Frictional unemployment
a. would be eliminated if the economy were more stable.
b. would be eliminated if the minimum wage were raised.
c. is the result of workers’ skills not matching the jobs available.
d. is present even when labor markets are working well.
Which one of the following would create a demand for a foreign currency and supply of
dollars in the foreign exchange market?
a. the spending of French tourists in the United States
b. the purchase of Japanese automobiles by American consumers
c. the sale of U.S. computer equipment to a French buyer
d. the purchase of a U.S. shoe factory by a Mexican investor
If borrowers and lenders expect a higher rate of inflation,
a. nominal interest rates will tend to fall.
b. real interest rates will tend to fall.
c. nominal interest rates will tend to rise.
d. real interest rates will tend to rise.
“Wine experts are discovering that California wines of several varieties and vintages are
comparable to many of the best French wines. The result is an increased demand, here
and abroad, for California wines.” With regard to the U.S. balance on current account,
this trend will
a. increase the U.S. deficit because of the rise in the price of California wine.
b. decrease the U.S. deficit because of increased shipments of California wines abroad.
c. decrease the demand for U.S. dollars.
d. increase the U.S. demand for euros.
When the Fed lowers the discount rate, it makes it
a. cheaper for banks to borrow from each other.
b. cheaper for banks to obtain additional reserves by borrowing from the Fed.
c. more difficult for banks to accept deposits.
d. more difficult for banks to extend loans.
Currently, the strategy of the Social Security system is to run surpluses to prepare for
the retirement of the baby boom generation. The effectiveness of this strategy is being
undermined because
a. rising interest rates make it more expensive for Social Security to borrow.
b. inflation is reducing the value of the Social Security surplus.
c. the trust fund is being used to finance current government expenditures, and the
bonds held by the trust fund are an obligation of the U.S. Treasury.
d. the federal budget surplus reduces the Social Security surplus.
The graph below depicts the cost structure for a firm in a competitive market.
Figure 9-13
Refer to Figure 9-13. When price rises from P2to P3, the firm finds that
a. marginal cost exceeds marginal revenue at a production level of Q2.
b. if it produces at output level Q3 it will earn a positive profit.
c. expanding output to Q4 would leave the firm with losses.
d. it could increase profits by lowering output from Q3 to Q2.
Figure 10-11
Refer to Figure 10-11. Which of the graphs shown would be consistent with a firm in a
competitive price-searcher market that is earning a positive profit?
a. Panel a
b. Panel b
c. Panel c
d. Panel d
Which of the following is true?
a. When the government undertakes an activity, we can be assured that all voters will
gain.
b. If a government activity is favored by most citizens, it must be productive.
c. If most voters oppose a government activity, it must be counterproductive.
d. When voters pay in proportion to benefits received, all voters will gain if the
government activity is productive.
Suppose a market basket of goods and services costs $1,000 in the base year and the
consumer price index (CPI) is currently 110. This indicates the price of the market
basket of goods and services is now
a. $110.
b. $1,000.
c. $1,100.
d. $1,225.
Measured as a share of GDP, the total federal debt
a. increased during the 1990s, but it has declined substantially during the most recent
decade.
b. increased substantially during the recession of 2008-2009, but it is still well below
the levels of the 1960s and 1970s.
c. has steadily trended downward during both the 1990s and the most recent decade.
d. is now approximately 100 percent of GDP, which is higher than at any time since the
years immediately following World War II.
Which of the following would be most likely to cause the per capita income of
less-developed countries to rise?
a. development of strong labor unions
b. more rapid population growth
c. investment expenditures that enhance the human capital of labor force participants
d. an international minimum wage law
Which of the following is a valid concern about the national debt for a country whose
debt is held entirely by its citizens?
a. The welfare of future generations will be directly related to the per-capita size of the
national debt that they inherit.
b. Growth of the national debt will eventually lead to the bankruptcy of the government.
c. When the debt comes due, future generations may be unable to pay it off.
d. If the increases in the national debt reduce private expenditures on capital formation,
future generations may have lower incomes because they will inherit a smaller stock of
capital.
