Excess demand in an unregulated market will cause the price of a product to fall.
During recessions, the full utilization of the capital stock raises labor productivity.
Governments sometime create an excess demand for a product by setting a maximum
price that is less than the equilibrium price, resulting in a permanent excess demand for
the product. This is known as a price floor.
If the workings of the economy are consistent with the real business cycle theory, then
the economy will not experience economic fluctuations.
An excess supply of pounds will cause an appreciation of the pound.
If supply of a product increases and demand for the product decreases, equilibrium
quantity will definitely change.
Recall Application 3, “The Links Between Self-Reported Happiness and GDP,” to
answer the following questions:
According to the Application 3, self-reported levels of happiness in the U.S. and the
U.K. increased over the last 30 years as per capita incomes in those countries increased.
Suppose that the government is currently experiencing a $100 surplus. If the multipliers
studied in this chapter are true, then GDP will grow more if we give the $100 to the
government to spend as opposed to if we give the $100 for households to increase
consumption.
Every country in the world has an independent central bank.
Because of diminishing returns, the production function has a slope that increases as the
quantity of inputs used increases.
One example of a microeconomic question is, “Should the inflation rate be lowered?”
Figure 10.2
Refer to Figure 10.2 to answer the question below. Points A, B, and C correspond to a
GDP level in Year 2. Suppose that in Year 1 the economy was projected to be at Pt. A by
Year 2. Which of the following policies could bring the economy to Point C instead?
A) a correctly timed tax cut
B) an ill-timed tax cut
C) a correctly timed tax increase
D) an ill-timed tax increase
Nominal GDP measures the value of all goods and services:
A) in constant dollars.
B) in current dollars.
C) in fixed dollars.
D) without inflation.
If the marginal propensity to consume is 0.95, the tax multiplier is:
A) -19.
B) -20.
C) -.05.
D) 20.
Which of the following is not included in private investment expenditure?
A) changes in business inventories
B) the purchase of a newly built factory
C) the purchase of a newly built home
D) the purchase of common stock
An increased federal budget deficit resulting from a recession can actually help stabilize
an economy, because corporate profits tend to fall in a recession which, in turn, results
in ________ corporate taxes and ________.
A) higher; more tax revenue for the government
B) higher; larger profits for businesses
C) lower; fewer spending cuts for businesses
D) lower; increases in the price level
Suppose the government has a $375 billion budget deficit. If the government creates
$225 billion of new money to finance this deficit and finances the rest by borrowing,
the amount borrowed from the public will be
A) $150 billion.
B) $225 billion.
C) $375 billion.
D) $600 billion.
Accounting rules:
A) specifies the term of exchange facilitating exchange between strangers.
B) increases the profitability of inventions encouraging firms to develop new products.
C) provides the public with reliable information about the performance of a firm.
D) increases the risk faced by entrepreneurs.
Suppose the U.S. price level is 150, the German price level is 450, and the Swiss price
level is 600. If exchange rates are 3 euros/dollar and 4 francs/dollar, then purchasing
power parity ________ between Germany and the United States and ________ between
Switzerland and the United States.
A) holds; does not hold
B) does not hold; holds
C) holds; holds
D) does not hold; does not hold
Suppose that the expected inflation rate is 3 percent and the actual inflation rate is 6
percent. Then borrowers
A) and lenders are both better off.
B) are better off and lenders are worse off.
C) are worse off and lenders are better off.
D) and lenders are both worse off.
The main effect of a decrease in labor demand that arises from a decrease in capital
stock is
A) shifts in unemployment.
B) a need for fewer immigrant workers.
C) lower real wages.
D) companies make fewer profits.
If Andrew is paid an interest rate of 10% on his savings account, but the inflation rate is
20%, the nominal value of his savings account is:
A) constant.
B) rising by the value of the inflation rate.
C) dropping.
D) rising.
If Bob withdraws $100 from his checking account and the reserve requirement is 10
percent, then:
A) the money supply can decrease by as much as $1000.
B) the money supply can increase by as much as $1000.
C) the money supply will decrease by less than $10.
D) the money supply will decrease by exactly $100.
Suppose GDP ________ the level of potential output. We would expect to see
________ unemployment, rising wages, and rising prices.
A) exceeds; high
B) exceeds; low
C) is below; high
D) is below; low
Refer to Figure 18.4. With free trade, how many gloves are produced domestically in
Duckland?
A) 100
B) 80
C) 60
D) 0
The two sides of a banks balance sheet are labeled:
A) assets and liabilities.
B) liabilities and net worth.
C) assets and net worth.
D) deposits and loans.
Explain the proposition known as Ricardian equivalence.
Using the money supply and money demand model, explain why money can be neutral
in the long run.
“Diminishing returns to labor occurs additional units of labor decreases total
production.” Do you agree or disagree? Explain.
Draw a graph of a money demand curve and a money supply curve. On the graph,
indicate the equilibrium interest rate. Also indicate the new equilibrium interest rate if
the Fed increases the money supply.
What are the two possible sources of inside lags for fiscal policy?
Explain why the budget deficit is considered to be an “automatic” economic stabilizer.