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Figure 4-5
Refer to Figure 4-5. Suppose that the federal government is concerned about obesity in
the United States. Congress is considering two plans. One would require "junk food"
producers to include warning labels on all junk food. The other would impose a tax on
all products considered to be junk food. If the warning labels are successful, we could
illustrate the plan as producing a movement from
a. Point A to Point B in Panel 1.
b. Point B to Point A in Panel 1.
c. Point A to Point C in Panel 2.
d. Point C to Point A in Panel 2.
Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day
and had a productivity of 2.5. Country B has a population of 800, of whom 560 worked
8 hours a day and had productivity of 3.0. The country with the higher real GDP was
a. country A, and the country with higher real GDP per person was country A.
b. country A, and the country with higher real GDP per person was country B.
c. country B, and the country with higher real GDP per person was country A.
d. country B, and the country with higher real GDP per person was country B.
When Mexico suffered from capital flight in 1994, Mexico's real interest rate
a. fell and the peso appreciated.
b. fell and the peso depreciated.
c. rose and the peso appreciated.
d. rose and the peso depreciated.
What actions could be taken to stabilize output in response to a large decrease in U.S.
net exports?
a. increase government expenditures or increase the money supply
b. increase government expenditures or decrease the money supply
c. decrease government expenditures or increase the money supply
d. decrease government expenditures or decrease the money supply
A low P/E for a stock indicates that
a. people may expect earnings to fall in the future, perhaps because the firm will be
faced with increased competition.
b. its dividends have been low so that no one is willing to pay very much for it.
c. the corporation is possibly overvalued.
d. All of the above are correct.
The supply curve for cameras is the typical upward-sloping straight line, and the
demand curve for cameras is the typical downward-sloping straight line. When cameras
are taxed, the area on the relevant supply-and-demand graph that represents
a. government's tax revenue is a rectangle.
b. the deadweight loss of the tax is a triangle.
c. the loss of consumer surplus caused by the tax is neither a rectangle nor a triangle.
d. All of the above are correct.
Monetary Policy in Southland
In Southland the Department of Finance is responsible for monetary policy. Southland
has had an inflation rate of 25% for many years.
Refer to Monetary Policy in Southland. Suppose that the Southland Department of
Finance has run a public relations campaign claiming it will reduce inflation to 12.5%
but that it actually leaves inflation at 25%. Suppose that the public had expected that the
Department of Finance would reduce inflation, but only to 20%. Then
a. unemployment falls, but it would have fallen more if people had been expecting 5%
inflation.
b. unemployment falls, but it would have fallen more if people had been expecting 22%
inflation.
c. unemployment rises, but it would have risen more if people had been expecting 5%
inflation.
d. unemployment rises, but it would have risen more if people had been expecting 22%
inflation.
If the interest rate is below the Fed's target, the Fed would
a. buy bonds to increase the money supply.
b. buy bonds to decrease the money supply.
c. sell bonds to increase the money supply.
d. sell bonds to decrease the money supply.
You are given three options. You may have the balance in an account that has been
collecting 5 percent interest for 20 years, the balance in an account that has been
collecting 10 percent interest for 10 years, or the balance in an account that has been
collecting 20 percent interest for five years. Each account had the same original
balance. Which account now has the lowest balance?
a. the first one
b. the second one
c. the third one
d. They all have the same balance.
In 1980, the U.S. misery index was
a. much higher than average.
b. slightly higher than average.
c. about average.
d. below average.
Other things the same, when the price level rises, interest rates
a. rise, so firms increase investment.
b. rise, so firms decrease investment.
c. fall, so firms increase investment.
d. fall, so firms decrease investment.
If the price elasticity of demand for a good is 10.0, then a 4 percent increase in price
results in a
a. 0.4 percent decrease in the quantity demanded.
b. 2.5 percent decrease in the quantity demanded.
c. 4 percent decrease in the quantity demanded.
d. 40 percent decrease in the quantity demanded.
