Which of the following accounts for about two-thirds of the decline in output during a
recession?
a. the decline in consumption expenditures on consumer durables alone
b. the decline in total consumption spending alone
c. the decline in investment spending alone
d. the combined decline in consumption and investment spending
If Congress increased the tax rate on interest income, investment
a. would increase and saving would decrease.
b. would decrease and saving would increase.
c. and saving would increase.
d. and saving would decrease.
Figure 8-6
The vertical distance between points A and B represents a tax in the market.
Refer to Figure 8-6. When the tax is imposed in this market, sellers effectively pay
what amount of the $10 tax?
a. $0
b. $4
c. $6
d. $10
When a tax is placed on the buyers of a product, buyers pay
a. more and sellers receive more than they did before the tax.
b. more and sellers receive less than they did before the tax.
c. less and sellers receive more than they did before the tax.
d. less and sellers receive less than they did before the tax.
Suppose we are analyzing the market for hot chocolate. Graphically illustrate the
impact each of the following would have on demand or supply. Also show how
equilibrium price and equilibrium quantity would change.
a. Winter starts, and the weather turns sharply colder.
b. The price of tea, a substitute for hot chocolate, falls.
c. The price of cocoa beans decreases.
d. The price of whipped cream falls.
e. A better method of harvesting cocoa beans is introduced.
f. The Surgeon General of the U.S. announces that hot chocolate cures acne.
g. Protesting farmers dump millions of gallons of milk, causing the price of milk to rise.
h. Consumer income falls because of a recession, and hot chocolate is considered a
normal good.
i. Producers expect the price of hot chocolate to increase next month.
j. Currently, the price of hot chocolate is $0.50 per cup above equilibrium.
Elizabeth just received her Ph.D. in economics and has two competing job offers. The
first is in Washington, D.C. and pays a salary of $200,000. She has a similar job offer in
Austin, TX that pays $90,000. Which pair of CPIs would make the two salaries have the
same purchasing power?
a. 70 in Washington, D.C. and 42 in Austin, TX
b. 140 in Washington, D.C. and 70 in Austin, TX
c. 160 in Washington, D.C. and 72 in Austin, TX
d. 210 in Washington, D.C. and 150 in Austin, TX
In the context of the aggregate-demand curve, the interest-rate effect refers to the idea
that, when the price level increases,
a. the real value of money decreases; in turn, the real value of the dollar increases in
foreign exchange markets, which decreases net exports.
b. the real value of money decreases; in turn, interest rates increase, which decreases net
exports.
c. households increase their holdings of money; in turn, interest rates decrease, which
reduces spending on investment goods.
d. households increase their holdings of money; in turn, interest rates increase, which
reduces spending on investment goods.
Figure 5-18
Refer to Figure 5-18. Which supply curve is most likely relevant over a very long
period of time?
a. S1
b. S2
c. S3
d. All of the above are equally likely to be relevant over a very long period of time.
The financial system
a. involves bank accounts, mortgages, stock prices, and many other items.
b. involves decisions and actions undertaken by people at a point in time that affect
their lives in the future.
c. coordinates the economy’s saving and investment.
d. All of the above are correct.
Harvey, a U.S. taxpayer, purchased 10 shares of MVC stock for $100 per share; one
year later he sold the 10 shares for $130 a share. Over the year, the price level increased
from 140.0 to 147.0. What is Harvey’s before-tax real capital gain?
a. $1,300 – $1,000(1.05) and this is the gain he is to report on his income tax
b. $1,300 – $1,000(1.05) but he is to report a $300 gain on his income tax
c. $1,300 – $1,000(1.07) and this is the gain he is to report on his income tax
d. $1,300 – $1,000(1.07) but he is to report a $300 gain on his income tax
Figure 9-16. The figure below illustrates a tariff. On the graph, Q represents quantity
and P represents price.
Refer to Figure 9-16. The area C + D + E + F represents
a. the decrease in consumer surplus caused by the tariff.
b. the decrease in total surplus caused by the tariff.
c. the deadweight loss of the tariff minus government revenue raised by the tariff.
d. the deadweight loss of the tariff plus government revenue raised by the tariff.
