Underground activities pertain to all illegal activities in the economy.
When individuals or firms make an investment, they incur costs today in the hope of
future gains.
From 1948 to 2010, the United States has experienced only 4 recessions.
In practice, the Board of Governors and the chairperson of the Federal Reserve have the
real control over monetary policy.
In a simple economy without government or the foreign sector, saving must equal
investment because output is divided into consumption and investment, and income is
either consumed or saved.
Recall Application 1, “The Chinese Yuan and Big Macs,” to answer the following
questions:
The real exchange rate is the rate at which a person can trade the currency of one
country for goods and services in another country.
The principles of comparative advantage and specialization only apply to trade between
different nations.
Import restrictions create an incentive to smuggle.
Economists use M2 to measure the amount of money that is regularly used in
transactions.
The existence of deposit insurance indirectly led to the U.S. savings and loan crisis in
the 1980s because it:
A) allowed the S & L banks to invest in real estate and other risky projects.
B) prevented the S & L banks to invest in real estate and other risky projects.
C) allowed the S & L banks to invest in treasury bills and bonds.
D) prevented the S & L banks to invest in treasury bills and bonds.
(a) What is the quantity equation?
(b) If the velocity of money is constant and the economy is operating below capacity,
what impact will an increase in the money supply have?
Dena won $1,000 at a bingo game. She deposits her $1,000 winnings into a money
market fund so that she can use the money next year to pay for her tuition. This is an
example of money serving as a (an):
A) unit of account.
B) medium of exchange.
C) store of value.
D) investment good.
Table 2.2 Julianne runs a business and needs to
decide how many hours to stay open. Table 2.2 illustrates her marginal costs of staying
open for each additional hour. Suppose that we observe Julianne staying open 2 hours
per day. If she is following the marginal principle, what must her marginal benefit be?
A) $8
B) $12
C) $20
D) $22
The development of money as a medium of exchange makes trade easier because:
A) holding money increases people’s wealth.
B) holding money increases people’s income.
C) money eliminates the “double coincidence of wants” problem.
D) no other mediums of exchange are available.
Recall the Application about the possibility of increases in health-care expenditures
crowding out consumption or investment spending to answer the following question(s).
In 1950, health-care expenditures in the United States were 5.2 percent of GDP; by
2000, this share had risen to 15.4 percent. Driving these increases were several factors:
increasing relative prices of health care compared to other goods, a larger population of
the elderly, and increased longevity. Since 1950, the average life span has increased by
1.7 years per decade.
According to the Application, if increases in health-care expenditures crowd out
investment, living standards would
A) rise in the long run.
B) fall in the long run.
C) fall in the short run, but rise again in the long run.
D) rise in the short run, and fall back to their original level in the long run.
Which of the following situations will arise in the domestic market following the
imposition of an import ban?
A) Domestic production decreases, prices increase.
B) Domestic production decreases, prices decrease.
C) Domestic production increases, prices increase.
D) Domestic production increases, prices decrease.
In 1995, the United States threatened to impose 100 percent tariffs on ________ from
________ if it didn’t loosen its protectionist policies.
A) luxury cars; Japan
B) auto parts; Japan
C) brandies; France
D) light trucks; Germany
Real GDP per capita is measured as:
A) GDP (adjusted for inflation) divided by population.
B) the population divided by GDP (adjusted for inflation).
C) GDP (adjusted for inflation) divided by the population growth rate.
D) the population growth rate divided by GDP (adjusted for inflation).
The more times a worker performs a particular task, the more proficient the worker
becomes at that task. This is called:
A) continuity.
B) innovation.
C) specialization.
D) repetition.
If the MPC = 0.9, the multiplier would be
A) 0.1.
B) 2.
C) 9.
D) 10.
When demand increases and the demand curve shifts to the right, equilibrium price
________ and equilibrium quantity ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
The balanced-budget multiplier is equal to
A) the government spending multiplier minus the tax multiplier.
B) the government spending multiplier plus the tax multiplier.
C) the government spending multiplier times the tax multiplier.
D) the government spending multiplier divided by the tax multiplier.
In an open economy, crowding out occurs when an increase in government purchases
results in:
A) a decrease in net exports.
B) an increase in public saving.
C) an increase in investment spending.
D) an increase in consumption spending.
The curve that depicts aggregate demand slopes downward because:
A) as the overall price level (P) falls, real GDP (y) falls.
B) as the overall price level (P) rises, real GDP (y) falls.
C) as the overall price level (P) rises, real GDP (y) rises.
D) as the overall price level (P) rises, real GDP (y) does not change.
If the marginal propensity to consume is 0.5, an increase in consumption by $200 will
shift the aggregate demand curve horizontally to the right by:
A) $400.
B) $100.
C) $200.
D) $200.5.
What assumptions are made concerning wages and prices in a classical economic
model?
Suppose country A has a per capita income of $1000. If country A’s GDP grows at 7
percent per year, how long will it take for country A’s income per capita equal $4000?
Explain why a market structure in which money is used as a medium of exchange is
more conducive to the expansion of trade and exchange than a barter system.
What differentiates the short run from the long run in macroeconomics?
Explain what effect a reduction in the U.S. interest rate would have on the exchange
rate.
Draw a graph showing the Solow model. Illustrate and explain the point at which
capital deepening ceases.
Explain how the interest rate effect can increase aggregate demand.
If you invest $4,000 in a savings account paying 3 percent interest, how much will your
investment be worth in 25 years?