Scenario: Countries A and B
Two countries, A and B, produce two goods, wheat (W) and steel (S). Each has a linear
production possibility frontier in both goods. If country A spends all of its available
resources to produce wheat, it can produce 500 tons of wheat and no steel. If it uses all
of its resources to produce steel, it can produce 250 tons of steel and no wheat. If
country B spends all of its available resources producing wheat, it can produce 400 tons
of wheat, and if it spends all of its resources on the production of steel, it can produce
400 tons of steel.
Look at the scenario Countries A and B. Given this information, country _____ has a
comparative advantage in the production of wheat, and country _____ has a
comparative advantage in the production of steel.
A) A; A
B) A; B
C) B; B
D) B; A
When David has no income, he spends $500. If his income increases to $2,000, he
spends $1,900. Which of the following represents his consumption function?
A) C= 1.2 YD
B) C= 0.95 YD
C) C= $500 + 0.7 YD
D) C= $500 + 1,000 YD
Based on historical economic growth, economists have noted that the estimated
aggregate production function:
A) exhibits constant returns to physical capital.
B) shows that when holding the amount of human capital and the state of technology
fixed, successive increases in the amount of physical capital per worker lead to smaller
increases in productivity.
C) depends primarily on physical capital and technology advances.
D) shows the negative relationship between physical capital and productivity.
Look at the table Production Possibilities Schedule II. If the economy is producing at
alternative X, the opportunity cost of producing at Y instead of X is _____ units of
consumer goods per period.
A) 0
B) 6
C) 8
D) 14
All countries must have either a fixed or floating exchange rate, since there are no
possible compromises between the two policies.
A) True
B) False
The circular-flow diagram illustrates how firms _____ goods and services and _____
factors of production.
A) buy; sell
B) buy; buy
C) sell; buy
D) sell; sell
If workers’ nominal wages have risen by 50% over a 10 years and prices have increased
by 40% in that same period, then we can safely conclude that the amount of goods and
services workers can buy has:
A) fallen.
B) increased.
C) not changed.
D) decreased in quality.
Using monetary policy to address a recessionary gap caused by a supply shock involves
_____ to _____.
A) decreasing the money supply; lower the aggregate price level
B) increasing interest rates; decrease investment spending
C) decreasing interest rates; lower the aggregate price level
D) increasing the money supply; lower the unemployment rate
If the tax rate is 0.1 and the marginal propensity to consume is 0.5, the multiplier is:
A) 2.
B) 1.8.
C) 2.1.
D) 1.
When a currency depreciates, the prices of its exports to other countries will:
A) increase.
B) decrease.
C) remain constant.
D) fluctuate randomly.
When the actual rate of unemployment is equal to the natural rate of unemployment, we
conclude that there is no cyclical unemployment.
A) True
B) False
When economists state that there is a zero bound on nominal interest rates, they mean
that:
A) the real interest rate cannot go below zero.
B) the nominal interest rate cannot go below zero.
C) the real interest rate can very well be negative.
D) the nominal interest rate can always go below zero.
Figure: Production Possibility Frontier Curve for Tealand
Look at the figure Production Possibility Frontier for Tealand. Tealand is producing at
point C on its production possibility frontier. What is the opportunity cost of increasing
the production of tea from 20 million cups to 30 million cups?
A) 10 million cups of tea
B) 5 million scones
C) 10 million scones
D) The answer is impossible to determine from the information given.
If the nominal interest rate is 4% and the inflation rate is 1%, then the real interest rate
is 5%.
A) True
B) False
Probably the most important feature of deposit insurance is that it:
A) is paid for by the federal government.
B) costs so little to buy the policies to keep your money safe.
C) protects the economy against bank runs.
D) ensures that banks will always make a profit.
Figure: Fiscal Policy Choices
Look at the figure Fiscal Policy Choices. It would be appropriate to use contractionary
fiscal policy to shift aggregate demand in _____ from _____.
A) panel (b); AD1 to AD2
B) panel (a); AD2 to AD1
C) panel (a); AD1 to AD2
D) panel (b); AD2 to AD1
If the executives of the U.S. silicon chip industry lobby Congress for protection from
imports on the grounds that theirs is a new industry that needs time to develop
technological efficiency, they are using the _____ argument.