Evaluate this sentence, “The best way to get rid of poverty is to increase government
expenditures on welfare programs.”
a. This sentence is inherently true. By providing the poor with more money they will no
longer remain in poverty.
b. This sentence is true. Everyone would be better off if we increased government
transfer programs.
c. This sentence is false. Increasing transfer benefits like welfare will lower the
opportunity cost of making decisions that can lead to poverty
d. This sentence is false. Increasing government expenditures will only be harmful to
those in poverty.
An American-owned McDonald’s opens in Russia. How would the net revenue earned
by this restaurant affect the GDP and GNP of the United States?
a. It would increase GNP and GDP.
b. It would increase GNP and leave GDP unchanged.
c. It would increase GDP and leave GNP unchanged.
d. It would leave both GDP and GNP unchanged.
How do high tariffs and other restraints on international trade affect a nation’s
prosperity?
a. They increase employment and thereby promote the growth of real GDP.
b. They prevent the nation from fully realizing the potential gains from specialization,
exchange, and competition.
c. They protect domestic producers and thereby promote economic growth.
d. Both a and c are correct.
How does competition from nonunion firms and foreign producers affect the ability of a
union to increase the wages of its members?
a. Such competition makes it easier for the union to achieve wage increases.
b. Such competition reduces the ability of a union to achieve wage increases.
c. Such competition does not affect the ability of a union to achieve wage increases.
d. Such competition will increase the strength of a union if it produces a product sold in
the domestic market but will reduce the strength of the union if it produces an export
product.
Price searchers can be expected to charge a price that
a. is the highest at which consumers will purchase any units.
b. they expect to provide the largest possible flow of gross revenue.
c. minimizes their per-unit costs of production.
d. maximizes their profit.
Which of the following is the best definition of money?
a. anything generally accepted as a payment for goods or repayment of debt
b. anything that is a liability of the federal government
c. anything that is a liability of a commercial bank
d. the outstanding balances of households on credit cards
Assume that Michael is interested in buying a lawn mower. Right now, interest rates are
very high, but he believes they will soon start to fall. If Michael purchases the lawn
mower today, we know that
a. he was concerned about future inflation.
b. the current inflation rate was low.
c. he paid an inflationary premium.
d. he had a strong, positive rate of time preference.
As the marginal propensity to consume (MPC) decreases, the spending multiplier
a. increases.
b. decreases.
c. remains constant.
d. becomes indefinable.
The rational expectations hypothesis indicates that people
a. pay little attention to policy when forming their expectations about the future.
b. expect the next period to be pretty much like the recent past, regardless of policy
changes.
c. will always be able to forecast the future accurately.
d. change their expectations about the future if policy changes.
Which of the following is one of the reasons to believe that institutional change is more
likely now than in the past?
a. The colonial era is over and countries are in the position to make their own
institutional choices.
b. The collapse of communism has expanded the opportunity for institutional change.
c. Reductions in transportation and communication costs have increased the importance
of institutions and policies.
d. All of the above are true.
In the United States, the purchasing power of money is determined by
a. the underlying precious metals that back each unit of currency.
b. the value of U.S. treasury bonds that back each unit of currency.
c. Federal Reserve policy, which controls the money supply.
d. Congress, which controls the money supply.
A tax dollar collected from an individual or a business costs the private economy more
than a dollar because
a. the administration and enforcement of the tax system is costly.
b. record keeping and the other elements of compliance cost are sizable.
c. the taxes will eliminate some productive exchanges (and cause people to undertake
some counterproductive activities).
d. All of the above are correct.
Which of the following statements best describes the scientific method?
a. The use of modern electronic testing equipment to understand the world.
b. The unbiased development and testing of theories about how the world works.
c. The use of controlled laboratory experiments to understand the way the world works.
d. Finding evidence to support preconceived theories about how the world works.
Cecilia’s Caf is in a competitive price-searcher market. Cecilia’s is currently producing
where average total cost is at its minimum, and Cecilia’s is earning a positive economic
profit. In the long run we would expect Cecilia’s output to
a. decrease and average total cost to be higher.
b. decrease and average total cost to be lower.
c. remain unchanged as Cecilia’s is doing the best it can.
d. increase and average total costs to be lower.
