All economic activities are included in the GDP.
As the price of a product falls, the demand for the product increases, ceteris paribus.
On the “demand side” of a market, consumers indicate to producers what they are
willing to buy, in what quantity, and at what price.
If the economy is at full employment equilibrium, an expansionary monetary policy
increases the price level but not output.
If Eddie can produce 40 milk shakes or 20 banana splits in an hour, and Tina can
produce 30 milk shakes or 16 banana splits in an hour, then Tina has a comparative
advantage in producing milk shakes.
Scarcity is a situation in which resources are unlimited in quantity and can be used in
different ways.
If the dollar appreciates against the peso it means that U.S. goods become more
expensive in Mexico.
From the 1990s until 2001, the U.S. economy’s share of the world economy increased.
Recall Application 1, “The Chinese Yuan and Big Macs,” to answer the following
questions:
The law of one price states that if the costs of transportation are small, other things
being equal, then the price of the same good in different countries should be roughly the
same.
The CPI somewhat overstates changes in the cost of living because it does not allow for
substitutions that consumers might make in response to relative price changes.
Dumping is sometimes legal under international trade agreements.
According to the rational expectations theory
A) the public makes consistent errors when forming expectations.
B) only central bankers form expectations rationally.
C) the public, on average, anticipates the future correctly.
D) the public only uses a portion of the available information when forming
expectations.
During the early 1990s, companies started downsizing. One of the results of this
downsizing was the permanent reduction in the number of middle management
positions. This change in the way businesses operate would have:
A) increased the natural rate of unemployment.
B) decreased the natural rate of unemployment.
C) not affected the natural rate of unemployment.
D) either increased or decreased the natural rate of unemployment.
Figure 1A.2
Refer to Figure 1A.2. The slope of the curve
A) is negative.
B) is positive.
C) is zero.
D) changes along the curve.
If the government were to experience a budget surplus in the next three years, the
government’s total debt would:
A) decrease over the next three years.
B) stay the same over the next three years.
C) increase over the next three years.
D) would decrease only on the third year.
The aggregate demand curve would shift to the left if:
A) government spending was increased.
B) taxes were increased.
C) the money supply was increased.
D) the cost of energy was to decrease.
An example of a consumption tax in the US is the:
A) sales tax.
B) state income tax.
C) social security tax.
D) property tax.
The reduction in investment demand that results when an expansionary fiscal policy
raises the real interest rate is called the:
A) multiplier effect.
B) accelerator effect.
C) Ricardian effect.
D) crowding-out effect.
Which of the following contributed to the rise in the natural rate of unemployment in
Europe?
A) generous benefits to the unemployed
B) restrictions on employers that made it more difficult to fire workers
C) The average incomes of Europeans increased during the 1990s.
D) A and B are correct.
Recall Application 1, “How to Fight a Liquidity Trap,” to answer the following
questions:
According to the Application, what was Ben Bernanke’s proposed solution to the
liquidity trap that Japan experienced?
A) quantitative easing
B) expansionary fiscal policy
C) purchase of corporate securities
D) open market purchase of bonds
If the monthly unemployment rate increase mentioned in the Application was a
temporary aberration, the best economic decision by the committee would be to
A) increase the money supply to stimulate the economy.
B) decrease the money supply to stimulate the economy.
C) decrease the money supply to slow the economy down.
D) not change monetary policy.
A leftward shift in the aggregate demand curve cannot be caused by:
A) a decrease in government spending.
B) a decrease in the money supply.
C) an increase in taxes.
D) a decrease in imports.
If the price of watermelons is 5 pesos in Argentina and the exchange rate is 4 pesos per
dollar, then what is the dollar price of watermelons?
A) $0.75
B) $0.80
C) $1.25
D) $2.00
Suppose the government’s initial debt is $350 billion and that during the next two years
the government runs deficits of $90 and $40 billion. If during the third year the
government has a $70 billion surplus, the government’s additional debt at the end of the
three years will be
A) $60 billion.
B) $200 billion.
C) $410 billion.
D) $550 billion.
Printing money to finance budget deficits ultimately leads to:
A) inflation.
B) higher interest rates.
C) lower levels of investment.
D) a drop in the price level.
Net investment plus depreciation is equal to
A) gross depreciation.
B) gross domestic product.
C) gross exports.
D) gross investment.
Table 11.2 Refer to Table 11.2. At an aggregate output level of $200, inventories will:
A) decrease by 150.
B) decrease by 100.
C) increase by 50.
D) increase by 150.
What is included in M1?
What will happen to the unemployment rate when some unemployed workers quit
working and are now classified as “discouraged workers”?
What effect does an introduction of an income tax rate have on the size of the
government spending multiplier? Explain.
Classical economists believe that recessions are self correcting. In their view, how does
the economy correct itself?
Using a graph, illustrate what the market effects of a quota, a tariff, or a complete ban
on imports would be.
Explain the concept of “crowding out” in a closed economy.
Explain the effect of trade deficits on economic growth.