Private ownership and competitive markets are important for economic growth because
they provide individuals with a strong incentive to
a. care for resources and use them beneficially.
b. innovate and introduce new products that are highly valued relative to their cost.
c. produce goods efficiently.
d. all of the above are correct.
Which of the following is true?
a. The stock market helps channel the savings of individuals into business activities that
create wealth.
b. Individual investors can reduce their risk by holding a large share of their wealth in
the form of the stock ownership of a single company.
c. Historically, the long-term real rate of return of stocks has generally been less than
that of bonds.
d. Mutual funds that have done well in the past are more likely to outperform the
market average in the future.
Suppose you received a 5 percent increase in your nominal wage. Over the year,
inflation ran about 2 percent. Which of the following is true?
a. Your real wage fell.
b. Your nominal wage fell.
c. Both your nominal and real wages decreased.
d. Although your nominal wage fell, your real wage increased.
e. Both your nominal and real wages increased.
Higher unemployment insurance benefits tend to increase unemployment because they
a. reduce the opportunity cost of job search and, hence, increase the search time.
b. increase the opportunity cost of job search and, hence, increase the search time.
c. reduce the opportunity cost of job search and, hence, decrease the search time.
d. increase the opportunity cost of job search and, hence, decrease the search time.
Suppose that you purchase a $5,000 bond that pays 7 percent interest annually and
matures in five years. If you expect that the inflation rate during the next five years will
be 2 percent annually, what real rate of return do you expect to earn?
a. 2 percent
b. 5 percent
c. 7 percent
d. 9 percent
During the 1970s, the price/earnings ratio of stocks in the S&P 500 was relatively low.
This low P/E ratio was
a. surprising because the inflation rate was high during the 1970s.
b. not surprising because interest rates were low during the inflationary 1970s.
c. not surprising because interest rates were high during the inflationary 1970s.
d. surprising because the inflation rate was low during the 1970s.
Use the production possibilities data below for Honduras and Nicaragua to answer the
following question(s).
Table 2-2
Refer to Table 2-2. Which of the following would be a mutually agreeable rate of
exchange?
a. Nicaragua trades one orange to Honduras for every one apple.
b. Nicaragua trades one orange to Honduras for every two apples.
c. Nicaragua trades one orange to Honduras for every three apples.
d. Nicaragua trades one orange to Honduras for every four apples.
Expansionary monetary policy will
a. often raise real interest rates in the short run.
b. generally reduce aggregate demand in the short run.
c. lead to higher nominal interest rates if the expansionary policy persists over a lengthy
time period.
d. lead to a rapid growth of real GDP if the expansionary policy persists over a lengthy
time period.
Which of the following indicates why the role of vigilant investors is important for the
efficient operation of an economy?
a. These investors generally serve on the boards of directors of corporations.
b. These investors tend to buy and sell stocks in a way that provides feedback to
management about the quality of its decisions.
c. These investors help allocate capital efficiently among investment projects.
d. Both b and c are true.
If a country allows trade and, for a certain good, the domestic price without trade is
higher than the world price,
a. the country will be an exporter of the good.
b. the country will be an importer of the good.
c. the country will be neither an exporter nor an importer of the good.
d. Additional information is needed about demand to determine whether the country
will be an exporter of the good, an importer of the good, or neither.
If government taxes a firm which pollutes this will
a. increase the demand for the good produced.
b. decrease the supply of the good produced.
c. increase the equilibrium quantity of the good produced in the market.
d. decrease the equilibrium price of the good produced in the market.
e. all of the above.
The empirical evidence indicates that compared to economies that are less free,
countries with institutions and policies more consistent with economic freedom
a. grow more rapidly, but experience higher poverty rates.
b. achieve higher income levels per person but experience higher poverty rates.
c. grow more rapidly and achieve larger poverty rate reductions.
d. Experience less rapid rates of economic growth and higher overall poverty rates.
Use the figure below to answer the following question(s).
Figure 6-2
Figure 6-2 illustrates the four possibilities of the structure of production and
consumption for a good or service. When the structure of production and consumption
for a good places it in quadrant B,
a. consumers have little incentive to search out and patronize low-cost suppliers.
b. private producers of such goods will have little incentive to operate efficiently and to
keep prices low.
c. goods and services will only be supplied if consumers are willing to pay an amount
sufficient to cover their production costs.
d. both a and b, but not c, will be true.
An important difference between the GDP deflator and the consumer price index is that
a. the GDP deflator reflects the prices of goods and services bought by producers,
whereas the consumer price index reflects the prices of goods and services bought by
consumers.
b. the GDP deflator reflects the prices of all final goods and services produced
domestically, whereas the consumer price index reflects the prices of some goods and
services bought by consumers.
c. the GDP deflator reflects the prices of all final goods and services produced by a
nation’s citizens, whereas the consumer price index reflects the prices of final goods and
services bought by consumers.
d. the GDP deflator reflects the prices of all goods and services bought by producers
and consumers, whereas the consumer price index reflects the prices of final goods and
services bought by consumers.
If a country with a large government debt uses money creation to service and repay the
debt, this will lead to
a. lower interest rates.
b. an appreciation of the nation’s currency in the foreign exchange market.
c. inflation, higher interest rates, and a financial crisis.
d. rapid economic growth, as the expansionary monetary policy stimulates the economy
and generates the additional tax revenue to service the larger debt.
The average tax rate is defined as
a. the average number of times a circulating dollar is taxed during a year.
b. the change in the tax rate as income increases.
c. the change in the tax rate as income decreases.
d. tax liability divided by taxable income.
