The price index was 150 in the first year, 142.5 in the second year, and 138.2 in the
third year. The economy experienced
a. 5.0 percent deflation between the first and second years, and 3.0 percent deflation
between the second and third years.
b. 7.5 percent deflation between the first and second years, and 4.3 percent deflation
between the second and third years.
c. 5.3 percent inflation between the first and second years, and 4.1 percent inflation
between the second and third years.
d. 7.5 percent inflation between the first and second years, and 4.3 percent inflation
between the second and third years.
Assume the market for tennis balls is perfectly competitive. When one tennis ball
producer exits the market,
a. the price of tennis balls increases.
b. the price of tennis balls decreases.
c. the price of tennis balls does not change.
d. there is no longer a market for tennis balls.
When there is an excess supply of money,
a. people will try to get rid of money causing interest rates to rise. Investment increases.
b. people will try to get rid of money causing interest rates to fall. Investment decreases.
c. people will try to get rid of money causing interest rates to fall. Investment increases.
d. people will try to get rid of money causing interest rates to rise. Investment
decreases.
Scenario34-2.The following facts apply to a small, imaginary economy.
Consumption spending is $6,720 when income is $8,000.
Consumption spending is $7,040 when income is $8,500.
RefertoScenario34-2.In response to which of the following events could aggregate
demand increase by $1,500?
a. A stockmarket boom increases households’ wealth by $500, and there is an operative
crowdingout effect.
b. A stockmarket boom increases households’ wealth by $575, and there is an operative
crowdingout effect.
c. An economic boom overseas increases the demand for U.S. net exports by $600, and
there is no crowding- out effect.
d. Aggregate demand could increase by $1,500 in response to any of these events.
All or part of a firm’s profits may be paid out to the firm’s stockholders in the form of
a. retained earnings.
b. dividends.
c. interest payments.
d. capital accounts.
Which of the following is notan example of a price index computed by the Bureau of
Labor Statistics?
a. the Los Angeles price index
b. the energy price index
c. the producer price index
d. the stock price index
Which of the following are currently provisions of the U.S. tax system and discourage
saving?
a. some forms of capital income are taxed twice
b. if they are large enough, bequests are taxed
c. both a and b
d. neither a nor b
Based on the quantity equation, if M= 150, V= 4, and Y= 300, then P =
a. 8.
b. 0.5.
c. 2.
d. 3.
Which of the following would cause the real exchange rate of the U.S. dollar to
depreciate?
a. the U.S. government budget deficit decreases
b. capital flight from foreign countries
c. the U.S. imposes import quotas
d. None of the above is correct.
If, at some interest rate, the quantity of money demanded is less than the quantity of
money supplied, people will desire to
a. sell interest-bearing assets, causing the interest rate to decrease.
b. sell interest-bearing assets, causing the interest rate to increase.
c. buy interest-bearing assets, causing the interest rate to decrease.
d. buy interest-bearing assets, causing the interest rate to increase.
If something happens to alter the quantity demanded at any given price, then the
demand curve shifts.
a. True
b. False
Other things the same, an increase in the price level causes the real value of the dollar
to fall in the market for foreign-currency exchange.
a. True
b. False
Which of the following properly describes the interest-rate effect?
a. A higher price level leads to higher money demand; higher money demand leads to
higher interest rates; a higher interest rate increases the quantity of goods and services
demanded.
b. A higher price level leads to higher money demand; higher money demand leads to
lower interest rates; a higher interest rate reduces the quantity of goods and services
demanded.
c. A lower price level leads to lower money demand; lower money demand leads to
lower interest rates; a lower interest rate reduces the quantity of goods and services
demanded.
d. A lower price level leads to lower money demand; lower money demand leads to
lower interest rates; a lower interest rate increases the quantity of goods and services
demanded.
Economists make assumptions to
a. provide issues for political discussion.
b. make a complex world easier to understand.
c. make it easier to teach economic concepts and analysis.
d. create policy alternatives that are incomplete or subject to criticism.
Figure 3-18
RefertoFigure3-18. The opportunity cost of 1 bowl for Juba is
a. 1/4 cup.
b. 2/3 cup.
c. 3/2 cups.
d. 4 cups.
The inflation tax
a. transfers wealth from the government to households.
b. is the increase in real income taxes due to lack of indexation in income tax rules.
c. is a tax on everyone who holds money.
d. All of the above are correct.
If the Fed increases the money supply, the equilibrium value of money decreases and
the equilibrium price level increases.
a. True
b. False
Babe Ruth’s 1931 salary was $80,000. Government statistics show a consumer price
index of 15.2 for 1931 and 229.6 for 2012. Ruth’s 1931 salary was equivalent to a 2012
salary of about
a. $5,296.
b. $1,128,421
c. $1,208,421
d. $17,152,000
Table 3-23
Assume that the farmer and the rancher can switch between producing pork and
producing tomatoes at a constant rate.
RefertoTable3-23.The farmer has an absolute advantage in the production of
a. pork.
b. tomatoes.
c. both goods.
d. neither good.
At a rummage sale, you buy two old books and an old rocking chair; your spending on
these items is not included in current GDP.
a. True
b. False
Kari downloads 7 songs per month when the price is $1.29 per song and 10 songs per
month when the price is $0.99 per song. Kari’s behavior demonstrates the law of
a. price.
b. supply.
c. demand.
d. income.
