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When economists say an activity is consistent with economic efficiency, they mean
a. a majority of citizens favor the activity.
b. the benefits that result from the activity exceed the costs.
c. the number of people who gain from the activity exceeds the number on whom costs
are imposed.
d. the costs that result from the activity exceed the benefits.
Fiscal policy moved toward expansion during the 1980s but toward restriction during
the 1990s. How did these differences affect the economy?
a. The expansionary fiscal policy of the 1980s led to strong growth while the restrictive
policy of the 1990s led to stagnation.
b. The expansionary fiscal policy of the 1980s led to weaker growth than the restrictive
policy of the 1990s.
c. The expansionary fiscal policy of the 1980s generated more rapid growth than the
restrictive policy of the 1990s.
d. There is little evidence that the differences in fiscal policy between the two decades
exerted much impact on either aggregate demand or real output.
Use the figure below to answer the following question(s).
Figure 6-1
Figure 6-1 illustrates the four possibilities of the distribution of costs and benefits
among voters for a government project. For which type would the government most
likely undertake many projects that would be considered inefficient or
counterproductive (in other words, do too many of them relative to economic
efficiency)?
a. type A
b. type B
c. type C
d. type D
Which of the following is most likely to increase the net inflow of foreign capital?
a. an increase in the rate of inflation
b. a decline in real GDP as the economy falls into a recession
c. a reduction in domestic investment
d. an increase in the real interest rate in the loanable funds market
Which of the following is true?
a. In 2002, national defense accounted for more than half of federal spending.
b. Federal spending on national defense has increase rapidly during the last several
decades.
c. Federal spending on health care programs such as Medicare and Medicaid has
increased rapidly during the last several decades.
d. Federal spending in the aftermath of hurricane Katrina expanded over 50%.
Use the figure to answer the following question(s).
Figure 8-3
The average variable cost (AVC) and average total cost (ATC) for a firm are indicated
in Figure 8-3. If the marginal cost curve were constructed, at what output would it cross
the AVC curve?
a. 2
b. 3
c. 4
d. 5
As baby-boomers reach retirement age and draw on Social Security and Medicare,
a. the Social Security Trust Fund will switch from running a deficit to a surplus.
b. unfunded promises included in the federal budget will decrease.
c. expenditures on these programs will increase the size of the federal debt.
d. the federal debt as a share of GDP will decrease.
The current U.S. unemployment insurance program
a. tends to significantly lower the unemployment rate.
b. tends to modestly lower the unemployment rate.
c. has no effect on the unemployment rate.
d. tends to raise the unemployment rate.
How will an increase in the world price of crude oil influence the economy of an
oil-importing country such as the United States?
a. Aggregate supply will decrease, leading to a decrease in real GDP.
b. Aggregate supply will increase, leading to an increase in real GDP.
c. Aggregate supply will increase, leading to an increase in prices and smaller GDP.
d. A change in the price of an imported good will not affect the domestic economy of an
oil-importing country.
When water cannot be traded among current and potential users, then
a. each user will take more care to conserve, because added water cannot be obtained.
b. users have a strong incentive to conserve because they are now protected from price
increases imposed by greedy entrepreneurs.
c. efficiency improves, as dry years can be better anticipated and planned for, and every
user knows the quantity that will be available.
d. water will not flow to its highest valued uses, and some users will use water for
relatively low-valued uses, because they cannot gain by selling it to others.
A price searcher confronts a downward sloping demand curve because
a. products in the market are differentiated.
b. there is no close competitor in the market.
c. the market is essentially monopolized.
d. the firm gains nothing if it lowers its price.
If the ice cream industry is a competitive price-taker market and all ice cream producers
are earning zero economic profit, what will be the impact of an increase in the demand
for ice cream?
a. Firms will exit the ice cream industry in the long run since they are earning zero
economic profit.
b. The firms will now be able to earn long-run economic profit assuming that barriers to
entry remain low and new firms can enter the market.
c. A shortage of ice cream will develop.
d. The price of ice cream will rise initially, inducing the existing firms to expand output
and new firms to enter the industry.
Which of the following tends to make the size of a shift in aggregate demand resulting
from a tax change smaller than would otherwise be the case?
a. the multiplier effect
b. the crowding-out effect
c. expansionary monetary policy
d. None of the above is correct.
If long-run equilibrium is present in a competitive market, the typical firm in the market
will be
a. making economic losses.
b. making zero economic profit.
c. making economic profit.
d. making a rate of return that is higher than the rate earned in other industries.
e. both c and d are correct.
Use the figure below to answer the following question(s).
