Refer to the figure above. Suppose the economy is in a short-run equilibrium at output
Y3 and inflation rate π2. The economy is currently experiencing ______, and the correct
fiscal policy response to this situation, to return the economy to potential GDP, is to
______.
A. a recessionary gap; increase government spending
B. an expansionary gap; decrease government spending
C. a recessionary gap; increase taxes
D. an expansionary gap; decrease taxes
The Federal Reserve can:
A. simultaneously set independent money supply and nominal interest rate targets.
B. only target the nominal interest rate, not the money supply.
C. only set a money supply target that is consistent with a nominal interest rate target,
and vice versa.
D. only target the money supply, not the nominal interest rate.
In general, individuals and nations should specialize in producing goods _________
other individuals or nations.
A. that they can produce more quickly than
B. that they can produce less quickly than
C. for which they have a lower opportunity cost compared to
D. for which they have a higher opportunity cost compared to
If the total benefits of watching 1, 2, and 3 baseball games on TV are 100, 120, and 125
respectively, then the marginal benefits of watching 1, 2 and 3 baseball games on TV
are:
A. 100,120, and 125 respectively.
B. 100, 20, and 5 respectively.
C. 100, 609, and 41.67 respectively.
D. 100, 240, and 375 respectively.
If the percent change in quantity demanded is zero for any percent change in the price,
demand is classified as:
A. inelastic.
B. perfectly inelastic.
C. unit elastic.
D. perfectly elastic.
Refer to the figure above. Assume demand remains unchanged at D1. If supply shifts
from S2 to S1, then the equilibrium price will ________ and the equilibrium quantity
will __________.
A. rise; fall
B. rise; rise
C. fall; fall
D. fall; rise
If the Federal Reserve is currently paying 0.75% interest on bank reserves, but then
increases that interest rate to 1%, banks may decide to hold ______ reserves, and the
money supply may _____.
A. more; increase
B. more; decrease
C. fewer; increase
D. fewer; decrease
Jen is offered a job answering the phone in the State U economics department during
lunchtime, from noon to 1 P.M., Tuesdays and Thursdays. Her reservation wage for this
job is $15/hour.
Now suppose the department chair announces that the $150/week earnings from the job
will be divided equally among Jen and 299 other students in the department. How much
economic surplus will Jen enjoy each week if she accepts the job?
A. $0.50
B. -$14.00
C. -$29.00
D. -$29.50
Refer to the figure above. What is the slope of the supply curve?
A. 4
B. 2
C. 1/2
D. 1
An economy produces only 1,000,000 computers valued at $2,000 each. Of these,
200,000 are sold to consumers, 300,000 are sold to businesses, 300,000 are sold to the
government, and 100,000 are sold abroad. No computers are imported. The unsold
computers at the end of the year are held in inventory by the computer manufacturers.
What is the value of GDP?
A. $0.9 billion
B. $1.0 billion
C. $1.8 billion
D. $2.0 billion
The major prediction of the lemons model is that
A. the presence of asymmetric information reduces the average quality of goods for
sale.
B. people will generally choose the ‘low hanging fruit’.
C. a used car in good condition can be sold for a higher-than-average price.
D. used cars are generally in better than average condition.
You notice that your grocery store always has day-old bakery products at a reduced
price. Why might that be?
A. At the original price, the quantity demanded was greater than the quantity supplied.
B. At the original price, there was a shortage of bakery products.
C. The original price was an equilibrium price because it was established in a free
market.
D. At the original price, quantity supplied was greater than quantity demanded.
Curly told Larry about his new business venture: Curly pays Acme International $1,000
per month for supplies and access to Acme’s network, works out of his own apartment
on his own computer and earns monthly revenues of $1,500. Should Larry quit his job
and do what Curly is doing?
A. Yes, if Larry has at least $1,000 in savings to get started.
B. Not if Larry is earning more than $500 per month at his current job.
C. Yes, if Larry can borrow the $1,000 monthly payment for less than 3% interest.
D. Yes, if Larry already owns a computer.
Since the cost of obtaining more of any resource is __________, viewing any resource’s
price as zero leads to __________.
A. positive; underutilization
B. negative; overutilization
C. positive; a surplus
D. positive; overutilization
When actual output equals potential output, there is ______ output gap and the inflation
rate will ____.
A. an expansionary; exceed the expected rate of inflation
B. an expansionary; be lower than the expected rate of inflation
C. no; be equal to the expected rate of inflation
D. a recessionary; exceed the expected rate of inflation
Insurance that pays for all expenses generated by the insured’s activity is known as
A. total-dollar insurance coverage.
B. last-dollar insurance coverage.
C. cradle to grave insurance coverage.
D. first-dollar insurance coverage.
Because an increase in the nominal interest rate raises the opportunity costs of holding
money, the money demand curve:
A. shifts to the right.
B. shifts to the left.
C. slopes upward.
D. slopes downward.
Refer to the figure above. If the price of Good A is $2 and the price of Good B is $6,
then the rational spending rule predicts _____ units of Good A and ______ units of
Good B will be purchased.