Which of the following events must cause equilibrium price to fall?
a. demand increases and supply decreases
b. demand and supply both decrease
c. demand decreases and supply increases
d. demand and supply both increase
After adjusting for inflation, over time the prices of most natural resources have been
a. steady or falling, meaning that our ability to conserve them is growing more rapidly
than their supplies are dwindling.
b. steady or falling, meaning that their supplies are dwindling more rapidly than our
ability to conserve them is growing.
c. rising, meaning that our ability to conserve them is growing more rapidly than their
supplies are dwindling.
d. rising, meaning that their supplies are dwindling more rapidly than our ability to
conserve them is growing.
In an open economy, the demand for loanable funds comes from
a. only those who want to buy domestic capital goods.
b. only those who want to buy foreign assets.
c. those who want to buy either domestic capital goods or foreign assets.
d. None of the above is correct.
If a U.S. textbook publishing company sells texts overseas, U.S. net exports
a. increase, and U.S. net capital outflow increases.
b. increase, and U.S. net capital outflow decreases.
c. decrease, and U.S. net capital outflow increases.
d. decrease, and U.S. net capital outflow decreases.
In the calculation of the CPI, tea is given greater weight than beer if
a. the price of tea is higher than the price of beer.
b. it costs more to produce tea than it costs to produce beer.
c. tea is more readily available than beer to the typical consumer.
d. consumers buy more tea than beer.
Figure 2-8
RefertoFigure2-8.Inefficient production is represented by which point(s)?
a. K, M
b. L
c. L, M
d. M
Under the assumptions of the Fisher effect and monetary neutrality, if the money supply
growth rate falls, then
a. both the nominal and the real interest rate fall.
b. neither the nominal nor the real interest rate fall.
c. the nominal interest rate falls, but the real interest rate does not.
d. the real interest rate falls, but the nominal interest rate does not.
Suppose an economist develops a theory that higher food prices arise from higher gas
prices. According to the scientific method, which of the following is the economist’s
next step?
a. Collect and analyze data.
b. Go to a laboratory and generate data to test the theory.
c. Publish the theory without testing it.
d. Consult with other economists to see they agree with the theory.
In a particular country in 1998, the average worker needed to work 40 hours to produce
100 units of output. In that same country in 2008, the average worker needed to work
36 hours to produce 72 units of output. In that country, the productivity of the average
worker
a. decreased between 1998 and 2008, so we would expect the standard of living to have
decreased accordingly.
b. increased between 1998 and 2008, so we would expect the standard of living to have
increased accordingly.
c. decreased between 1998 and 2008, so we would expect inflation to have decreased
accordingly.
d. increased between 1998 and 2008, so we would expect inflation to have increased
accordingly.
Scenario 1-1
You have the afternoon free. You have a choice between going to the movies with a
friend or studying economics for three hours. If you go to the movies, you will spend
$8.00 on a ticket and $4.50 on popcorn. If you choose to study economics for three
hours, you will raise your exam grade by 10 points.
RefertoScenario1-1.What is your opportunity cost of studying economics?
Explain how a decrease in the demand for capital goods in the U.S. can lead to a change
in the U.S. exchange rate.
Figure 3-26
RefertoFigure3-26.What is Kate’s opportunity cost of one cookie?
Using the outline below, draw a circular-flow diagram representing the interactions
between households and firms in a simple economy. Explain briefly the various parts of
the diagram.
For a country like the United States, explain why the CPI would increase at a faster rate
than the GDP deflator during periods of oil and gasoline price increases.
Zack quits his job at a consulting firm, which pays $40,000 a year, to enroll in a
two-year graduate program. His annual school expenses are $30,000 for tuition, $2,000
for books, and $600 for food. What is his opportunity cost of attending the two-year
graduate program?
Suppose the Fed sells government bonds. Use a graph of the money market to show
what this does to the value of money.
Suppose a bottle of wine costs 20 euros in France and 25 dollars in the United States. If
the exchange rate is .80 euros per dollar, what is the real exchange rate?
Table 2-6
Refer to Table2-6. Consider the production possibilities table for an economy that
produces only mobile phones and pizzas. What is the opportunity cost of increasing
production of mobile phones from 200 to 500?
Since unemployment rates are consistently higher in Canada and some Western
European countries than in the United States, it appears that the natural rate of
unemployment is lower in the United States. What might explain this difference?
Since 1946, the president of the United States has received guidance from a group
comprised of three members and a staff of a few dozen economists known as the
According to the efficient markets hypothesis, what changes the price of a share of a
corporation’s stock? Make up an example.
Explain the time inconsistency of monetary policy.
The costs a business incurs to change its prices are called .
When tax code changes increase investment incentives, the _____ for loanable funds
curve shifts to the _____. This results in a(n) _____ in the interest rate and a(n) _____
in investment.
The idea that aggregate demand fluctuates due to irrational waves of pessimism by
households and firms is known as _____.
List three different ways that a risk-averse person can reduce financial risk.
An economy produces two goods, x and y. A year ago the price of x was $4 and the
price of y was $6. Today the price of x is $8 and the price of y is $10. What happened to
the nominal and the real value of good x? What happened to the nominal and real value
of good y?
In a centrally-planned economy, economic activity is guided by .
Is the following a positive or normative statement? The federal minimum wage is lower
than many state minimum wages.