Table: The Lemonade Market
Look at the table The Lemonade Market. If the price of a cup of lemonade is $1, there
will be _____ in the market.
A) equilibrium
B) a shortage of 150 cups
C) a shortage of 75 cups
D) a surplus of 75 cups
If the marginal propensity to consumeis 0.8 and the government spending decreases by
$50 million, then equilibrium GDP will decrease by:
A) $40 million.
B) $50 million.
C) $200 million.
D) $250 million.
Medicaid, Medicare, and Social Security are examples of:
A) unilateral payments.
B) transfer payments.
C) monetary policy.
D) taxes.
The difference between a country’s balance of payments on goods and services and the
merchandise trade balance is that:
A) the merchandise trade balance does not include exports and imports of services.
B) the balance of payments does not include exports and imports of services.
C) the merchandise trade balance does not include imports of goods and services.
D) the balance of payments does not include imports of goods and services.
With regard to the aggregate price level, economists generally believe:
A) price stability is desirable.
B) inflation is worse than deflation.
C) deflation is worse than inflation.
D) inflation benefits most retired people.
If the current equilibrium output lies above potential output, then an appropriate fiscal
policy would be to _____, which will shift the AD curve to the _____.
A) decrease government purchases; right
B) increase government purchases; left
C) decrease government purchases; left
D) raise tax rates; right
Government tax revenue rises and falls with the business cycle as:
A) the multiplier effect of taxes and government transfers.
B) a discretionary fiscal policy.
C) the multiplier effect of government purchases.
D) an automatic stabilizer.
Under a floating exchange rate regime, raising the interest rate has all of the following
effects EXCEPT:
A) increasing foreign imports.
B) reducing capital outflows.
C) increasing domestic investment spending.
D) reducing domestic exports.
Figure: The Market for Candy
Look at the figure The Market for Candy. Equilibrium occurs at a price of _____, and
the equilibrium quantity is equal to _____.
A) P1; Q5
B) P2; Q3
C) P3; Q2
D) P1; Q3
One of the lessons learned from the 2008 financial crisis was that:
A) banks had been overregulated.
B) the Federal Deposit Insurance Corporation was ineffective.
C) banking regulation was too narrow; before the crisis, shadow banks were not subject
to the same regulation as depository institutions.
D) financial crises are usually very short, and recovery from them is relatively quick
and easy.
Many countries engage in trade protection by imposing import tariffs or quotas for at
least some goods. This is because:
A) economists have established that such restrictions are welfare-improving for certain
categories of goods (such as raw materials).
B) such restrictions tend to benefit consumers without harming producers.
C) while such restrictions harm consumers, they benefit producers, who are usually a
more cohesive and politically influential group.
D) while such restrictions harm consumers and benefit producers, the losses to
consumers are outweighed by the gains to producers.
Figure: An Increase in Aggregate Demand
Look at the figure An Increase in Aggregate Demand. Because of the pressures at the
short-run equilibrium at Y2 and P2:
A) the SRAS will shift to the right.
B) the SRAS curve will shift to the left.
C) unemployment will decrease.
D) LRAS will shift to the right.
When the economy turns down and the incomes of many people decrease, vacationers
are more likely to take car trips than to fly. Which of the following provides one
possible explanation for this phenomenon?
A) Air travel and travel by car are complementary goods.
B) Air travel and travel by car are both normal goods.
C) Air travel is a normal good and travel by car is an inferior good.
D) Air travel is an inferior good and travel by car is a normal good.
Figure: Shifts in Demand and Supply
Look at the figure Shifts in Demand and Supply. The figure shows how supply and
demand might shift in response to specific events. Suppose scientists discover that
eating a tomato a day prevents aging. Which panel BEST describes how this will affect
the market for tomatoes?
A) panel A
B) panel B
C) panel C
D) panel D
After a hurricane devastates New Orleans, a Canadian charity sends $1 million to the
United States to help the survivors rebuild their homes. In the U.S. balance of
payments, this transaction causes the balance on the _____ account to _____.
A) current; decrease
B) current; increase
C) financial; decrease
D) financial; increase
If the marginal propensity to save is 0.3, the size of the multiplier is:
A) 3.3.
B) 2.3.
C) 1.3.
D) 0.7.
The main reason South Korea has grown so rapidly is that because it was so poor:
A) it could take advantage of international financial aid for poor countries.
B) people left to go to more prosperous countries.
C) it could skip forward, or leapfrog, to use new-generation technology as it developed.
D) it could import highly trained engineers from other countries.
Look at the scenario Assets and Liabilities of the Banking System. Suppose that the
reserve ratio is 10% and the Fed buys $25,000 worth of U.S. Treasury bills from the
banking system. If the banking system does NOT want to hold any excess reserves,
_____ will be added to the money supply.
A) about $667,000
B) about $111,000
C) $250,000
D) $1 million
Real seignorage is calculated by the:
A) real interest rate times the money supply.
B) rate of growth of the money supply times the real money supply.
C) real interest rate minus the inflation rate.
D) rate of growth of the money supply divided by the price index.
Increases in human capital will promote economic growth.
A) True
B) False
The effect of automatic stabilizers is to increase the size of the multiplier.
A) True
B) False
If a supply curve is represented by the equation Q = 10 + 2P, what is its slope?
A) 1/2
B) 1
C) 2
D) 5
The notion that the real quantity of money is always at its long-run equilibrium level is
associated with the _____ of the price level.
A) classical model
B) Keynesian model
C) monetarist model
D) modern view
Included in the M2 definition of money are checkable bank deposits.
A) True
B) False
Figure: Demand and Supply of Gasoline
Look at the figure Demand and Supply of Gasoline. Given the equilibrium after a
change in supply from S1 to S2:
A) at the old price of $2.50, there will be pressure for the price to fall.
B) the new price will be $2.00.
C) the new quantity will be 600.
D) the price will remain constant.
Figure: Policy Alternatives
Look at the figure Policy Alternatives. In panel (b), the economy is initially in short-run
equilibrium at real GDP level Y1 and price level P2. If the government decides to
intervene, it will most likely:
A) increase taxes.
B) decrease the quantity of money.
C) increase its spending.
D) decrease its spending.
Rising high school graduation rates are an example of an increase in:
A) technological progress.
B) human capital.
C) population stock.
D) fertility rates.
Seignorage is:
A) the government’s cost of printing and coining money.
B) the revenue generated by the government’s right to print money.
C) the money financial institutions make selling government bonds to the Fed when the
Fed creates money.
D) the revenue the government generates in tax receipts.
Suppose the level of planned aggregate expenditure in an economy is $1,000 and real
GDP is $800. According to the simple model developed in this chapter, in which the
aggregate price level is assumed to be constant, we can expect:
A) inventories to stay the same, since this is part of planned investment.
B) inventories to decrease.
C) inventories to increase.
D) real GDP to fall further.
Figure: Fiscal Policy Choices
Look at the figure Fiscal Policy Choices. In panel (a), the economy is initially at output
level Y1 and there is:
A) an inflationary gap.
B) a recessionary gap.
C) equilibrium at full employment.
D) no gap.