Situation 32-1
In the early 1980s, the U.S. automobile industry managed to influence the government
to negotiate a voluntary export restraint agreement with Japan that was in effect from
1981 until 1985. The predictable result was an average increase in the price of Japanese
cars by about $1,000 and of U.S. cars by about $370. Also, as a result of the import
quotas, 26,000 new jobs were “created” in the U.S. automobile industry.
At the time the total yearly salary (including all the benefits) of the average auto worker
was no more than $50,000 per year, and the cost per job saved was estimated at
$160,000 per worker per year. We can conclude that
a. import quotas are a cost-efficient way of saving jobs.
b. the U.S. auto industry, through its lobbying efforts, managed to promote the general
public interest.
c. the net social benefits of import quotas were positive.
d. all of the above
e. none of the above
If Carlos is waiting to be called back to his job from which he has been temporarily laid
off, the Bureau of Labor Statistics will classify him as unemployed.
a. True
b. False
If the economy is in long-run equilibrium, the actual unemployment rate is less than the
natural unemployment rate.
a. True
b. False
Suppose that a rules-based monetary policy proposal specifies that the money supply
will grow 3 percent each year. If velocity grows 1 percent this year and Real GDP
grows 2 percent, the price level will __________ by __________ percent.
a. rise; 3
b. fall; 2
c. rise; 2
d. rise; 6
e. fall; 5
The law of demand states that price and quantity demanded are
a. directly related, ceteris paribus.
b. inversely related, ceteris paribus.
c. independent.
d. positively related, ceteris paribus.
Exhibit 5-2
If the tuition is set at $70 there will be
a. a shortage at 10 a.m. and a surplus at 8 a.m.
b. a surplus at 10 a.m. and a shortage at 8 a.m.
c. equilibrium at 10 a.m. and a surplus of seats at 8 a.m.
d. equilibrium at 10 a.m. and a shortage of seats at 8 a.m.
If it is assumed that people vote for the candidate who comes closer to matching their
own views, to win votes in a two-person race
a. one candidate will move to the far right of the political spectrum while the other
moves to the far left.
b. one candidate will move between the middle and far right end of the political
spectrum while the other moves between the middle and the far left end.
c. both candidates will move to the far right end of the political spectrum.
d. both candidates will move to the far left end of the political spectrum.
e. both candidates will move toward the middle of the political spectrum.
If a person predicts that a cut in income tax rates will decrease income tax revenues, he
or she implicitly assumes that the percentage __________ in the tax base will be
__________ the percentage cut in the tax rate.
a. rise; less than
b. rise; greater than
c. rise; equal to
d. fall; equal to
e. none of the above
Exhibit 15-3
The economy is currently at point 4. The Fed increases the money supply and the
economy ends up at point 8. Has monetary policy been effective at moderating the
business cycle?
a. Yes, since it eliminated the recessionary gap.
b. Yes, since it decreased the unemployment rate.
c. Yes, since it increased Real GDP.
d. No, since it has moved the economy from a recessionary gap to an inflationary gap.
e. a, b and c
A necessary condition for a money economy to be self-regulating is that
a. wages must be flexible in an upward direction, but not in a downward direction.
b. the economy must always be operating on its institutional production possibilities
frontier.
c. wages must be flexible in a downward direction, but not in an upward direction.
d. interest rates must be flexible in the credit market.
e. none of the above
Suppose candidate A is conservative and candidate B is liberal and both are currently
positioned away from the “middle ground” toward their respective ends of the political
spectrum. We would expect that as the campaign draws closer to election day,
a. candidate A will move to the right (more conservative) and candidate B will move to
the left (more liberal).
b. both candidates A and B will move to the other’s position in an attempt to capture the
other’s supporters.
c. candidate A will move closer to the middle, and candidate B will stay where he or she
is because he or she realizes that Americans are basically liberal.
d. candidate B will move closer to the middle, and candidate A will stay where he or she
is because he or she realizes that Americans are basically conservative.
e. both candidates will move toward the middle.
When a bank repays a _________________ loan, the Fed _____________________the
bank€s reserve account.
a. overnight; subtracts the repayment from
b. overnight; adds the repayment to
c. discount; adds the repayment to
d. discount; subtracts the repayment from
Continued inflation occurs
a. if there is a sustained increase in the price level.
b. only if there is a sustained increase in the price of every good and service.
c. only if there is a sustained increase in the price of every good and service by the same
dollar amount.
d. only if there is a sustained increase in the price of every good and service by the
same percentage.
Today, the Dow Jones Industrial Average
a. consists of 30 stocks.
b. is a set group of stocks that remains constant over time.
c. contains stocks that are widely held by institutional investors and individuals.
d. contains both stocks and bonds of large American companies.
e. a and c
In which of the following economic theories is it possible for an increase in the money
supply to lead to a decrease in Real GDP in the short run?
a. Keynesian theory
b. Monetarist theory
c. New classical theory
d. a and b
e. a and c
Taxable income rises by $1,500 and taxes rise by $435. What is the marginal tax rate?
a. 4 percent
b. 29 percent
c. 10 percent
d. 30 percent
e. 25 percent
In a self-regulating economy, a recessionary gap will be eliminated by falling wages
which will shift the SRAS curve to the right.
a. True
b. False