A. 1; 1
B. 2; 1
C. 4; 3
D. 3; 2
The marginal tax rate is:
A. total taxes divided by total before-tax income.
B. the average tax rate divided by the total tax rate.
C. the amount by which taxes increase when before-tax income rises by an additional
dollar.
D. the tax rate at which the benefit of an extra dollar of taxes equals the cost of an extra
dollar of taxes.
In markets with incomplete information, middlemen tend to __________ total
economic surplus by __________.
A. reduce; raising price
B. reduce; giving misleading information
C. increase; raising price
D. increase; matching sellers with buyers with higher reservation prices
Suppose a perfectly competitive firm knows that it is not going to shut down, but it is
going to earn a loss. It should pick the output level where:
A. total costs are minimized.
B. price equals marginal cost.
C. total revenues are maximized.
D. the costs of the variable factors of production are minimized.
The term marginal utility denotes the amount by which ______ changes when
consumption changes by _____ unit(s).
A. total utility, 1
B. demand, 5
C. demand, 1
D. total utility, 5
The consumer price index for Planet Econ consists of only two items: books and
hamburgers. In 2000, the base year, the typical consumer purchased 10 books for $25
each and 25 hamburgers for $2 each. In 2005, the typical consumer purchased 15 books
for $30 each and 30 hamburgers for $3 each. The consumer price index for 2005 on
Planet Econ equals:
A. 1.00
B. 1.15
C. 1.25
D. 1.45
A village has five residents, each of whom has accumulated savings of $50. Each
villager can use the money to buy a government bond that pays 10% interest per year or
to buy a year-old goat, send it onto the commons to graze, and sell it after one year. The
price of the goat that the villager will get at the end of the year depends on the amount
of weight it gains while grazing on the commons, which in turn depends on the number
of goats sent onto the commons, as shown in table below.
Refer to the information given above. If each villager is purely self-interested, how
many goats will be sent onto the commons?
A. 2
B. 3
C. 4
D. 5
When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar,
the dollar has:
A. appreciated.
B. depreciated.
C. become overvalued.
D. become undervalued.
The rational spending rule is derived from the consumer’s efforts to
A. maximize utility.
B. minimize expenditures.
C. obtain the lowest possible price.
D. maximize the number of units purchased.
The money demand curve will shift to the left if:
A. the nominal interest rate increases.
B. the nominal interest rate decreases.
C. price level increases.
D. real income decreases.
Consider an industry with two firms producing similar products.
Mega Corp’s total costs are TC = $5,000 + 100 × Quantity.
Big Inc’s total costs are TC = $4,000 + 200 × Quantity.
Refer to the information given above. When each firm produces 8 units _____ has
lower costs, and when each firm produces 12 units _____ has lower costs.
A. Big Inc; Mega Corp
B. Mega Corp; Big Inc
C. Big Inc; Big Inc
D. Mega Corp; Mega Corp
Megafirm is the only provider of products in the Seven Corners region, a sparsely
populated area out west. It currently has a small distribution center and two retail
outlets. Gigafirm has threatened to open a competing business in the Seven Corners
region. Megafirm has publicly stated that, if Gigafirm comes in, Megafirm will flood
the market with goods, driving down prices and forcing Gigafirm out. Suppose that
expansion would cost the firm $100,000 and that Megafirm’s profits are $1,000,000 per
year when it is the only firm in the region regardless of whether it expands or not. Both
firms would earn $350,000 if Gigafirm entered and Megafirm remained a small
operation, and both would earn -$100,000 if Gigafirm entered and Megafirm expanded.
Megafirm’s threat to expand if Gigafirm enters is
A. not credible because $350,000 is better than -$100,000.
B. not credible, because it is inevitable that Gigafirm will enter in response to the profit
incentive.
C. credible, because Megafirm will experience economies of scale.
D. not credible, because threats are not enforceable contracts.
Which of the following statements about inflation targeting is true?
A. Inflation targets have only been used in developed countries.
B. Inflation targets are always met.
C. Inflation targets have been used in both developed and developing countries.
D. Inflation targets increase uncertainty.
You had to pay $600 (non-refundable) for your meal plan for Fall semester, which gives
you up to 150 meals. If you eat only 100 meals, your marginal cost for the 100th meal
is:
A. $6
B. $4
C. $0.25
D. $0