Which of the following is not a reason the aggregate-demand curve slopes downward?
As the price level increases,
a. firms may believe the relative price of their output has risen.
b. real wealth declines.
c. the interest rate increases.
d. the exchange rate increases.
Which of the following could explain a decrease in the U.S. real exchange rate?
a. the U.S. government budget deficit rises
b. the U.S. impose import quotas
c. the default risk of U.S. assets rise
d. All of the above are correct.
As a money management fee, mutual funds usually charge their customers
a. between 0.5 and 2.0 percent of assets each year.
b. between 1.5 and 3.0 percent of assets each year.
c. nothing, because they receive commissions from the firms whose stock they buy.
d. a flat fee of about $50.
Which of the following trade-offs does the production possibilities frontier illustrate?
a. if an economy wants to increase efficiency in production, then it must sacrifice
equality in consumption
b. once an economy has reached the efficient points on its production possibilities
frontier, the only way of getting more of one good is to get less of the other
c. for an economy to consume more of one good, it must stop consuming the other good
entirely
d. for an economy to produce and consume goods, it must sacrifice environmental
quality
Suppose the United States exports cars to Canada and imports bananas from Mexico.
This situation suggests
a. the United States has a comparative advantage relative to Canada in producing cars,
and Mexico has a comparative advantage relative to the United States in producing
bananas.
b. the United States has a comparative advantage relative to Canada in producing
bananas, and Mexico has a comparative advantage relative to the United States in
producing cars.
c. the United States has an absolute advantage relative to Canada in producing cars, and
Mexico has an absolute advantage relative to the United States in producing bananas.
d. the United States has an absolute advantage relative to Mexico in producing bananas,
and Canada has an absolute advantage relative to the United States in producing cars.
Figure 12-1. On the horizontal axis, K/L represents capital (K) per worker (L). On the
vertical axis, Y/L represents output (Y) per worker (L).
Refer to Figure 12-1. The shape of the curve is consistent with which of the following
statements about the economy to which the curve applies?
a. In the long run, a higher saving rate leads to a higher level of productivity.
b. In the long run, a higher saving rate leads to a higher level of income.
c. In the long run, a higher saving rate leads to neither a higher growth rate of
productivity nor a higher growth rate of income.
d. All of the above are correct.
Policymakers who control monetary and fiscal policy and want to offset the effects on
output of an economic contraction caused by a shift in aggregate supply could use
policy to shift
a. aggregate supply to the right.
b. aggregate supply to the left.
c. aggregate demand to the right.
d. aggregate demand to the left.
Figure 17-3. On the graph, MS represents the money supply and MD represents money
demand. The usual quantities are measured along the axes.
Refer to Figure 17-3. At the end of 2009 the relevant money-supply curve was the one
labeled MS1. At the end of 2010 the relevant money-supply curve was the one labeled
MS2. Assuming the economy is always in equilibrium, what was the economy’s
approximate inflation rate for 2010?
a. -33 percent
b. 17 percent
c. 50 percent
d. 67 percent
When the local used bookstore prices economics books at $15 each, it generally sells 70
books per month. If it lowers the price to $7, sales increase to 90 books per month.
Given this information, we know that the price elasticity of demand for economics
books is about
a. 2.91, and an increase in price from $7 to $15 results in an increase in total revenue.
b. 2.91, and an increase in price from $7 to $15 results in a decrease in total revenue.
c. 0.34, and an increase in price from $7 to $15 results in an increase in total revenue.
d. 0.34, and an increase in price from $7 to $15 results in a decrease in total revenue.
The information below for 2008 in millions was reported by the World Bank. On the
basis of this information, which list below contains the correct ordering of GDP per
person from highest to lowest?
a. Argentina, Bolivia, Peru
b. Argentina, Peru, Bolivia
c. Bolivia, Argentina, Peru
d. Peru, Bolivia, Argentina
According to liquidity preference theory, an increase in the price level causes the
interest rate to
a. increase, which increases the quantity of goods and services demanded.
b. increase, which decreases the quantity of goods and services demanded.
c. decrease, which increases the quantity of goods and services demanded.
d. decrease, which decreases the quantity of goods and services demanded.
