Suppose the marginal propensity to consume is 0.8 and the government cuts taxes by
$40 billion. Real GDP will _____ by _____.
A) increase; $200 billion
B) decrease; $200 billion
C) increase; $160 billion
D) decrease; $160 billion
The consumer price index reflects:
A) changes in the prices of goods and services typically purchased by consumers.
B) the level of prices for intermediate goods and services purchased by business.
C) the level of prices for raw materials.
D) the prices of all goods and services computed from the ratio of nominal GDP to real
GDP.
Long-term unemployment is measured by the percentage of the unemployed who have
been out of work for:
A) a week or longer.
B) 6 weeks or longer.
C) 20 weeks or longer.
D) 27 weeks or longer.
The price index in the current year is the cost of the market basket in the base year
divided by the cost of the market basket in the current year.
A) True
B) False
_____ depicts a trade-off between unemployment and inflation.
A) The Phillips curve
B) Keynes’s law
C) The multiplier
D) The Friedman curve
Specialization in production was the starting point for:
A) The Wealth of Nations, by Adam Smith.
B) The General Theory, by John Maynard Keynes.
C) Das Kapital, by Karl Marx.
D) Free to Choose, by Milton Friedman.
Long-term interest rates are higher than short-term rates. This reflects a belief that:
A) short-term rates will fall.
B) short-term rates will rise.
C) short-term rates will remain the same.
D) the Federal Reserve is undergoing a change in policy.
Figure: Short- and Long-Run Equilibrium II
Look at the figure Short- and Long-Run Equilibrium II. If the economy is at
equilibrium at E1, the government should use _____ fiscal policy to shift the aggregate
demand curve to the _____.
A) expansionary; right
B) expansionary; left
C) contractionary; right
D) contractionary; left
The marginal propensity to save:
A) is the change in consumer savings divided by the change in consumption.
B) is the change in savings divided by the change in disposable income.
C) equals MPC+ 1.
D) changes when the marginal propensity to consume is constant.
Scenario: Growth Rates in Two Countries
India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500,
while the United States is growing at a rate of 3% per year, and its real GDP per capita
is about $47,000.Look at the scenario Growth Rates in Two Countries. About how
much will U.S. real GDP per capita be in 14 years?
A) $71,000
B) $28,000
C) $112,000
D) $224,000
Look at the table The Market for Chocolate-Covered Peanuts. The equilibrium quantity
and the equilibrium price are _____ bags and _____.
A) 140; $0.40
B) 175; $0.60
C) 175; $0.80
D) 210; $0.50
Suppose that the market basket for the university student price index (USPI) consists of
4 textbooks and 100 gallons of gasoline. In 2010, the base year for this index, textbooks
cost $50 each and gas costs $1 per gallon. In 2011, textbooks still cost $50 each and
gasoline costs $4 per gallon. The USPI for 2011 is:
A) 250.
B) 200.
C) 150.
D) 100.
Who wrote The Wealth of Nations, a book that many credit with establishing economics
as a discipline?
A) Karl Marx
B) David Ricardo
C) Adam Smith
D) John Maynard Keynes
A financial asset is:
A) a physical asset like a car.
B) a claim that entitles the owner to future income from the seller.
C) the value of accumulated savings.
D) another term for capital.
The multiplier process assumes that:
A) aggregate prices are perfectly flexible.
B) the economy is open and there is free trade.
C) the economy is operating with sticky aggregate price levels.
D) interest rates are constantly changing.
Structural unemployment occurs when:
A) new workers enter the work force.
B) there is a surplus of labor.
C) the economy expands.
D) there is cyclical unemployment.
The liquidity preference model focuses on interest rates in the short run.
A) True
B) False
If a country imposes a tariff on imported shoes, we expect the domestic price of shoes
to _____ and the quantity of shoes consumed in the domestic market to _____ .
A) fall; fall
B) fall; rise
C) rise; fall
D) rise; rise
Figure: Short- and Long-Run Equilibrium II
Look at the figure Short- and Long-Run Equilibrium II. Which of the following would
be the appropriate response on the part of the government upon viewing the state of the
economy?
A) Increase government spending to close the recessionary gap.
B) Decrease government spending to close the recessionary gap.
C) Lower tax rates to close the inflationary gap.
D) Raise tax rates to close the inflationary gap.
Which of the following assets is the LEAST liquid?
A) cash
B) checking account balance
C) corporate bond
D) ownership of one fourth of a privately held company
Flows of money, goods and services, and factors of production through the economy are
all shown in the circular-flow diagram.
A) True
B) False
A survey reveals that on a small island initially 1,000 people have jobs, 250 people are
not working but are looking for jobs, and 450 people are neither working nor looking
for work. Suppose that 150 of the 450 people who weren’t looking for work now begin
looking for work. There are now 400 people looking for work and 1,000 people
working. The unemployment rate:
A) falls to 20%.
B) rises to 28.6%.
C) rises to 50%.
D) Nothing happens to the unemployment rate, because these people weren’t working
before and they aren’t working now.
A decrease in supply means:
A) a shift to the left of the entire supply curve.
B) a movement down the supply curve as prices go down.
C) that less will be demanded at every price.
D) that more will be supplied at every price.
When the dollar appreciates, exports will _____ and imports will _____ .
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
The natural rate of unemployment is 4%, and the economy is producing 95% of its
potential output. Okun’s law predicts an unemployment rate of:
A) 4%.
B) 5%.
C) 6.5%.
D) 9%.
In an economy with no taxes or imports, if disposable income increases by $1,000 and
consumption increases by $600, the marginal propensity to save is:
A) $600.
B) $400.
C) 2.5.
D) 0.40.
If the United States imports more goods from Japan than it exports to Japan, how will
the difference be financed?
A) U.S. consumers will borrow money from domestic banks.
B) The United States will buy more Japanese assets.
C) The United States will sell assets, generating a liability that obligates Americans to
pay for those imports in the future.
D) The United States will sell assets to the Japanese, which would reduce its liabilities.
The long-run Phillips curve shows the relationship between:
A) potential aggregate output and the natural rate of unemployment at a given rate of
expected inflation.
B) expected inflation and actual inflation after the expectation becomes embedded in
people’s minds.
C) the aggregate output and the aggregate price level at a given rate of expected
inflation.
D) unemployment and inflation after expectations of inflation have had time to adjust to
experience.
An increase in government transfer payments of $100 billion and a tax cut of $100
billion will have equal effects on the budget balance and unequal effects on real GDP.
A) True
B) False
_____ will increase the aggregate consumption function.
A) An increase in aggregate wealth
B) An increase in aggregate disposable income
C) A decrease in aggregate wealth
D) A decrease in expected disposable income
If the economy is at potential output and the Fed decreases the money supply, in the
SHORT run the likely result will be a(n) _____ in investment and a(n) _____ in
consumption.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease