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International trade based on comparative advantage allows a country to produce outside
its production possibility frontier.
A) True
B) False
Figure: Shifts in Demand and Supply II
Look at the figure Shifts in Demand and Supply II. The figure shows how supply and
demand might shift in response to specific events. Suppose vast new oilfields are
discovered offshore of California and gasoline prices fall. Which panel BEST describes
how this will affect the market for sport utility vehicles, a complement in consumption
to gasoline?
A) panel A
B) panel B
C) panel C
D) panel D
Figure: Aggregate Expenditures Curve I
Look at the figure Aggregate Expenditures Curve I. The slope of the aggregate
expenditures curve in this figure is:
A) 0.25.
B) 0.5.
C) 1.0.
D) 45 degrees.
Over time, contractionary monetary policy _____ nominal wages and causes the
short-run aggregate supply curve to shift _____.
A) lowers; leftward
B) raises; rightward
C) lowers; rightward
D) raises; leftward
When the U.S. dollar price of a foreign currency rises:
A) it becomes cheaper for foreigners to buy U.S. goods.
B) it becomes cheaper to buy foreign goods in the United States.
C) foreign goods go down in price.
D) we need fewer dollars to buy the foreign currency.
When Julie Ann's disposable income is $10,000, she spends $10,000, and when her
disposable income is $15,000, her spending is $12,500. Julie Ann's autonomous
consumption is _____ and her marginal propensity to consume is 0.5.
A) $5,000
B) $10,000
C) $15,000
D) $0
The Federal Reserve, the central bank of the United States, has been cutting the interest
rate to stimulate the recessionary economy. Interest cuts by the Federal Reserve are
supposed to:
A) lower the savings rate in the economy and stop leakages.
B) increase government spending on the economic infrastructure and thus increase GDP
through the multiplier process.
C) increase cash holding by the general public, thus lowering their dependence on
credit.
D) increase planned investment spending and thus increase GDP via the multiplier.
If the economy is at potential output and the Fed increases the money supply, in the
short run real GDP will likely remain the same.
A) True
B) False
Which of the following is one reason for Latin America's lack of economic growth
since 1920?
A) overspending on education
B) inability to compete with imported products
C) low savings and investment spending because government policies led to inflation,
bank failures, and other disruptions
D) very poor natural resources
If the Fed funds rate is only 1%, the economy is dangerously close to:
A) an inflationary spiral.
B) a liquidity trap.
C) very high unemployment.
D) another recession.
Fiat money has value because the government has declared that it can be exchanged for
gold or silver.
A) True
B) False
Other things being equal, planned investment spending _____ as long as _____.
A) decreases; technological innovation develops faster than technological obsolescence
B) increases; sales exceed the existing production capacity
C) increases; the rate of growth of real GDP is lower than the marginal propensity to
save
D) decreases; the rate of growth of physical capital is positive
Foreign exchange controls are:
A) fixed exchange rates.
B) a government licensing system that limits the amount of foreign currency an
individual can buy.
C) floating exchange rates.
D) international limits on exchange rates.
Unemployment is at its natural level if there is no:
A) unemployment.
B) frictional unemployment.
C) structural employment.
D) cyclical unemployment.
Figure: Supply of Coconuts
Look at the figure Supply of Coconuts. If the prices of inputs (e.g., labor, fertilizer, and
fuel) used to produce and transport coconuts increased, it would be represented in the
figure as a movement from:
A) A to B.
B) B to A.
C) C to A.
D) E to B.
The largest component of U.S. GDP is value added in:
A) household production.
B) business production.
C) government production.
D) production of goods sold overseas.
The period of relative calm in the economy between 1985 and 2007 is called the Great
Moderation.
A) True
B) False
An increase in the minimum wage would likely cause an increase in short-run aggregate
supply.
A) True
B) False
Malthus' predictions have proved to be false because the negative effects on
productivity of population growth have been outweighed by advances in technology
and increases in both human and physical capital.
A) True
B) False
Scenario: Fiscal Policy
Consider the economy of Arcadia. Its households spend 75% of increases in their
income. There are no taxes and no foreign trade. Its currency is the arc. Potential output
is 600 billion arcs.
Look at the scenario Fiscal Policy. Suppose actual real GDP in Arcadia is 500 billion
arcs. This economy has:
A) a recessionary gap.
B) production at the full employment level.
C) an inflationary gap.
D) a liquidity trap.
Figure: Inflationary and Recessionary Gaps
Look at the figure Inflationary and Recessionary Gaps. At E2, the economy:
A) is in equilibrium.
B) has an inflationary gap.
C) has a recessionary gap.
D) has high unemployment.
The liquidity trap is associated with all of the following EXCEPT:
A) a large reduction in the demand for loanable funds.
B) the nominal interest rate falling to zero.
C) monetary policy becoming ineffective.
D) fiscal policy becoming ineffective.
An increase in the amount of physical capital per worker _____, while technological
progress _____.
A) makes the aggregate production function steeper; changes the slope of the aggregate
production function
B) makes the aggregate production function steeper; makes the aggregate production
function flatter
C) moves the economy along the aggregate production function; shifts up the aggregate
production function
D) shifts up the aggregate production function; moves the economy along the aggregate
production function
The most widely used indicator of the conditions in the labor market is the:
A) unemployment rate.
B) population growth rate.
C) inflation rate.
D) trade deficit.
The tax and government transfer payment multiplier is smaller than the government
purchases multiplier because all of an increase in government purchases is spent, only
some of tax cuts or increases in government transfers is spent.
A) True
B) False
During the Great Depression, unemployment rates reached as high as:
A) 25%.
B) 50%.
C) 10%.
D) 60%.
In a typical business cycle, the peak is immediately followed by the:
A) recession.
B) trough.
C) expansion.
D) depression.
If the consumer price index changes from 120 to 125 between December 2009 and
December 2010, the:
A) inflation rate for 2010 is 4.2%.
B) inflation rate for 2010 is 5%.
C) deflation rate for 2010 is 5%.
D) deflation rate for 2010 is 4.2%.
The point where the long-run aggregate supply curve intercepts the horizontal axis is:
A) the point that reflects the economy's actual output.
B) the economy's potential output.
C) the level of real GDP the economy would produce if all prices were flexible and
wages were fixed.
D) impossible to attain.
If the government guarantees liabilities of financial institutions other than deposits:
A) those financial institutions will have the incentive to engage in overly risky
behavior.
B) those financial institutions will have the incentive to engage in less risky behavior.
C) the Federal Reserve will be forced to raise reserve requirements.
D) the economy will be pushed close to the zero bound on interest rates.
Before the Panic of 1907, trusts became unprofitable because they used too much of
their capital to form their own clearinghouses.
A) True
B) False
Historical evidence has led economists to conclude that during periods of high inflation,
the _____ model of the price level is a good approximation of reality because nominal
wages and prices adjust more _____ than during periods of low inflation.
A) classical; quickly
B) modern; slowly
C) classical; slowly
D) modern; quickly
Keynesians believed that the economy could get out of the Great Depression if:
A) monetary policy focused on the use of a monetary rule.
B) fiscal authorities worked at balancing the budget.
C) government spent enough to offset the drop in both consumption and investment
spending.
D) expansionary monetary policy was used.
Figure: The Labor Market
Look at the figure
The Labor Market. What is the unemployment rate at an efficiency wage of $16?
A) 10%
B) 20%
C) 27%
D) 73%