A) environmental standards
B) infant industry
C) cheap foreign labor
D) national security
The Federal Open Market Committee has decided that the federal funds rate should be
0.5% rather than the current rate of 1.25%. The appropriate open market action is to
_____ Treasury bills to _____ money _____.
A) buy; decrease; demand
B) buy; decrease; supply
C) sell; decrease; demand
D) buy; increase; supply
Receipts for gold and silver deposited with goldsmiths became one of the first forms of
paper money.
A) True
B) False
The Bureau of Labor Statistics calls a person who is out of work, would like to work,
but has given up looking for work:
A) unemployed.
B) employed.
C) a discouraged worker.
D) lazy.
A key input for measuring economic growth is:
A) the size of the government’s budget.
B) real GDP per capita.
C) life expectancy.
D) the Dow Jones stock market index.
Scenario: Aggregate Consumption Equation
Suppose that the aggregate consumption function is given by the equation C= 200 +
0.8YD, where Crepresents consumption and YDrepresents disposable income.
Look at the scenario Aggregate Consumption Equation. If disposable income is $500,
aggregate consumption is:
A) $0.
B) $200.
C) $400.
D) $600.
Mexico is relatively labor-abundant when compared with the United States. Therefore,
Mexico has a comparative advantage in _____ compared with the United States.
A) all goods
B) goods that are labor-intensive in production
C) goods that are capital-intensive in production
D) goods that are land-intensive in production
Figure: The Market for Loanable Funds II
Look at the figure The Market for Loanable Funds II. Other things being equal, an
increase in taxes on savings and investment income will shift _____ to the _____ and
_____ the interest rate.
A) demand; right; increase
B) demand; left; decrease
C) supply; right; decrease
D) supply; left; increase
A negative output gap implies an unemployment rate:
A) above the natural rate.
B) below the natural rate.
C) equal to the natural rate.
D) that equals the frictional and structural amounts of unemployment.
Scenario: First National Bank
First National Bank has $80 million in checkable deposits, $15 million in deposits with
the Federal Reserve, $5 million cash in the bank vault, and $5 million in government
bonds.
Look at the scenario First National Bank. If the minimum reserve ratio is 20%, how
much is the bank required to keep in reserves?
A) $20 million
B) $16 million
C) $25 million
D) $10 million
_____ occurs when financial institutions assemble pools of loans and sell shares in the
income from these pools.
A) Loan origination
B) Securitization
C) Risk aversion
D) Adverse selection
Okun’s law is less than a 1:1 ratio because some:
A) employers quickly lay off workers.
B) employers change the working hours of current employees as demand changes.
C) employees act to job share.
D) workers are not counted as unemployed when they are actively seeking work.
Good X and good Y are related. If the price of good X increases and the demand for
good Y shifts left, these goods are:
A) complements.
B) substitutes.
C) inferior.
D) normal.
Frances has a linear production possibility frontier when she produces tomatoes and
green beans. If she uses all of her resources, she can produce 400 bushels of tomatoes
or 800 bushels of green beans. Frances CANNOT efficiently produce _____ bushels of
tomatoes and _____ bushels of green beans.
A) 400; 0
B) 200; 400
C) 200; 200
D) 0; 800
Figure: Fiscal Policy with a Fixed Money Supply
Look at the figure Fiscal Policy with a Fixed Money Supply. Assume that this economy
is at E1. Now government deficit spending is increased, but the Federal Reserve does
NOT expand the money supply. According to this model:
A) real GDP will expand just as much as if the Federal Reserve had expanded the
money supply.
B) real GDP will decrease because the Federal Reserve did not expand the money
supply.
C) real GDP will expand, but not as much as if the Federal Reserve had expanded the
money supply.
D) interest rates will decrease.
Figure: Guns and Butter
Look at the figure Guns and Butter. This production possibility frontier is:
A) bowed out because of increasing opportunity costs.
B) bowed in because of increasing opportunity costs.
C) bowed in because of constant costs of guns and butter.
D) linear because of constant costs.
Suppose that South Korea is growing at 7% per year and is producing real GDP per
capita of about $28,000, while Norway is growing at 3.5% per year and is producing
real GDP per capita of $56,000. If all else stays equal, the real GDP per capita for these
two countries will converge in:
A) 40 years.
B) 20 years.
C) 10 years.
D) 4 years.
An increase in the demand for gasoline today caused by concerns that gasoline prices
will be higher tomorrow is most likely attributable to a change in:
A) income.
B) consumer expectations.
C) consumer preferences.
D) prices of other goods.
If the government wants to decrease the value of its currency in foreign exchange
markets, it can limit the ability of foreigners to buy its currency.
A) True
B) False