In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y –
20,000r, the interest rate is currently 5 percent (0.05). If potential output equals 11,750,
the central bank must ______ the interest rate to close the ____________ gap.
A. reduce; expansionary
B. reduce; recessionary
C. raise; recessionary
D. raise; expansionary
For the past 40 years, the Federal Reserve has expressed policy in terms of a target
value for:
A. bank reserves.
B. the Federal Reserve discount rate.
C. the federal funds rate.
D. open market operations.
In the absence of environmental protection laws, firms pollute because
A. business owners follow different norms than do environmentalists.
B. controlling emissions costs money, reducing profits.
C. business owners do not believe that pollution is a problem.
D. the cost pollution imposes on society is small relative to the cost of reducing
pollution.
Minimum wage laws contribute to structural unemployment by:
A. keeping wages above the market-clearing level.
B. keeping wages below the market-clearing level.
C. allowing unemployed workers to search longer or less intensively for jobs.
D. forcing unemployed workers to take the first job offered to them.
If a firm functions in an oligopoly, it:
A. is one of a few firms that produces a good with close substitutes.
B. has no close substitutes in a market.
C. is one of many suppliers of a good with perfect substitutes.
D. is the only firm in a geographic region.
Refer to the figure above. At the point of monopoly profit maximization, consumer
surplus is represented by the area:
A. CJE.
B. GJI.
C. BJEK.
D. BCEK.
Peg’s Manicure Manor did 4,000 sets of nails in 2010 and 4,500 sets of nails in 2011.
The price of a set of nails was $20 in 2010 and $22 in 2011. If 2010 is the base year,
Peg’s contribution to nominal GDP in 2010 was ______ and to real GDP in 2010 was
_____.
A. $80,000; $80,000
B. $80,000; $88,000
C. $80,000; $99,000
D. $88,000; $90,000
High rates of saving today contribute to ______ in the future.
A. higher tax rates
B. more unemployment
C. a higher standard of living
D. more capital gains
Jen spends her afternoon at the beach, paying $1 to rent a beach umbrella and $11 for
food and drinks rather than spending an equal amount of money to go to a movie. The
opportunity cost of going to the beach is:
A. the $12 she spent on the umbrella, food and drinks.
B. only $1 because she would have spent the money on food and drinks whether or not
she went to the beach.
C. the movie she missed seeing.
D. the movie she missed seeing plus the $12 she spent on the umbrella, food and drinks.
Brady owns a beachfront lot with a small house. During hurricanes, he refuses to leave.
Afterward he applies for federal assistance to rebuild and files insurance claims for
damages. By doing so, Brady is:
A. pursuing life, liberty and the pursuit of happiness.
B. imposing an external cost on himself.
C. imposing an external cost on rescue workers, taxpayers, and insurance policy
holders.
D. treating his private property as common property.
In an open economy, an increase in capital inflows ______ the equilibrium domestic
real interest rate and ______ the quantity of domestic investment.
A. increases; increases
B. increases; decreases
C. decreases; decreases
D. decreases; increases
If you post your car on eBay with a Buy-It-Now price of $1,800, you are using money
as:
A. bank reserves.
B. a medium of exchange.
C. a unit of account.
D. a store of value.
If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals
5, potential output (Y*) equals 11,000, then government purchases must ______ to
eliminate any output gap.
A. increase by 200
B. increase by 1,000
C. increase by 5,000
D. decrease by 200
Menu costs are the costs of:
A. running a restaurant.
B. changing prices.
C. increasing aggregate demand.
D. changing production.
Refer to the figure above. Suppose this demand curve shows the demand at one coffee
shop that currently charges $2.00 for a latte. The manager wants to increase its total
revenues. What should the manager do?
A. Increase the price from $2.00 to $3.00.
B. Increase the price from $2.00 to $2.50.
C. Reduce the price from $2.00 to $1.00.
D. Reduce the price from $2.00 to $1.75.
A decrease in the perceived riskiness of the stock of Company A ______ the risk
premium investors require to purchase Company A stock and ______ the price of
Company A stock.
A. increases; increases
B. increases; decreases
C. decreases; increases
D. decreases; decreases
Liabilities of the commercial banking system include:
A. reserves and loans.
B. deposits.
C. reserves and deposits.
D. loans and deposits.
According to the textbook, the largest factor explaining the variance in the performance
of the economies of the world is the:
A. degree of specialization.
B. technological sophistication.
C. location of the country.
D. type of government.
The principle that if the amount of labor and other inputs is held constant, then the
greater the amount of capital in use, the less an additional unit of capital adds to
production is called the principle of:
A. increasing average capital productivity.
B. diminishing returns to capital.
C. increasing returns to capital.
D. decreasing output per unit of capital.
The substitution bias in the CPI refers to the failure of statisticians to:
A. allow for the possibility that consumers switch from products whose prices are
rising.
