The long run aggregate supply curve is vertical.
Fiscal actions to eliminate a recession are likely to decrease the federal budget deficit.
Markets exist to facilitate exchange between people.
Net interest payments made by the government depend on the total federal debt held
and on the level of interest rates.
Recall Application 1, “The Chinese Yuan and Big Macs,” to answer the following
questions:
Purchasing power parity implies that a unit of any given currency should be able to buy
the same quantity of goods and services in any country.
When the nominal rate of interest and the rate of inflation are the same, the real interest
rate is zero.
A decrease in the price level causes an increase in aggregate quantity demanded.
In an open economy with strong international trade, increases in government spending
are likely to have an overall “crowding out” effect.
A rancher raises sheep. Once a year he shears them and sells the raw wool to a
processor who cleans it and spins it into yarn. The yarn is then sold to a knitting mill,
which produces and sells sweaters. In calculating GDP we would count
A) the raw wool, the yarn and the sweaters.
B) only the yarn and the sweaters.
C) only the sweaters.
D) only the raw wool and the yarn.
An example of a tool used by the Fed that decreases the money supply is:
A) an increase in the required reserve ratio.
B) the Fed buying government bonds in the open market.
C) a decrease in the prime lending rate.
D) a decrease in the discount rate.
Which of the following is a transfer payment and is not counted as part of government
purchases?
A) government welfare payments
B) defense spending
C) government worker salaries
D) government spending on federal prisons
You are an employee of the Bureau of Labor Statistics involved in the monthly survey
of households used to estimate the unemployment rate. In each of the following cases,
classify the individual as frictionally, structurally, or cyclically unemployed. Explain
your classification.
(a) There has been a general economic slowdown. Because of weak demand, Andy
Capp has lost his job at the docks.
(b) Phil McCafferty, a newly qualified dental school graduate, is looking for a place to
set up practice.
(c) Coal miner Ned Ludd is thrown out of work by the introduction of a more
mechanized production process.
(d) Latosha Hogan, a computer programmer with a large bank, quit her job two months
ago in search of a better-paid programming position. She is still looking.
Refer to Application 2, “Recovering From a Recession,” to answer the following
questions:
As per the Application, what is the best way to measure how long an economy to
recover from a recession?
A) from the peak before the recession to the peak after a recession
B) from the peak before a recession to the trough after a recession
C) from the trough after a recession to the peak after the recession
D) from the trough before a recession to the trough after a recession
Recall the Application about the Fed’s response to the collapse of the investment house
Bear Stearns as well as its handling of the 2008 financial crisis with respect to other
financial institutions to answer the following question(s).
Recall the Application. In response to the financial crisis, the Fed implemented a new
policy in which it began to pay interest on deposits held at the Fed. This move would
________ deposits held at the Fed and ________ the Fed’s ability to make loans.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
The Federal Open Market Committee consists of the:
A) 7 members of the Board of Governors and 5 of the 12 regional bank presidents.
B) the chairman of the Federal Reserve and members of the Senate Finance Committee.
C) 7 members of the Board of Governors and the 12 regional bank presidents.
D) 7 members of the Board of Governors and the presidents of the 12 largest banks in
the country.
Table 5.2 Refer to Table 5.2.
Suppose this economy produces only the three goods A, B, and C. If we use year 2 as
the base year, nominal GDP in year 2 is:
A) $6.20.
B) $7.80.
C) $8.50.
D) $9.70.
Which of the following affects a country’s net international investment position?
A) real interest rates paid on foreign assets
B) the costs of shipping goods and services across countries.
C) the differences in the prices of services between two countries.
D) the amount of debt owed by one country to another.
Recall the Application about the impact that home equity values have on consumer
spending and wealth to answer the following question(s). From 1997 to mid-2006,
housing prices rose nationally by approximately 90 percent and consumer wealth
increased by $6.5 trillion, but in the summer of 2006, housing prices began to fall.
Home equity is the single largest component of net wealth for most families in the
United States, and changes in the value of home equity affect consumer spending.
According to this Application, falling home equity values have decreased consumer
wealth, which is a measure of a consumer’s
A) total net worth.
B) annual income.
C) annual income minus annual expenses.
D) annual income minus total expenses.
Table 5.5 Answer Parts (a) and (b)
below using the information contained in Table 5.5. Assume this economy only
produces corn and steel and that Year 1 is used as the base year.
(a) Calculate nominal GDP for Year 1 and Year 2.
(b) Calculate real GDP for Year 1 and Year 2.
(c) Calculate the growth rate of the real GDP between Year 1 and Year 2, using Year 1
as the base year.
(d) Calculate the GDP Deflator for Year 1 and Year 2.
Recall Application 5, “Honeybees and the Price of Ice Cream,” to answer the following
questions:
According to the application, the increase in the price of ice cream is caused by:
A) a decrease in the output of fruit trees caused by the decline in the number of honey
bees that pollinate these fruit trees.
B) an increase in the output of fruit trees caused by the decline in the number of honey
bees that pollinate these fruit trees.
C) a decrease in the output of fruit trees caused by the rise in the number of honey bees
that pollinate these fruit trees.
D) an increase in the output of fruit trees caused by the rise in the number of honey bees
that pollinate these fruit trees.
If the price of smoothies is $3.50 in the United States and the exchange rate is 110 yen
per dollar, then what is the yen price of smoothies?
A) 110 yen
B) 240 yen
C) 318 yen
D) 385 yen
Suppose a ticket to a concert costs $39, and parking costs $5. Further, in order to watch
the concert, you must miss 2 hours of work where your hourly wage is $15 per hour.
The total opportunity cost of watching a concert is:
A) $74.
B) $44.
C) $39.
D) $30.
Which of the following curves is illustrated as an upward sloping line?
A) the short-run aggregate supply curve
B) the long-run aggregate supply curve
C) the short-run aggregate demand curve
D) the long-run aggregate demand curve
Figure 2.1
Refer to Figure 2.1. If you choose to produce only agricultural products, what is the
maximum quantity you can produce per year?
A) 200 tons
B) 400 tons
C) 600 tons
D) > 600 tons
If real salaries decrease but nominal salaries do not, this means that:
A) the purchasing power of money has increased.
B) prices have not changed.
C) prices have risen.
D) prices have fallen.
If the U.S. sends food aid to Zimbabwe to help the thousands who are dying from
hunger, then the value of the aid is entered as a ________ in the U.S. ________
account.
A) negative; current account
B) positive; current account
C) negative; financial account
D) negative capital account
Taxes and transfer payments that stabilize GDP without requiring policymakers to take
explicit actions are known as ________.
A) full-employment budgets
B) fiscal drags
C) automatic stabilizers
D) cyclical deficits