Figure 2-12
Refer to Figure 2-12. Which of the following statements is true about point B for this
economy?
a. Point B is currently unattainable.
b. Point B is efficient.
c. At point B, more pillows are produced than blankets.
d. There is unemployment at point B.
Figure 19-6
Refer to Figure 19-6. If the interest rate were initially at r2 and an import quota were
imposed, the interest rate would
a. stay at r2.
b. decrease because supply would shift right.
c. increase because supply would shift left.
d. decrease because demand would shift left.
Suppose that the real exchange rate between the United States and Kenya is defined in
terms of baskets of goods. Other things the same, which of the following will increase
the real exchange rate?
a. a decrease in the quantity of Kenyan currency that can be purchased with a dollar
b. a decrease in the price of U.S. baskets of goods
c. a decrease in the price in Kenyan currency of Kenyan goods.
d. None of the above is correct.
In the open-economy macroeconomic model which of the following falls if there is an
increase in the budget deficit?
a. the interest rate
b. net exports
c. the exchange rate
d. All of the above are correct.
Figure 2-13
Refer to Figure 2-13. The graph shown is known as a
a. time-series graph.
b. bar graph.
c. scatterplot.
d. pie chart.
The world price of a ton of steel is $650. Before Russia allowed trade in steel, the price
of a ton of steel there was $1,000. Once Russia allowed trade in steel with other
countries, Russia began
a. exporting steel and the price per ton in Russia decreased to $650.
b. exporting steel and the price per ton in Russia remained at $1,000.
c. importing steel and the price per ton in Russia decreased to $650.
d. importing steel and the price per ton in Russia remained at $1,000.
If R represents the reserve ratio for all banks in the economy, then the money multiplier
is
a. 1/(1-R).
b. 1/R.
c. 1/(1+R).
d. (1+R)/R.
Economic models
a. are people who act out the behavior of firms and households so that economists can
study this behavior.
b. are usually detailed replications of reality.
c. incorporate simplifying assumptions that often contradict reality, but also help
economists better understand reality.
d. are useful to researchers but not to teachers because economic models omit many
details of the real-world economy.
Figure 4-22
Panel (a) Panel (b)
Panel (c) Panel (d)
Refer to Figure 4-22. Which of the four panels illustrates a decrease in quantity
supplied?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Panel (d)
Other things the same, which of the following would both make Americans more
willing to buy Italian goods?
a. the nominal exchange rate falls, the price of goods in Italy falls
b. the nominal exchange rate falls, the price of goods in Italy rises
c. the nominal exchange rate rises, the price of goods in Italy falls
d. the nominal exchange rate rises, the price of goods in Italy rises
Which of the following tends to make the size of a shift in aggregate demand resulting
from a tax cut smaller than it otherwise would be?
a. the multiplier effect
b. the crowding-out effect
c. the accelerator effect
d. None of the above is correct.
Which of the following is not correct?
a. Frictional unemployment results from the process of matching workers and jobs.
b. Structural unemployment results when the number of jobs is insufficient for the
number of workers.
c. Minimum wages are the predominant reason for unemployment in the U.S. economy.
d. When a minimum-wage law forces the wage to remain above the level that balances
supply and demand, it raises the quantity of labor supplied and reduces the quantity of
labor demanded compared to the equilibrium level.
The U.S. government pays an economist at the U.S. Department of Commerce $50,000
in salary in 2006. The economist then retires. In 2007, the government pays him
$30,000 in retirement benefits. Which of the following is correct?
a. The 2006 payment is included in 2006 GDP as government purchases, and the 2007
payment is included in 2007 GDP as government purchases.
b. The 2006 payment is included in 2006 GDP as government purchases, but the 2007
payment is not included in 2007 GDP.
c. The 2006 payment is included in 2006 GDP as government purchases, and the 2007
payment is included in 2007 GDP as government transfer payments.
d. The 2006 payment is included in 2006 GDP as government purchases, and the 2007
payment is allocated to previous years' GDP according to the amount of work
performed by the economist each year.
The utility function of a risk-averse person has a
a. positive slope and gets steeper as wealth increases.
b. positive slope but gets flatter as wealth increases.
c. negative slope but gets steeper as wealth increases.
d. negative slope and gets flatter as wealth increases.
