Greenspan’s action, “Black Monday” did not cause
a recession in the United States.The Stock Market Crash in 1987 could have caused a
recession in the economy had it resulted in:
A) a sharp drop in the availability of credit.
B) an increase in the money supply.
C) a sharp increase in the availability of credit.
D) a sharp drop in the interest rates.
In the 1980s, a new category entitled ________ was added to M1.
A) traveler’s checks
B) demand deposits
C) other checkable deposits
D) money market mutual fund deposits
What are some of the problems associated with using the Consumer Price Index as a
measure of changes in the cost of living?
Give an example of something that is scarce in your life and explain the choices you’ve
made because of scarcity.
Suppose that the inflation rate measured by changes in the Consumer Price Index is 5%.
Does this mean that every individual’s cost of living has increased by 5%? Explain.
Identify the time lags that are associated with stabilization policies.
What does it mean for an economic variable to be procyclical? Is investment
procyclical? Explain.
Define the term “import.”