B. allow for the possibility that consumers switch stores at which they shop.
C. take into account improvements in goods and services.
D. take into account new products purchased by consumers.
Elvis loves to eat peanut butter with bananas. Martha thinks the combination of peanut
butter and bananas is repulsive. Therefore, economists would classify peanut butter and
bananas as:
A. complements for Elvis, but not for Martha.
B. complements only if their cross-price elasticity is negative.
C. complements only if their cross-price elasticity is positive.
D. unrelated because whether or not they are complements depends in individual tastes.
The production possibilities curve shows:
A. the minimum production of one good for every possible production level of the other
good.
B. how increasing the inputs used for one good increases the production of the other
good.
C. the maximum production of one good for every possible production level of the
other good.
D. how increasing the production of one good allows production of the other good to
also rise.
When actual output equals potential output and the inflation rate is equal to the
expected rate of inflation, the economy is said to be in ______ equilibrium.
A. long-run
B. recessionary
C. expansionary
D. short-run
When actual output is less than potential output there is a(n):
A. budget deficit.
B. budget surplus.
C. trade deficit.
D. recessionary gap.
Suppose you are a government analyst and you think beans are particularly nourishing.
You decide to subsidize beans in order to encourage people to eat more of them. (By
subsidizing an item, consumers pay a lower price.) After you successfully lower bean
prices, you notice that consumption of beans has fallen. What went wrong?
A. The substitution effect caused people to substitute ramen noodles and rice for beans.
B. The income effect caused people’s real income to fall so they could no longer afford
as much food.
C. The income effect caused people’s real income to rise so they purchased less of what
they considered to be inferior goods.
D. Demand for beans is price inelastic.
______ start new economic enterprises, while ______ run the enterprises on a
day-to-day basis.
A. Entrepreneurs; managers
B. Mangers; entrepreneurs
C. Mangers; laborers
D. Entrepreneurs; laborers
If you put a $20 bill in the pocket of your winter coat at the beginning of spring so that
you will be surprised when you find it again next winter, you are using money as:
A. bank reserves.
B. a medium of exchange.
C. a unit of account.
D. astore of value.
To derive the market demand curve for a private good one sums the __________. For a
public good, one sums the __________.
A. individual quantities at various prices; individual quantities at various prices
B. individual prices at various quantities; individual quantities at various prices
C. individual quantities at various prices; individual prices at various quantities
D. individual prices at various quantities; individual prices at various quantities
All of the following describe trends in labor markets EXCEPT:
A. growing wage equality in the United States in recent decades.
B. a slowdown in real wage growth since the 1970s.
C. substantial growth in the level of employment in the United States.
D. over-sixteen population growth rates that fall short of the growth rate of new jobs in
the United States.
The demand function curve for workers
A. is dependent on the demand for the product that they make.
B. is stable as there is no substitute for human labor.
C. shifts to the right when the population decreases.
D. shifts to the right when technology allows a firm to replace human labor with
machines.
The degree of income inequality produced by competitive markets, in Professor Rawls’
view, is
A. minor.
B. greater than the amount people would prefer.
C. consistent with the ideal amount.
D. acceptable.
A police department is trying to allocate crime control resources between murder and
burglary. Detectives cost $40,000 each. Suppose that she marginal benefit of one less
murder is $20,000 while the marginal benefit of one less burglary is $1,000. The
number of murders and burglaries that occur at different levels of detective allocation is
shown in the table.
The marginal benefits of 1, 2, 3, and 4 detectives being assigned to burglary prevention
are
A. $40,000, $30,000, $20,000, and $10,000.
B. $60,000, $30,000, $10,000, and 0.
C. $40,000, $70,000, $90,000 and $100,000.
D. 40, 30, 20, and 10.
Proponents of fixed exchange rates, who argue that fixed exchange rates eliminate
uncertainty and therefore promote international trade, sometimes fail to recognize:
A. that fixed exchange rates may not remain fixed forever.
B. that fixed exchange rates are more volatile than flexible exchange rates.
C. that exchange rates do not matter to businesses, so the uncertainty has no impact.
D. that international trade is bad for the economy and should not be promoted.
Three macroeconomic factors that affect the demand for money are:
A. the nominal interest rate; real income, and the price level.
B. the nominal interest rate; capital, and labor.
C. globalization, skill-biased technological change, and labor mobility.
D. capital, labor, and technology.
Unexpectedly high inflation ______ borrowers and ______ lenders.
A. helps; hurts
B. helps; helps
C. hurts; hurts
D. hurts; helps