If the nominal interest rate is 8 percent and expected inflation is 3.5 percent, then what
is the real interest rate?
a. 11.5 percent
b. 7.5 percent
c. 4.5 percent
d. 2.5 percent
Suppose that an increased risk of mortgage defaults lowers the expected profitability of
banks. Then we would expect to see
a. the demand for bank stocks rise which would raise the prices of bank stocks.
b. the demand for bank stocks rise which would reduce the prices of bank stocks.
c. the demand for bank stocks fall which would raise the prices of bank stocks.
d. the demand for bank stocks fall which would reduce the prices of bank stocks.
You may be unwilling to buy a used car because you suspect the last owner found out
the car was a lemon. You may treat a car you rented with a little less care than you'd use
on your own car.
a. Both examples primarily illustrate adverse selection.
b. Both examples primarily illustrate moral hazard.
c. The first example primarily illustrates adverse selection; the second primarily
illustrates moral hazard.
d. The first example primarily illustrates moral hazard; the second primarily illustrates
adverse selection.
Figure 8-2
The vertical distance between points A and B represents a tax in the market.
Refer to Figure 8-2. The per-unit burden of the tax on sellers is
a. $2.
b. $3.
c. $4.
d. $5.
Borrowers can (and sometimes do) default on their loans when
a. the dividend yield on their shares of stock reaches zero.
b. they convert their bonds into perpetuities.
c. they declare bankruptcy.
d. they cannot find enough buyers of their bonds to sell all the bonds they wish to sell.
For a good that is a necessity, demand
a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.
A risk-averse person
a. has a utility curve where the slope increases with wealth, and might take a bet with a
70 percent chance of wining $400 and a 30 per chance of losing $400.
b. has a utility curve where the slope increases with wealth, and would never take a bet
with a 70 percent chance of wining $400 and a 30 per cent chance of losing $400.
c. has a utility curve where the slope decreases with wealth, and might take a bet with a
70 percent chance of wining $400 and a 30 per chance of losing $400.
d. has a utility curve where the slope decreases with wealth, and would never take a bet
with a 70 percent chance of wining $400 and a 30 per cent chance of losing $400.
Values of Assets
Asset Amount in $Billions
Refer to Value of Assets. What is the value of M2 in billions of dollars?
a. 9925
b. 8225
c. 7485
d. 7445
When a minimum-wage law forces the wage to remain above the level that balances
supply and demand, the result is a surplus of labor.
If money demand shifts right, the price level falls.
A tax of $1 on sellers always increases the equilibrium price by $1.
The labor force equals the sum of the employed and the unemployed.
Economists predict the business cycle well enough that stabilization policy is likely to
work despite lags in the effects of policy.
"Minimum wage laws result in unemployment" is a normative statement, while "the
minimum wage should be higher" is a positive statement.
In an open economy, the demand for loanable funds comes from both domestic
investment and net capital outflow.
Within the U.S. population, women have higher rates of unemployment than men.
When economists are trying to explain the world, they are scientists, and when they are
trying to help improve the world, they are policy advisers.
Proponents of zero-inflation policies acknowledge that the public is unconcerned about
the inflation rate.
A firm might offer efficiency wages in order to attract a better pool of applicants.
In the long run what primarily determines the natural rate of unemployment? In the
long run what primarily determines the inflation rate? How does this relate to the
classical dichotomy?
Colonial America had little industry and so had mostly raw materials to export. At the
same time, there were many opportunities to purchase capital goods and earn a high rate
of return because there was little existing capital so that the marginal product of capital
was relatively high. What does this suggest about net exports and net capital outflow in
colonial America?
The nominal interest rate tells you how fast the number of dollars in your bank account
rises over time.
Even though participants in the economy are motivated by self-interest, the "invisible
hand" of the marketplace guides this self-interest into promoting general economic
well-being.
If the interest rate is 8 percent, then the present value of $1,000 to be received in 4 years
is $735.03.