The actions of borrowers and lenders are coordinated by
a. the interest rate in the loanable funds market.
b. the government in the resources market.
c. businesses in the resources market.
d. the interest rate in the goods and services market.
When a group of nations adhere to a strict fixed exchange rate system, then
a. no country will experience inflation or recession.
b. each nation loses some control of its monetary policy and its domestic economy.
c. each nation is able to exercise more control of its fiscal policy and aggregate demand.
d. each nation is able to exercise more control of its monetary policy and its domestic
economy.
Figure 3-17
Refer to Figure 3-17. When the price is P2, consumer surplus is
a. A.
b. B.
c. A + B.
d. A + B + C.
Which of the following lists two things that both decrease the money supply?
a. make open market purchases and raise the reserve requirement ratio
b. make open market purchases and lower the reserve requirement ratio
c. make open market sales and raise the reserve requirement ratio
d. make open market sales and lower the reserve requirement ratio
Market failure will most likely arise from poor information when the product is
a. a repeat-purchase item.
b. easily evaluated on inspection.
c. often purchased from the same seller.
d. unlikely to be purchased from the same seller in the future.
Which of the following best illustrates the use of discretionary countercyclical fiscal
policy?
a. Congress provides $90 billion in relief aid for hurricane victims.
b. Congress appropriates $50 billion to help the needy, and the appropriation is financed
by a tax on wealth.
c. Income tax receipts are smaller because of a decline in real GDP during a recession.
d. Congress passes a bill authorizing $100 billion in additional spending when it
receives news of a deepening recession.
If a local shop buys a used motorcycle for $1,000, makes repairs and refurbishes it, then
resells it for $2,500, the
a. shop contributes value added equal to $1,500, but nothing is added to GDP.
b. shop contributes value added equal to $1,500, and consequently $1,500 is added to
GDP.
c. shop contributes nothing to production because only existing goods are involved.
d. shop contributes value added equal to $2,500, but only $1,500 is added to GDP.
The share of new loans with a down payment of 5 percent or less extended by Freddie
Mac and Fannie Mae
a. declined substantially after 1999.
b. rose from 4 percent in 1998 to 12 percent in 2003 and 23 percent in 2007.
c. rose from 4 percent in 1998 to 23 percent in 2002, but declined to less than 10
percent in 2007.
d. never exceeded 10 percent of the new loans financed.
If an amusement park that is highly profitable during the summer months is unable to
cover its variable costs during the winter months, it should
a. raise its prices during the winter months.
b. lower its prices during the summer months.
c. operate during the summer but shut down during the winter months.
d. operate during all months of the year as long as its profits during the summer exceed
its losses during the winter.
Under democratic representative government, spending on a government program will
likely be larger than the amount consistent with economic efficiency when
a. tax costs are levied in direct proportion with the benefits received.
b. both the costs and benefits are widespread among the voters.
c. benefits of the program are highly concentrated, while the costs are widely dispersed
among voters.
d. costs of the program are highly concentrated, while the benefits are widely dispersed
among voters.
Assume a certain competitive price-taker firm is producing Q = 1,000 units of output.
At Q = 1,000, the firm’s marginal cost equals $15 and its average total cost equals $11.
The firm sells its output for $12 per unit. To maximize its profit, the firm should
a. increase its output.
b. continue to produce 1,000 units.
c. decrease its output, but continue to produce.
d. shut down.
The rapid growth rates of less developed countries (LDCs) after adopting institutions
and policies more favorable to economic freedom and voluntary exchange is not
surprising when one considers that
a. LDCs can emulate and borrow successful practices and technologies from other,
more developed nations.
b. foreign aid payments to a less developed country are nearly always expanded rapidly
when the country begins to increase its income level.
c. the governments of LDCs play a larger role in economic planning, when economic
freedom rises.
d. economic theory indicates that improvements in institutions normally result from
economic growth, rather than growth stemming from better institutions.
What percentage of federal spending was financed by borrowing during 2009-2010?
a. approximately 10 percent
b. approximately 20 percent
c. approximately 40 percent
d. more than 50 percent
A monopolist will maximize profits by
a. setting the price at the level that will maximize per-unit profit.
b. producing the output where marginal revenue equals total cost and charging a price
along the demand curve.
c. selling at the price on the demand curve at the output rate where marginal revenue
equals marginal cost.
d. producing at the output rate where price equals marginal cost.
Refer to Table 13-2. If the reserve requirement is 10 percent, then this bank
a. is in a position to make a new loan of $15,000.
b. has less reserves than required.
c. has excess reserves of less than $15,000.
d. none of the above is correct.
Which of the following will increase economic freedom?
a. an increase in tariff rates imposed on imported goods
b. an increase in government spending as a share of the economy
c. elimination of regulations that make it difficult to start a business
d. an increase in the rate of inflation and its variability
When a firm in a competitive market is earning profits, this indicates that the firm is
a. exploiting consumers.
b. increasing the value of resources.
c. blocking the entry of competing firms.
d. reducing overall wealth in the market.
Use the figure below to answer the following question(s).
Figure 4-13
Refer to Figure 4-13. The supply curve S and the demand curve D1 indicate initial
conditions in the market for flu shots. A new government program is implemented that
grants buyers a $25 subsidy when they buy a flu shot, shifting the demand curve from
D1 to D2. Which of the following is true for this subsidy given the information provided
in the figure?
a. The original price of a flu shot was $75, and after the subsidy, it rises to $90.
b. $65 represents the net price a buyer must pay for a flu shot after taking into account
the subsidy payment.
c. Buyers of flu shots will receive an actual benefit of $10 from the subsidy, while
sellers of flu shots will receive an actual benefit of $15 from the subsidy.
d. All of the above are true.