Which of the following statements about real and nominal interest rates is correct?
a. When the nominal interest rate is rising, the real interest rate is necessarily rising;
when the nominal interest rate is falling, the real interest rate is necessarily falling.
b. If the nominal interest rate is 4 percent and the inflation rate is 3 percent, then the
real interest rate is 7 percent.
c. An increase in the real interest rate is necessarily accompanied by either an increase
in the nominal interest rate, an increase in the inflation rate, or both.
d. When the inflation rate is positive, the nominal interest rate is necessarily greater
than the real interest rate.
Which of the programs below would not transfer wealth between young and old
generations?
a. Taxes are raised to provide better education.
b. Taxes are raised to improve government infrastructure such as roads and bridges.
c. Taxes are raised to provide more generous Social Security benefits.
d. Taxes are raised to provide more generous Medicare benefits.
The Economy in 2008
In the first half of June 2008 the effects of a housing and financial crisis and an increase
in world prices of oil and foodstuffs were affecting the economy.
Refer to The Economy in 2008. The effects of the housing and financial crises could
be shown by shifting
a. aggregate demand to the right.
b. aggregate demand to the left.
c. aggregate supply to the right.
d. aggregate supply to the left.
Table 6-2
Refer to Table 6-2. A price ceiling set at $15 will
a. be binding and will result in a shortage of 50 units.
b. be binding and will result in a shortage of 100 units.
c. be binding and will result in a shortage of 125 units.
d. not be binding.
Bountiful Harvest Bakery buys $4.00 of flour from Grinkers’ Mill and uses the flour to
make bread sold to the public for $12.00. Taking these two transactions into account,
what is the effect on GDP?
a. GDP increases by $4.00
b. GDP increases by $8.00
c. GDP increases by $12.00
d. GDP increases by $16.00
Table 3-11
Assume that Falda and Varick can switch between producing wheat and producing cloth
at a constant rate.
Quantity Produced in 1 Hour
Refer to Table 3-11. Assume that Falda and Varick each has 1 hour available. If each
person divides his time equally between the production of wheat and cloth, then total
production is
a. 4 bushels of wheat and 7.5 yards of cloth.
b. 7 bushels of wheat and 13.5 yards of cloth.
c. 8 bushels of wheat and 15 yards of cloth.
d. 14 bushels of wheat and 27 yards of cloth.
Below are pairs of GDP growth rates and unemployment rates. Economists would be
shocked to see most of these pairs in the U.S. Which pair of GDP growth rates and
unemployment rates is realistic?
a. 6 percent, 0 percent
b. 3 percent, 10 percent
c. -1 percent, 6 percent
d. -3 percent, 2 percent
The local Chevrolet dealership has an increase in inventory of 25 newly produced cars
in In 2007, it sells all 25 cars. Which of the following statements is correct?
a. The value of the cars in inventory will be counted as part of 2006 GDP, and the value
of the cars sold in 2007 will not increase 2007 GDP.
b. The value of the cars in inventory will not affect 2006 GDP, and the value of the cars
sold in 2007 will increase 2007 GDP.
c. The value of the cars in inventory will be counted as part of 2006 GDP, andthe value
of the cars sold in 2007 will increase 2007 GDP.
d. The value of the cars in inventory will not affect 2006 GDP, and the value of the cars
sold in 2007 will not increase 2007 GDP.
Scenario 11-3
Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh
Holloway, is an accountant today and he earned $210,000 in 2008. The price index was
17.6 in 1944 and 184 in 2008.
Refer to Scenario 11-3. Sue Holloway’s 1944 income in 2008 dollars is
a. $1,147.83.
b. $113,454.55.
c. $125,454.55.
d. $1,996,800.00.
The banking system currently has $50 billion of reserves, none of which are excess.
People hold only deposits and no currency, and the reserve requirement is 10 percent. If
the Fed raises the reserve requirement to 12.5 percent and at the same time sells $10
billion worth of bonds, then by how much does the money supply change?
a. It falls by $20 billion.
b. It falls by $110 billion.
c. It falls by $180 billion.
d. None of the above is correct.