A law that requires hairdressers to undergo many hours of training and acquire a license
before they can offer haircuts to the public is an example of a
a. positive externality.
b. natural monopoly.
c. barrier to entry.
d. public good.
In order for the law of diminishing returns to be present, we must have
a. at least one factor of production to be fixed.
b. output decreasing as more laborers are hired.
c. the price of labor increasing as more workers are hired.
d. simultaneous changes in labor and capital.
e. double the output when labor input is doubled.
A depreciation in the value of the U.S. dollar would
a. encourage foreigners to travel on American owned airlines.
b. make U.S. goods more expensive to foreign consumers.
c. decrease the number of dollars it takes to buy a Swiss franc.
d. make it more expensive for U.S. citizens to travel abroad.
Use the figure below to answer the following question(s).
Figure 4-7
Refer to Figure 4-7. The supply curve S1 and the demand curve D indicate initial
conditions in the market for gasoline. A $.60-per-gallon excise tax on gasoline is levied,
which shifts the supply curve from S1 to S2. Imposing the tax causes the equilibrium
price of gasoline to increase from
a. $.80 to $1.40.
b. $.80 to $1.50.
c. $.90 to $1.50.
d. $.90 to $1.40.
The supply-side effects of a reduction in taxes are the result of
a. increases in the disposable income of households accompanying reductions in tax
rates.
b. the stimulus effects of increases in government expenditures.
c. increased attractiveness of productive activity relative to leisure and tax avoidance.
d. reductions in interest rates that generally accompany expansionary fiscal policy.
In 1993 the negotiations over the North American Free Trade Agreement and the
General Agreement on Tariffs and Trade were frequently characterized by comments
such as, “Free trade with low-wage countries will cause the wages of U.S. workers to
fall.” Identify the errors in statements such as this.
As real incomes grow, what happens to federal tax revenues as a share of the economy?
What are the two theories about how expectations are formed? Discuss each.
The market for home-delivered pizza is extremely competitive in Introville, Utah, and
prices continue to fall. Assume they have fallen so low that the 20 pizza delivery firms
are all suffering economic losses. What will likely happen in the long run?
A terrible storm wipes out 70 percent of the peanut crop. Explain and show graphically
how this will affect the market for peanut butter and the market for jelly, a
complementary good.
Evaluate this statement: “People engaged in economizing behavior will always buy the
lowest priced item they can find.”
Lowincomesville is a poor town. The mayor has decided to impose a law to cut all
rental rates on apartments in half and to fix them at this level. Will this help the poor?
Why or why not? Be sure to distinguish between the short run and the long run.
Write out the equation of exchange. What assumptions did the classical economists
make about the variables that compose the equation, and what did this lead them to
conclude about money and prices?
What are the three categories of transactions in the balance of payments? Give an
example of each.
Income inequality exists in the United States. Is this necessarily a bad thing? Explain
how our assessment of income inequality depends crucially on the source of that
inequality.
What characteristics of both the product market and the labor market enhance the
likelihood that a union will be effective?
Describe two ways that public policy could reduce the natural rate of unemployment.
Evaluate the following statement: “Competitive price-searcher markets are inefficient
relative to purely competitive markets since prices are higher and firms don’t produce
an output rate that minimizes average total cost. As a result, government action should
be undertaken to remedy this situation.”
What is the difference between short-run equilibrium and long-run equilibrium in the
goods and services market?
Why does the government provide benefits in-kind? Why don’t we just give money to
low-income people?
What types of transactions count as debits in the balance of payments? What types of
transactions count as credits? Give examples.
How does a voting structure that relies on unanimity for an action guarantee that no one
will be adversely affected? Why isn’t this type of decision making used more
frequently?
Given the amount of time and other costs of investing in human capital that it takes to
earn a Ph.D., why are college professors paid less than other occupations that require
similar or lesser amounts of human capital?
What common goals, if any, do labor and management share?