Which of the following lists correctly identifies the four expenditure categories of
GDP?
a. consumption, government purchases, investment, net-exports
b. consumption, investment, depreciation, net-exports
c. consumption, saving, investment, depreciation,
d. consumption, government purchases, investment, savings
Price ceilings and price floors that are binding
a. are desirable because they make markets more efficient and more fair.
b. cause surpluses and shortages to persist because price cannot adjust to the market
equilibrium price.
c. can have the effect of restoring a market to equilibrium.
d. are imposed because they can make the poor in the economy better off without
causing adverse effects.
The slope of the production function with capital per worker on the horizontal axis and
output per worker on the vertical axis
a. is positive and gets steeper as capital per worker rises.
b. is positive and gets flatter as capital per worker rises.
c. is negative and gets steeper as capital per worker rises.
d. is negative and gets flatter as capital per worker rises.
The price level is a
a. relative variable.
b. dichotomous variable
c. real variable.
d. nominal variable.
Andre walks Julia’s dog once a day for $50 per week. Julia values this service at $60
per week, while the opportunity cost of Andre’s time is $30 per week. The government
places a tax of $35 per week on dog walkers. After the tax, what is the total surplus?
a. $50
b. $30
c. $25
d. $0
Which of the following is correct?
a. Inflation impedes financial markets in their role of allocating savings to alternative
investments.
b. Inflation encourages savings through the tax treatment on capital gains.
c. Inflation encourages larger holdings of currency by the public.
d. Inflation reduces people’s real purchasing power.
When constructing a production possibilities frontier, which of the following
assumptions is not made?
a. The economy produces only two goods or two types of goods.
b. Firms produce goods using factors of production.
c. The technology available to firms is given.
d. The quantities of the factors of production that are available are increasing over the
relevant time period.
Inefficiency can be caused in a market by the presence of
a. market power.
b. externalities.
c. imperfectly competitive markets.
d. All of the above are correct.
Assume the MPC is 0.80. The multiplier is
a. 0.80.
b. 1.25.
c. 4.25.
d. 5.00.
The Bureau of Labor Statistics produces data on unemployment and other aspects of the
labor market from a regular survey of about 60,000 households, called the Current
Population Survey.
A price floor set below the equilibrium price causes a surplus in the market.
If the reserve ratio is 20 percent, how much money can be created from $100 of
reserves? Show your work.
Economic policies often have effects that their architects did not intend or anticipate.
Advocates of unions contend that unions are a necessary antidote to the market power
of the firms that hire workers and that unions are important for helping firms respond
efficiently to workers’ concerns.
Connie can clean windows in large office buildings at a cost of $1 per window. The
market price for window-cleaning services is $3 per window. If Connie cleans 100
windows, her producer surplus is $100.
Describe three costs of inflation.
Use the data on U.S. real GDP below to compute real GDP per person for each year.
Then use these numbers to compute the percentage increase in real GDP per person
from 1987 to 2005.
Year Real GDP (2000 prices) Population
1987 $6,435,000 million 243 million
2005 $11,092,000 million 296.6 million
Other things the same, a decrease in aggregate demand decreases both inflation and
unemployment.
Opportunity cost measures the trade-off between two goods that each producer faces.
According to traditional Keynesian analysis, a tax cut has a larger effect on aggregate
demand than an increase in government expenditures of the same size.
Price elasticity of demand along a linear, downward-sloping demand curve decreases as
price falls.
U.S. GDP includes the market value of rental housing, but not the market value of
owner-occupied housing services.
Causes of the changing role of women in American society over the past several
decades include new technologies that have reduced the amount of time required to
complete routine household tasks, improved birth control, and changing political and
social attitudes.
In general, demand curves for luxuries tend to be price elastic.
The downward slope of the aggregate demand curve is based on logic that as the price
level rises, consumption, investment, and net exports all fall.