If the economy is in long-run equilibrium at full employment, lowering taxes leads to a
higher price level and a higher level of real GDP.
Along a Keynesian short-run supply curve, when the price level rises, there is an
increase in aggregate quantity supplied.
If prices and wages were fully flexible, then the economy behaves in the way that
Keynes predicted.
Investment is a smaller component of GDP than consumption, but it is a more stable
component.
A central bank strongly committed to fighting inflation will risk increasing
unemployment rather than increasing the money supply.
Among the rationales for protection is that it helps the domestic economy grow.
Recall Application 3, “Oil Supply Disruptions, Speculation and Supply Shocks,” to
answer the following questions:
Lutz Kilian’s study showed that a small proportion of the fluctuation of oil prices
worldwide is caused by disruptions in the supply of oil.
The Federal Excise taxes are a major source of revenues for the federal government.
Protection can give new industries a chance to get a foothold so that they can later
compete in the international market after they become more productive through
learning by doing.
Normative economics questions, “What ought to be?” Positive economics predicts the
consequences of alternative actions, answering the questions, “What is?” or “What will
be?”
Keynes and Friedman disagreed on the speed of adjustment of nominal wages to
changes in prices.
Anticipated inflation hurts the lenders and benefits the borrowers.
Using the rule of 70, if the GDP per capita growth rate in the United States is 4.4
percent, real GDP per capita doubles every
A) 6.72 years.
B) 15.91 years.
C) 44 years.
D) 65.6 years.
An event that allows the economy to operate more efficiently by producing more
outputs without using any more inputs is referred to as
A) absolute progress.
B) efficiency progress.
C) capital investment.
D) technological progress.
Suppose the government’s initial debt is $400 billion. If for the next three years the
government runs deficits of $150, $125, and $200 billion, the government’s additional
debt at the end of the three years will be
A) -$50 billion.
B) $50 billion.
C) $475 billion.
D) $900 billion.
Daily Output of Japan and U.S.
Table 18.2 Refer to Table 18.2. After trade begins,
________ will specialize in the production of stereos and ________ will specialize in
the production of tractors.
A) U.S.; U.S.
B) U.S.; Japan
C) Japan; U.S.
D) Japan; Japan
Suppose that the CPI in 1999 was 125.2 and the CPI in 2000 was 139.1. The rate of
inflation between 1999 and 2000 was:
A) 11.1%.
B) 12.9%.
C) 13.9%.
D) 14.3%.
Assuming an upward-sloping short-run aggregate supply curve, a decrease in
government spending results in ________ in output and ________ in prices in the short
run.
A) a decrease; a slight decrease
B) an increase; no change
C) an increase; a slight increase
D) no change; a decrease
Figure 2.2
Figure 2.2 presents a production possibilities curve for a country that can either produce
highways or provide people with medical care in a given year. The figure shows that as
more highways are built, the opportunity cost of building each additional highway is:
A) decreasing.
B) increasing.
C) constant.
D) decreasing and then increasing.
Which of the following causes the dollar to depreciate relative to the British pound?
A) a decrease in the supply of dollars
B) an increase in the demand for pounds
C) a decrease in the demand for dollars
D) an increase in the supply of pounds
Recall Application 2, “More Disability, Less Unemployment?” to answer the following
questions:
According to the application, changes in the federal Disability Insurance program:
A) increased the number of non-elderly adults receiving benefits from the program.
B) decreased the number of non-elderly adults receiving benefits from the program.
C) increased the number of elderly adults receiving benefits from the program.
D) decreased the number of elderly adults receiving benefits from the program.
Explain what will happen to the size of both M1 and M2 in each of the following
situations:
(a) Jane, a millionaire, withdraws $500,000 from her money market account to buy a
famous painting.
(b) Paul transfers $10,000 from his checking account to his savings account.
(c) Sarah takes $5,000 out of her checking account to buy IBM stock.
Figure 18.1
Refer to Figure 18.1. ________ has a comparative disadvantage in bicycles and
________ has a comparative disadvantage in hang gliders.
A) The United States; the United States
B) The United States; Canada
C) Canada; the United States
D) Canada; Canada
The factor that ultimately determines the change in the stock of capital, the level of real
wages, and the output of an economy is
A) the labor force.
B) net investment.
C) the unemployment level.
D) GDP.
Midwest State University in Nebraska is trying to convince Nebraska taxpayers that the
tax dollars spent at Midwest State University are well spent. One of the university’s
arguments is that for every $1 spent by Midwest State University, an additional $5 of
expenditures are generated within Nebraska. Midwest State University is arguing that
the multiplier for their expenditures is:
A) .2.
B) 1.
C) 4.
D) 5.
For the purposes of GDP accounting, government purchases include
A) the purchases of new military equipment.
B) social security payments.
C) direct transfer payments by the government to other individuals.
D) welfare payments.
Fiscal policy shifts the:
A) full employment level of output.
B) the long run aggregate supply curve.
C) the short run aggregate supply curve.
D) the aggregate demand curve.
The saying that “There’s no such thing as a free lunch” refers to the
A) marginal principle.
B) spillover principle.
C) principle of opportunity cost.
D) reality principle.
A market failure could be caused by:
A) firms not bearing the full costs of production.
B) firms competing against each other for customers.
C) profit.
D) capitalism.
A firm sells a corporate bond to:
A) the public in order to borrow money.
B) its parent corporation in order to borrow money.
C) the government in order to borrow money.
D) another corporation, in order to share profits.
Recall the Application about the government of Mexico City repainting highway
lane lines to transform a 4-lane highway into a 6-lane highway to answer the
following question. To increase income by $120 when the slope of the curve showing
the relationship between your income and work hours is 8, how many extra hours will
you need to work?
A) 8
B) 15
C) 112
D) 960
Figure 2.4 Joe runs a business and needs to decide how many hours to stay open.
Figure 2.4 illustrates his marginal benefit of staying open for each additional hour.
Suppose that we observe Joe staying open 4 hours per day. If he is following the
marginal principle, what must his marginal cost be?
A) $16
B) $24
C) $32
D) $40
Suppose you were interested in increasing technological progress in your country.
Suggest some ways to do it.
Suppose that the natural rate of unemployment for the economy is 6 percent and the
economy is currently experiencing a 4 percent unemployment rate. Explain what will
likely happen to wages and prices as the economy adjusts to the long-run equilibrium.
Recall the Application about the incentives to buy hybrid vehicles to answer the
following question(s).
According to the book, what are the four elements of economic thinking?
How did the presence of deposit insurance indirectly create the savings and loan crisis
during the 1980s?
If the economy has an MPC of 0.8, by how much will a $50 billion increase in
government purchases increase GDP? By how much will a $50 billion increase in taxes
decrease GDP?