The Fed has immense power and there are no limits to the extent to which it can
effectively control the economy.
The government can use contractionary fiscal policies to prevent a wage-price spiral.
Taxation and government spending are examples of fiscal policy tools used to stabilize
an economy.
The term ‘stagflation” is used to define an economic situation where there are adverse
supply shocks which cause a fall in output but with increasing price level.
The faster you spend your money, the higher the velocity.
The expenditure approach calculates GDP by summing final consumption, investment
expenditures, government expenditures and net exports.
Higher employment taxes lead to lower levels of employment.
The Keynesian view that demand could fall short of production is more likely to hold
true if
A) wages and prices are fully flexible.
B) prices, but not wages, are fully flexible.
C) wages and prices are not fully flexible.
D) wages, but not prices, are fully flexible.
Table 5.1
Refer to Table 5.1. Assume that this economy produces only two goods: Good X and
Good Y. If year 1 is the base year, then the percentage growth rate of real GDP between
year 1 and year 2 is:
A) about 33 percent.
B) about 27 percent.
C) about 45 percent.
D) about 36 percent.
Expansionary policies are government policies that
A) increase aggregate supply.
B) decrease aggregate supply.
C) decrease aggregate demand.
D) increase aggregate demand.
Recall Application 3, “The Broken Window Fallacy and Keynesian Economics,” to
answer the following questions:
In the Application, if the government increases funding on a spending program, but the
increase in the expenditure does not result in higher income, then it must be true that:
A) the economy is at full employment and crowding out existed.
B) the economy is at a recession and crowding out existed.
C) the economy is at a recession and crowding out did not exist.
D) the economy is at full employment and crowding out did not exist.
To help pull an economy out of a recession and put additional income in the hands of
the public, a government can force its expenditures to ________ its revenues and create
a ________.
A) reduce; deficit
B) exceed; deficit
C) stimulate; depression
D) exceed; special taxes
Labor productivity is defined as:
A) output per hour of work.
B) output per year.
C) output growth per person.
D) output per worker.
Developing countries can benefit from the vast accumulated knowledge of developed
economies if they invest in:
A) health improvements.
B) population growth.
C) brain drain.
D) education and training.
If the real interest rate is 4 percent and the inflation rate is 3 percent, then the nominal
interest rate is
A) -1 percent.
B) 1 percent.
C) 3.5 percent.
D) 7 percent.
Recall the Application about the possibilities of transformative economic growth in
authoritarian and participatory political institutions to answer the following
question(s).According to this Application, economist Daron Acemoglu categorizes
which of the following as authoritarian institutions?
A) democracies, monarchies, and dictatorships
B) constitutionally limited monarchies and democracies
C) monarchies, dictatorships, and tightly controlled oligarchies
D) tightly controlled oligarchies, democracies, and constitutionally limited monarchies
Because the marginal propensity to consume is positive, the consumption function is:
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
Prices for fresh fruit, vegetables and other food products are examples of
A) custom prices.
B) auction prices.
C) sticky prices.
D) temporary prices.
If crowding out occurs in the long run and the government increases spending for
non-investment projects such as defense, then the additional government spending:
A) replaces an equivalent amount of private non-investment.
B) replaces a larger amount of private investment.
C) decreases total investment spending in the economy.
D) enhances private investment by the same amount.
The total demand for goods and services at a given price level is also known as
A) the consumption function.
B) planned expenditures.
C) equilibrium output.
D) autonomous consumption.
Lettuce and spinach are substitute goods. All else equal, if a spinach beetle destroys half
of the nation’s spinach crop, we predict that the equilibrium price of lettuce will
________ and the equilibrium quantity of spinach will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
As the result of unanticipated inflation, lenders are better off while borrowers are worse
off if the actual inflation rate
A) is equal to the expected inflation rate.
B) exceeds the expected inflation rate.
C) is less than the expected inflation rate.
D) Neither borrowers nor lenders are better off as the result of unanticipated inflation.
Because resources are limited
A) only the very wealthy can get everything they want.
B) firms will be forced out of business.
C) the availability of goods will be limited but the availability of services will not.
D) people must make choices.
________ occurs when a firm cuts prices below production costs in a deliberate attempt
to drive competitors out of business.
A) Voracious dumping
B) Price discrimination
C) Predatory pricing
D) Deliberate dumping.
What is a marginal benefit?
Name the three types of unemployment.
What are the four components of aggregate demand?
Explain what is meant by a revaluation of a currency. Under what circumstances would
a country devalue its currency?
Explain why some economists argue that counting discouraged workers as unemployed
gives a better picture of the unemployment situation. How would the magnitude of the
unemployment rate change if discouraged workers were counted as unemployed?
How did the financial crisis contribute to the worsening U.S. economy in 2008?
When consumers find their incomes increasing, they tend to buy more ________.
Explain why a large deflation could force many borrowers to default on their loans.
Describe the relationship illustrated by the Laffer curve.
When a consumer’s income decreases, that consumer tends to buy more ________.