Figure 3-2
Peru’s Production Possibilities Frontier
Refer to Figure 3-2. Suppose Madagascar is willing to trade 40 rubies to Peru for each
emerald that Peru produces and sends to Madagascar. Which of the following
combinations of emeralds and rubies could Peru then consume, assuming Peru
specializes in emerald production?
a. 2 emeralds and 240 rubies
b. 3 emeralds and 220 rubies
c. 4 emeralds and 200 rubies
d. 5 emeralds and 140 rubies
While pollution regulations yield the benefit of a cleaner environment and the improved
health that comes with it, the regulations come at the cost of reducing the incomes of
the regulated firms’ owners, workers, and customers. This statement illustrates the
principle that
a. trade can make everyone better off.
b. rational people think at the margin.
c. people face tradeoffs.
d. people respond to incentives.
If the exchange rate is 70 euro per dollar, the price of an MP3 player in Paris is 150
euros and the price of an MP3 player in the U.S. is $150, then what is the real exchange
rate?
a. 1/70 French MP3 players per U.S. MP3 player
b. 1 French MP3 players per U.S. MP3 player
c. 70 French MP3 players per U.S. MP3 player.
d. None of the above are correct.
The adage, “There is no such thing as a free lunch,” means
a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. people face tradeoffs.
d. all costs are included in the price of a product.
If the quantity of loanable funds supplied is less than the quantity demanded, then
a. there is a shortage of loanable funds and the interest rate will fall.
b. there is a shortage of loanable funds and the interest rate will rise.
c. there is a surplus of loanable funds and the interest rate will fall.
d. there is a surplus of loanable funds and the interest rate will rise.
You sell fruit smoothies. One day you double the time you spend and double all your
inputs, and make twice as many smoothies. Your smoothie production function has
a. decreasing returns to scale.
b. zero returns to scale.
c. constant returns to scale.
d. increasing returns to scale.
An increase in the budget deficit
a. raises net exports and domestic investment.
b. raises net exports and reduces domestic investment.
c. reduces net exports and raises domestic investment.
d. reduces net exports and domestic investment.
Figure 4-21
Refer to Figure 4-21. Which of the following movements would illustrate the effect in
the market for bread of an increase in the price of flour?
a. Point A to Point B
b. Point C to Point B
c. Point C to Point D
d. Point A to Point D
If the natural rate of unemployment falls,
a. both the short-run Phillips curve and the long-run Phillips curve shift.
b. only the short-run Phillips curve shifts.
c. only the long-run Phillips curve shifts.
d. neither the short-run nor the long-run Phillips curves shift.
Suppose that the country of Xenophobia chose to isolate itself from the rest of the
world. Its ruler proclaimed that Xenophobia should become self-sufficient, so it would
not engage in foreign trade. From an economic perspective, this idea would
a. make sense if Xenophobia had an absolute advantage in all goods.
b. make sense if Xenophobia had no absolute advantages in any good.
c. not make sense as long as Xenophobia had a comparative advantage in some good.
d. not make sense as long as Xenophobia had an absolute advantage in at least half the
goods that could be traded.
If there is surplus of loanable funds, then
a. the supply for loanable funds shifts right and the demand shifts left.
b. the supply for loanable funds shifts left and the demand shifts right.
c. neither curve shifts, but the quantity of loanable funds supplied increases and the
quantity demanded decreases as the interest rate rises to equilibrium.
d. neither curve shifts, but the quantity of loanable funds supplied decreases and the
quantity demanded increases as the interest rate falls to equilibrium.
If a government managed to reduce the time inconsistency problem by mandating that
the central bank target inflation at a low rate, then
a. the long-run Phillips curve would shift right.
b. the long-run Phillips curve would shift left.
c. the short-run Phillips curve would shift up.
d. the short-run Phillips curve would shift down.
A change in expected inflation shifts
a. the short-run Phillips curve, but not the long run Phillips curve.
b. the long-run Phillips curve, but not the long run Phillips curve.
c. neither the short-run nor the long-run Phillips curve.
d. both the short-run and long-run Phillips curve right.
A supply curve slopes upward because
a. as more is produced, total cost of production falls.
b. an increase in input prices increases supply.
c. the quantity supplied of most goods and services increases over time.
d. an increase in price gives producers an incentive to supply a larger quantity.
In response to recession, who primarily cut taxes rather than raised expenditures?
a. President George W. Bush and President Barack Obama
b. President George W. Bush but not President Barack Obama
c. President Barack Obama but not President George W. Bush
d. Neither President George W. Bush and President Barack Obama
The “invisible hand” is
a. used to describe the welfare system in the United States.
b. a concept developed by Adam Smith to describe the virtues of free markets.
c. a concept used by J.M. Keynes to describe the role of government in guiding the
allocation of resources in the economy.
d. a term used by some economists to characterize the role of government in an
economy inevitable but invisible.