Figure 14-5
In Figure 14-5, AD1and SRAS1indicate an economy initially operating at
full-employment output level, Y1. The long-run impact of the Fed unexpectedly shifting
to a more restrictive monetary policy will be
a. a decrease in aggregate demand to AD2 and a decrease in real output to Y2.
b. a decrease in the full-employment level of output to Y2.
c. a decrease in aggregate demand to AD2 and an increase in short-run aggregate supply
to SRAS2, causing the price level to fall to P3 and real output to remain unchanged at
Y1.
d. no change; AD and SRAS will stay at AD1 and SRAS1.
Which of the following helps explain why the aggregate demand curve slopes
downward?
a. If the price level increases, the purchasing power of the fixed quantity of money
decreases, causing people to buy less.
b. If the price level increases, the purchasing power of the fixed quantity of money
increases, causing people to buy more.
c. If domestic prices increase, we substitute domestic goods for imported goods.
d. If domestic prices decrease, we substitute imported goods for domestic goods.
The difference between a positive economic statement and a normative statement is that
a. a positive statement must be true; a normative statement is often not true
b. a normative statement must be true; a positive statement is often not true
c. a positive statement can be proved; a normative statement cannot
d. a normative statement can be proved; a positive statement cannot
e. a positive economic statement is a moral judgment; a normative economic statement
is not a moral judgment
In order to make effective policy changes, policy makers need to know
a. where the economy is going to be six to twelve months from now.
b. the magnitude of past recessions.
c. Keynesian economics.
d. the exact size of the current M1 money supply.
Income is created when
a. individuals supply others with productive resources that they value.
b. the government levies taxes on some and transfers the revenues to others.
c. the general level of prices increases.
d. shares of stock are sold from their current owner to another party.
For each watch Denmark produces, it gives up the opportunity to make 50 pounds of
cheese. Germany can produce one watch for every 100 pounds of cheese it produces.
Which of the following is true with regard to opportunity costs in the two countries?
a. The opportunity cost of producing watches is lower in Denmark.
b. The opportunity cost of producing cheese is lower in Denmark.
c. The opportunity cost of producing watches is identical in both countries.
d. It is impossible to compare opportunity costs because the two countries use different
currencies.
e. In Germany the opportunity cost of producing one pound of cheese is one watch.
The long run is a period of
a. at least one year.
b. sufficient length to allow a firm to expand output by hiring additional workers.
c. sufficient length to allow a firm to alter its plant size and capacity and all other
factors of production.
d. sufficient length to allow a firm to transform economic losses into economic profits
by hiring better workers.
Rather than seeking to balance the budget, Keynesian economists argue that the
government's tax and spending policies should be determined by the
a. demand for government-provided public goods.
b. level of aggregate demand required to achieve full employment of resources.
c. size and quality of the labor force.
d. need to expand or contract the supply of money.
(I) Rational expectations adherents believe that decision makers base their future
expectations on actual outcomes observed during recent periods.
(II) The adaptive expectations hypothesis states that decision makers weigh all available
evidence when forming expectations about future economic events.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.
If marginal cost exceeds marginal revenue, a profit-maximizing firm should
a. expand output until marginal cost equals marginal revenue.
b. expand output until marginal revenue equals price.
c. reduce output until marginal cost equals marginal revenue.
d. reduce output until price equals average total cost.
Which of the following factors will reduce considerably the ability of a union to raise
the wages of its workers?
a. an elastic demand for the goods produced by union labor
b. a five-year apprenticeship before one can qualify for jobs held by union members
c. high tariffs on goods produced by the union labor
d. favoritism in the allocation of government contracts to firms that employ union labor
The primary source of earnings of commercial banks is income derived from
a. the checking account services provided to customers.
b. the use of deposits to extend loans and undertake investments.
c. vault cash and deposits held with the Fed.
d. services provided to the U.S. Treasury.
The type of banking system under which banks are required to hold only a portion of
their assets in reserve against the checking deposits of their customers is called
a. a gold-backed banking system.
b. a full reserve banking system.
c. a fiat banking system.
d. a fractional reserve banking system.
A new law requiring plumbers to pass strict certification tests that reduce the number of
plumbers would
a. increase the wage rate of plumbers.
b. decrease the wage rate of plumbers.
c. increase the employment of plumbers.
d. cause no change in the labor market for plumbers.
When real GDP grows more slowly than potential GDP,
a. nominal GDP rises.
b. the unemployment rate falls.
c. labor productivity falls.
d. the unemployment rate rises.
Which of the following explains most clearly why business owners have a strong
incentive to strive for operational efficiency?
a. They recognize that operational efficiency promotes the public interest.
b. As residual claimants, owners will receive a higher income from increased efficiency.
c. The owners will be able to keep production costs low by providing free managerial
services to the firm.
d. The owners will be able to gain by paying employees below market wages, which
will improve the overall efficiency of the economy.
Which of the following is most likely to cause the dollar to depreciate?
a. higher domestic interest rates
b. an increase in the rate of inflation abroad
c. a shift by the Fed to a more expansionary monetary policy
d. a decrease in foreign interest rates
