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If a firm pays for investment spending out of retained earnings:
A) the interest rate is irrelevant.
B) past profits are adjusted downward.
C) current profits are adjusted downward.
D) the firm forgoes interest it could have received.
Figure: Guns and Butter
Look at the figure Guns and Butter. Suppose the economy produced 8 guns and 12
pounds of butter per period.
A) This is a possible choice but is inefficient.
B) This combination invalidates the notion of increasing opportunity cost.
C) The economy is still efficient but does not buy as much as it could.
D) Something must be done to reduce the amount of employment.
A contractionary fiscal policy:
A) decreases a government budget deficit or increases a government budget surplus.
B) may include increases in government spending.
C) may include reductions in taxes.
D) may include discretionary increases in transfer payments.
If a checking account has an interest rate of 1% and a Treasury bill has an interest rate
of 2%, the opportunity cost of holding the checking account as money is:
A) zero.
B) 0.02%.
C) 1%.
D) 2%.
The banking crisis of 1907 that preceded the Great Depression and the recent one in
2008 were both caused by:
A) short-run business cycle fluctuations.
B) lack of investment spending and high unemployment.
C) risky speculation in real estate and in the stock market.
D) low labor productivity in the United States combined with a huge trade deficit.
The short-run Phillips curve shows:
A) a direct relationship between unemployment and inflation.
B) an inverse relationship between unemployment and inflation.
C) consequences of the misperceptions theory.
D) the optimal level of employment.
Figure: Production Possibility Frontier Curve for Tealand
Look at the figure Production Possibility Frontier for Tealand. Tealand can produce at
point E only if the government:
A) eliminates unemployment.
B) raises taxes.
C) permits more immigration.
D) increases the cost of production by decreasing the use of technology.
Which of the following is FALSE? The consumer price index:
A) reflects changes in the prices of goods typically purchased by consumers.
B) contains thousands of goods and services.
C) is calculated by the Bureau of Labor Statistics.
D) changes only in the base year, every five to seven years.
If the multiplier is 4, the marginal propensity to consume is:
A) 3.
B) 0.80.
C) 0.75.
D) 0.25.
As a limit to economic growth, environmental problems are more difficult to solve than
resource problems because:
A) environmental problems don't automatically provide incentives for changed
behavior.
B) resource problems don't automatically provide incentives for changed behavior.
C) the opportunity cost of solving environmental problems in terms of GDP sacrificed
is larger.
D) most scientists haven't determined the relationship between greenhouse gas
emissions and climate change.
A simplified representation that is used to study a real situation is called a(n):
A) model.
B) production possibility frontier.
C) assumption.
D) trade-off.
The Great Moderation consensus in macroeconomics is that:
A) prices are sticky in the long run but flexible in the short run.
B) decreases in aggregate output can be traced to poor monetary policy.
C) in the long run, neither monetary nor fiscal policy can reduce unemployment below
the natural rate.
D) monetary and fiscal policies are equally effective at curing recessions.
Scenario: Real GDP
Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75
pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell
for $3.25 each and 80 pizzas that sell for $9 each.
Look at the scenario Real GDP. The growth rate of nominal GDP from year 1 to year 2
is:
A) 10%.
B) 7.8%.
C) 19.7%.
D) 8.8%.
To _____ the money supply, the Federal Reserve could _____.
A) increase; lower the reserve requirements
B) decrease; lower the discount rate
C) increase; raise the federal funds rate
D) decrease; conduct open-market purchases
Economists use models to explain real-life situations because:
A) such models tend to be exactly what is occurring in each situation.
B) assumptions found in such models tend to make analyzing the situation more
difficult.
C) simplifications and assumptions often yield results that can help to explain the more
difficult real-life situations.
D) real-life situations are not relevant to the building of models.
The classical school of economics:
A) emphasizes the short run.
B) emphasizes the flexibility of wages and prices.
C) has a problem with potential output, since potential output cannot be achieved
without active policy.
D) advocates the use of discretionary fiscal policy.
Table: South Korea's Real GDP per Capita
Look at the table South Korea's Real GDP
per Capita. As a percentage of real GDP per capita in 1960, approximately how much
did South Korea produce in 2000?
A) 10%
B) 15%
C) 151%
D) 1,011%
The AD curve will shift to the left:
A) because of the wealth and interest rate effects.
B) if household wealth decreases.
C) if the aggregate price level falls.
D) if the government decreases taxes paid by households.
When the economy is producing output below potential, it has a(n):
A) full-employment output.
B) natural level of employment.
C) recessionary gap.
D) inflationary gap.
Scenario: Technological Progress and Productivity Growth in Techland
In Techland, from 1980 to 2010, holding technology and human capital fixed,
increasing physical capital per worker from $25,000 to $100,000 would have led to a
doubling of real GDP per worker, from $40,000 to $80,000. However, not only did
physical capital per worker increase from $25,000 to $100,000, but technological
progress shifted the productivity curve upward so that real GDP per worker actually
increased from $40,000 to $320,000.
Look at the scenario Technological Progress and Productivity Growth in Techland.
What share of the growth rate of real GDP per capita was attributable to increasing
physical capital per worker?
A) 2.0%
B) 4.5%
C) 8.75%
D) 17.5%
The owner of the Dismal Philosopher, one of the five bookstores on College Road, asks
you to make a graph showing each College Road bookstore's share of all five stores'
book purchases. A good way to show this information is with a pie chart.
A) True
B) False
Expansionary monetary policy may decrease investment spending.
A) True
B) False
Long-run economic growth depends almost entirely on:
A) labor productivity growth.
B) population growth.
C) agricultural production growth.
D) the number of hours worked.
If the multiplier equals 4, then the marginal propensity to save must be equal to:
A) 0.25.
B) 0.5.
C) 0.75.
D) the marginal propensity to consume.
The marginal propensity to consume:
A) is the change in consumption divided by the change in saving.
B) is usually higher for unemployed individuals than for people who are very wealthy.
C) is equal to the marginal propensity to save plus 1.
D) tells policy makers the additional amount of investment spending that would
accompany an additional amount of government spending.
Figure: The Domestic Market for Rice
Look at the figure The Domestic Market for Rice. Assume that PAis the autarky price
and PWis the world price. Before international trade, consumer surplus is equal to the
area:
A) A.
B) A + B.
C) A + B + C.
D) A + B + D.
An increase in the aggregate price level will increase:
A) short-run aggregate supply.
B) the quantity of aggregate output supplied in the short run.
C) aggregate demand.
D) the quantity of aggregate output demanded.
A survey reveals that on a small island 100 people have jobs, 25 people are not working
but are looking for jobs, and 45 people are neither working nor looking for work. The
unemployment rate on the island is:
A) 12.5%.
B) 20%.
C) 25%.
D) 50%.
When the output gap is _____, the unemployment rate is _____ the natural rate.
A) negative; below
B) zero; zero
C) inflationary; above
D) positive; below
Figure: Loanable Funds Market
Look at the figure Loanable Funds Market. If the interest rate is 8%, people will want to
save approximately:
A) $3 trillion.
B) $2 trillion.
C) $4 trillion.
D) $1 trillion.
