If the opportunity cost of a table is 5 chairs in nation A and 1 chair in nation B, it makes
sense for nation B to produce chairs.
Economists argue that individuals should continue to consume until total benefit equals
total cost.
One example of a microeconomic question is, “How will prices in the clothing industry
change if the government bans imports from China?”
Excess demand in an unregulated market will cause the price of a product to fall.
Under a flexible exchange rate system, exchange rates are determined by free markets.
When there is imperfect information, a role of government is to disseminate
information and promote informed choice.
If Libby can produce 20 gallons of beer or 5 gallons of wine per hour, her opportunity
cost of one gallon of beer is 4 gallons of wine.
Persistent unemployment is consistent with the predictions of the classical models.
The four components of GDP are consumption expenditures, private investment
expenditures, government purchases, and transfer payments.
When output exceeds planned expenditures, there is insufficient production in the
economy.
The net international investment position of the U.S. increases when Americans hold
more assets issued by foreign countries.
A key assumption of most economic analysis is that people act rationally, meaning they
respond to incentives.
Table 6.11 Refer to
Table 6.11. If 1999 is the base year, then the inflation (i.e., the growth rate of the price
index) between 2000 and 2001 is:
A) about 14 percent.
B) about 17 percent.
C) about 21 percent.
D) about 38 percent.
Recall Application 2, “The Market for Meteorites,” to answer the following questions:
According to the Application, what determines the price of a meteorite?
A) age
B) rarity
C) color
D) similarity to earth rocks
Which of the following is not considered investment in human capital?
A) an individual decides to enroll in a vocational training program
B) a firm engages in on-the-job training
C) the government expands its programs to improve health care
D) the government increases the level of unemployment benefits
Expected Real Rates of Interest for Five Countries
Source: Trading Economics, September, 2010Refer to Table 12.1. Assuming the
inflation rate forecast to be accurate, which nation would pay the highest nominal rate
of return?
A) South Africa
B) Australia
C) Brazil
D) the United States
As a result of an increase in the enforcement of illegal immigration laws, the demand
for labor will ________, the supply of labor will ________, and the real wage will
________.
A) remain the same; decrease; increase
B) increase; decrease; remain the same
C) remain the same; increase; decrease
D) decrease; increase; remain the same
How much does a bank earn if it leaves assets in the form of reserves?
A) a small positive rate
B) the discount rate
C) the fed funds rate
D) personal loan lending rate
If the Fed reduces the money supply to reduce inflation:
A) the interest rate will increase, and the price of U.S. exports will fall and the price of
U.S. imports will rise.
B) the interest rate will increase, and the price of U.S. exports will rise and the price of
U.S. imports will fall.
C) the interest rate will increase, and the price of both U.S. exports and U.S. imports
will rise.
D) the interest rate will increase, and the price of U.S. exports and U.S. imports will
fall.
Assuming a long-run aggregate supply curve, a decrease in taxes results in ________ in
output and ________ in price level.
A) a decrease; a decrease
B) no change; an increase
C) no change; a decrease
D) an increase; no change
Let C = 300 + 0.9y and I = 125. The value of the multiplier is
A) 0.9.
B) 9.
C) 10.
D) 27.
Recall Application 2, “Did Fed Policy Cause the Commodity Boom?” to answer the
following questions:
According to the Application, did the Fed cause the commodity boom in 2010?
A) Yes, partly.
B) Yes, completely.
C) No. The higher commodity prices were purely caused by lower supply of these
commodities.
D) No. The higher commodity prices were purely caused by higher demand from
growing economies like China and India.
Assume that C = 150 + 0.9Y and I = 50. The government spending multiplier is:
A) 8.
B) 6.
C) 4.
D) 10
Which of the following caused the the unemployment rate to rise to over 10 percent in
1983?
A) The change in U.S. labor laws requiring firms to pay unemployment insurance to
workers.
B) The Fed’s contractionary response to inflation caused by the oil shocks.
C) The increase in the number of illegal immigrants from Central and Latin America.
D) Increase in tax rates implemented by Ronald Reagan in 1981.
Recall Application 1, “The Chinese Yuan and Big Macs,” to answer the following
questions:
According to the Application, the actual dollar-yuan exchange rate was 6.8 yuan per
U.S. dollar and the predicted purchasing power exchange rate (using the Big Mac) in
China is 3.49 yuan. If the exchange rates were to adjust so that the law of one price
were achieved, then the:
A) yuan will appreciate.
B) US dollar will appreciate.
C) yuan will depreciate.
D) Big Mac will depreciate.
Table 5.1
Refer to Table 5.1. Assume that this economy produces only two goods: Good X and
Good Y. If year 2 is the base year, then the percentage growth rate of real GDP between
year 2 and year 3 is:
A) about 37 percent.
B) about 27 percent.
C) about 45 percent.
D) about 54 percent.
A tax ________ income.
A) increase raises national
B) cut decreases disposable
C) cut increases disposable
D) increase decreases planned
Table 5.3
Refer to Table 5.3. Suppose this economy produces only the two goods X and Y. If year
1 is the base year, Real GDP in year 1 is:
A) $150.
B) $200.
C) $290.
D) $324.
Increased investment spending in the economy would be a possible result of
A) an increase in interest rates.
B) an open market purchase of bonds by the Fed.
C) an open market sale of bonds by the Fed.
D) a decrease in the money supply.
If a bank chooses to keep reserves more than what is required by law, then these are
called:
A) required reserves.
B) bank equity.
C) excess reserves.
D) supplemental reserves.
Using the AS and AD diagram, graphically illustrate how the economy experiences a
stagflation.
Using the AS-AD diagram, show the effects of an increase in the price of oil in the short
run.
People who develop new products and production processes increase their profitability
by taking out ________ on their inventions.
Explain automatic stabilizers and their impact on the economy.
Assume everyone in an economy uses rational expectations. Now suppose that the
Federal Reserve wants to reduce the inflation rate. Given the goals of the Fed, do you
think the Fed should announce its policy to reduce the inflation rate? Explain.
Explain what is meant by “barter” and discuss what role the double coincidence of
wants plays in a barter economy.
Draw a graph to illustrate the effect of higher gasoline prices on the demand for large
SUVs. What is the relationship between gasoline and SUVs?
What do economists mean when they say that there is no such thing as a free lunch?
In a closed economy, how can an increase in government spending crowd out
investment?