If the government levies a $2 tax per DVD on buyers of DVDs, then the price received
by sellers of DVDs would
a. decrease by more than $2.
b. decrease by exactly $2.
c. decrease by less than $2.
d. increase by an indeterminate amount.
For the following questions, use the diagram below:
Figure 21-7.
Refer to Figure 21-7. If the economy is at point b, a policy to restore full employment
would be
a. an increase in the money supply.
b. a decrease in government purchases.
c. an increase in taxes.
d. All of the above are correct.
Scenario 21-2. The following facts apply to a small, imaginary economy.
Consumption spending is $5,200 when income is $8,000.
Consumption spending is $5,536 when income is $8,400.
Refer to Scenario 21-2. In response to which of the following events could aggregate
demand increase by $1,500?
a. A stock-market boom increases households’ wealth by $300, and there is an operative
crowding-out effect.
b. A stock-market boom increases households’ wealth by $275, and there is an operative
crowding-out effect.
c. An economic boom overseas increases the demand for U.S. net exports by $240, and
there is no crowding-out effect.
d. Aggregate demand could increase by $1,500 in response to any of these events.
Which of the following would cause the price level to fall and output to rise in the short
run?
a. an increase in the money supply
b. a decrease in the money supply
c. an adverse supply shock
d. a favorable supply shock
If you go to the bank and notice that a dollar buys more Mexican pesos than it used to,
then the dollar has
a. appreciated. Other things the same, the appreciation would make Americans less
likely to travel to Mexico.
b. appreciated. Other things the same, the appreciation would make Americans more
likely to travel to Mexico.
c. depreciated. Other things the same, the depreciation would make Americans less
likely to travel to Mexico.
d. depreciated. Other things the same, the depreciation would make Americans more
likely to travel to Mexico.
Figure 19-5
Refer to Figure 19-5. Starting from r2 and E3, an increase in the budget deficit can be
illustrated as a move to
a. r1 and E4.
b. r1 and E2.
c. r3 and E4.
d. r3 and E2.
Scenario 8-1
Erin would be willing to pay as much as $100 per week to have her house cleaned.
Ernesto’s opportunity cost of cleaning Erin’s house is $70 per week.
Refer to Scenario 8-1. If Ernesto cleans Erin’s house for $80, Ernesto’s producer
surplus is
a. $80.
b. $30.
c. $20.
d. $10.
A decrease in the expected price level shifts short-run aggregate supply to the
a. right, and an increase in the actual price level shifts short-run aggregate supply to the
right.
b. right, and an increase in the actual price level does not shift short-run aggregate
supply.
c. left, and an increase in the actual price level shifts short-run aggregate supply to the
left.
d. left, and an increase in the actual price level does not shift short-run aggregate
supply.
Other things the same, the real exchange rate between American and Mexican goods
would be lower if
a. prices of Mexican goods were higher, or the number of pesos a dollar purchased was
higher.
b. prices of Mexican goods were higher, or the number of pesos a dollar purchased was
lower.
c. prices of Mexican goods were lower, or the number of pesos a dollar purchased was
higher.
d. prices of Mexican goods were lower, or the number of pesos a dollar purchased was
lower.
The theory of liquidity preference is most helpful in understanding
a. the wealth effect.
b. the exchange-rate effect.
c. the interest-rate effect.
d. misperceptions theory.
Which of the following adjust to bring aggregate supply and demand into balance?
a. the price level and real output
b. the real rate of interest and the money supply
c. government expenditures and taxes
d. the saving rate and net exports
The use of theory and observation is more difficult in economics than in sciences such
as physics due to the difficulty in
a. performing an experiment in an economic system.
b. applying mathematical methods to economic analysis.
c. analyzing available data.
d. formulating theories about economic events.