The experience of the Volcker disinflation of the early 1980s
a. generally increased estimates of the sacrifice ratio.
b. generally decreased estimates of the sacrifice ratio.
c. clearly refuted the predictions of the proponents of rational expectations.
d. clearly refuted the predictions of the opponents of rational expectations.
An asset market is said to experience a speculative bubble when
a. the price of the asset rises above what appears to be its fundamental value.
b. the price of the asset appears to follow a random walk.
c. the market cannot establish an equilibrium price for the asset.
d. the asset is a natural resource and its supply is manipulated by foreign nations and
foreign firms.
A bank’s reserve ratio is 5 percent and the bank has $1,000 in deposits. Its reserves
amount to
a. $5.
b. $50.
c. $95.
d. $950.
The art in scientific thinking — whether in chemistry, economics, or biology — is
a. the design and implementation of laboratory experiments.
b. knowing when to stop collecting data and when to start analyzing the data.
c. deciding which assumptions to make.
d. being able to mathematically model natural phenomena.
Suppose the demand for peaches decreases. What will happen to producer surplus in the
market for peaches?
a. It increases.
b. It decreases.
c. It remains unchanged.
d. It may increase, decrease, or remain unchanged.
When a country allows trade and becomes an exporter of a good, which of the
following is not a consequence?
a. The price paid by domestic consumers of the good increases.
b. The price received by domestic producers of the good increases.
c. The losses of domestic consumers of the good exceed the gains of domestic
producers of the good.
d. The gains of domestic producers of the good exceed the losses of domestic
consumers of the good.
If the MPC = 0.85, then the government purchases multiplier is about
a. 1.18.
b. 3.33.
c. 6.67.
d. 8.5.
Figure 5-14
Refer to Figure 5-14. Using the midpoint method, what is the price elasticity of supply
between points B and C?
a. 1.67
b. 1.19
c. 0.84
d. 0.61
In the first few years of the Great Depression, unemployment rose to about
a. 10 percent, and prices rose about 14 percent.
b. 15 percent, and prices rose about 22 percent.
c. 20 percent, and prices fell about 14 percent.
d. 25 percent, and prices fell about 22 percent.
Of the following theories, which is consistent with a vertical long-run aggregate supply
curve?
a. the sticky-wage theory
b. misperceptions theory
c. both the sticky-wage and misperceptions theories.
d. neither the sticky-wage nor the misperceptions theory.
The theory of liquidity preference assumes that the nominal supply of money is
determined by the
a. level of real output only.
b. interest rate only.
c. level of real output and by the interest rate.
d. Federal Reserve.
Which of the following would increase output in the short run?
a. an increase in stock prices makes people feel wealthier
b. government spending increases
c. firms chose to purchase more investment goods
d. All of the above are correct.
The aggregate demand and aggregate supply graph has the
a. quantity of output on the horizontal axis. Output is best measured by real GDP.
b. quantity of output on the horizontal axis. Output is best measured by nominal GDP.
c. quantity of output on the vertical axis. Output is best measured by real GDP.
d. quantity of output on the vertical axis. Output is best measured by nominal GDP.
If a price floor is not binding, then
a. there will be a surplus in the market.
b. there will be a shortage in the market.
c. there will be no effect on the market price or quantity sold.
d. the market will be less efficient than it would be without the price floor.
Assuming that the substitution effect is large relative to the income effect, tax reform
designed to increase saving
a. increases the interest rate and decreases spending on capital goods.
b. increases the interest rate and increases spending on capital goods.
c. decreases the interest rate and increases spending on capital goods.
d. decreases the interest rate and decreases spending on capital goods.
Other things the same, corporate bonds generally feature higher interest rates than U.S.
government bonds.
If real GDP is higher in one country than in another, then we can be sure that the
standard of living is higher in the country with the higher real GDP.
If prices in the U.S. rise faster than prices in the United Kingdom, then according to the
doctrine of purchasing-power parity the U.S. nominal exchange rate should fall.
For a given real interest rate, an increase in the inflation rate reduces the after-tax real
interest rate.
An implication of the Employment Act of 1946 is that the government should respond
to changes in the private economy to stabilize aggregate demand.
In a closed economy, if taxes fall and consumption rises, then private saving must fall.
Suppose that in one hour Dewey can produce either 10 bushels of corn or 20 yards of
cloth. Dewey’s opportunity cost of producing one bushel of corn is 1/2 yard of cloth.
It is possible for a country to have domestic investment that exceeds national saving.
A technological advance in the production of the first good increases the opportunity
cost of the first good in terms of the second good.
Neither monetary policy nor any government policy can change the natural rate of
unemployment.
In the circular-flow diagram, factors of production are the goods and services produced
by firms.
The flatter the demand curve that passes through a given point, the more inelastic the
demand.
U.S. Department of Labor data show that minimum-wage workers tend to be young,
less educated, more likely to be working part time, and concentrated in the leisure and
hospitality industry.
If orange juice and apple juice are substitutes, an increase in the price of orange juice
will shift the demand curve for apple juice to the right.
If Darby values a soccer ball at $50, and she pays $40 for it, her consumer surplus is
$10.