Figure 3-3
Arturo’s Production Possibilities Frontier Dina’s Production Possibilities Frontier
Refer to Figure 3-3. Suppose Arturo is willing to trade 6 burritos to Dina for each 10
tacos that Dina produces and sends to Arturo. Which of the following combinations of
tacos and burritos could Dina then consume, assuming Dina specializes in taco
production and Arturo specializes in burrito production?
a. 100 tacos and 200 burritos
b. 200 tacos and 130 burritos
c. 300 tacos and 60 burritos
d. 340 tacos and 40 burritos
Which of the following arguments for trade restrictions is often advanced?
a. Trade restrictions make all Americans better off.
b. Trade restrictions increase economic efficiency.
c. Trade restrictions are necessary for economic growth.
d. Trade restrictions are sometimes necessary for national security.
On which of these bonds is the prospect of default least likely?
a. a junk bond
b. a bond issued by the state of Arizona
c. a bond issued by the federal government
d. a bond issued by General Electric Corporation
When a country experiences capital flight its currency
a. appreciates and net exports rise.
b. appreciates and net exports fall.
c. depreciates and net exports rise.
d. depreciates and net exports fall.
If saving is less than domestic investment, then
a. there is a trade deficit and Y > C + I + G.
b. there is a trade deficit and Y < C + I + G.
c. there is a trade surplus and Y > C + I + G.
d. there is a trade surplus and Y < C + I + G.
Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the
good, other things equal,
a. the larger is the decrease in quantity demanded as a result of the tax.
b. the smaller is the tax burden on buyers relative to the tax burden on sellers.
c. the larger is the deadweight loss of the tax.
d. All of the above are correct.
Just after World War II, the labor-force participation rate of women was
a. about 25 percent, and in 2009, it was about 50 percent.
b. about 33 percent, and in 2009 it was about 60 percent.
c. about 50 percent, and in 2009, it was about 70 percent.
d. about 60 percent, and in 2009, it was about 80 percent.
The logic behind the catch-up effect is that
a. workers in countries with low incomes will work more hours than workers in
countries with high incomes.
b. the capital stock in rich countries deteriorates at a higher rate because it already has a
lot of capital.
c. new capital adds more to production in a country that doesn’t have much capital than
in a country that already has much capital.
d. None of the above is correct.
A certificate of indebtedness that specifies the obligations of the borrower to the holder
is called a
a. bond.
b. stock.
c. mutual fund.
d. All of the above are correct.
U.S. monetary policy in the early 1980s reduced the inflation rate by more than half.
It is possible to observe a positive nominal interest rate together with a negative real
interest rate.
Sam wants to trade eggs for sausage. Sally wants to trade sausage for eggs. Sam and
Sally have a double-coincidence of wants.
In years of economic contraction, firms throughout the economy increase their
production of goods and services, employment rises, and jobs are easy to find.
Three possible reasons for an above-equilibrium wage are minimum-wage laws, unions,
and efficiency wages.
The true burden of a payroll tax has nothing to do with the percentage of the tax that
employers are required to pay.
The sooner a payment is received and the higher the interest rate, the greater the present
value of a future payment.
When a minimum-wage law forces the wage to remain above the level that balances
supply and demand, the quantity of labor supplied is lower and the quantity of labor
demand is higher than at the equilibrium wage.
The Bureau of Labor Statistics’ U-2 measure of joblessness includes job losers and job
leavers.
The value of the consumer price index increased from 140 to 147 during 2006. Nathan
opened a bank account at the beginning of 2006, and at the end of 2006 his account
balance was $12,840. The purchasing power of Nathan’s account increased by 2 percent
during the year. We can conclude that Nathan opened his account with a deposit of
$11,500 at the beginning of 2006.
A shortage is the same as an excess demand.
Some long-run unemployment may be explained by the fact that the number of jobs
available in some labor markets may be insufficient to give a job to everyone who
wants one.
The demand for gasoline will respond more to a change in price over a period of five
weeks than over a period of five years.
A decrease in income will shift the demand curve for an inferior good to the right.
Using a supply and demand diagram, show a labor market with a binding minimum
wage. Use the diagram to show those who are helped by the minimum wage and those
who are hurt by the minimum wage.
Money allows people to specialize in what they do best, thereby raising everyone’s
standard of living.
It is difficult for economists to make observations and develop theories, but it is easy
for economists to run experiments to generate data to test their theories.
The CPI is always 1 in the base year.
Hyperinflations are associated with governments printing money to finance
expenditures.