On a graph representing two variables:
A) a positive slope of a curve means the variables are negatively related.
B) a negative slope of a curve means the two variables are positively related.
C) a line that is horizontal has a zero slope.
D) a line that is vertical has a zero slope.
Figure: Hot Drinks Sold and Temperature
Look at the figure Hot Drinks Sold and Temperature. If we move from point L to point
M in the figure, the outside temperature has ______ degrees and the number of hot
drinks sold has ______.
A) decreased by 30; increased by 30
B) increased by 20; decreased by 20
C) increased by 30; decreased by 30
D) increased by 40; decreased by 40
In the graph of a curve, the vertical intercept is:
A) the value of the y-variable when the value of the x-variable is equal to zero.
B) the change in the y-variable between two points divided by the change in the
x-variable between those same two points.
C) the value of the y-variable when the value of the slope is equal to zero.
D) the value of the x-variable when the value of the y-variable is equal to zero.
Look at the table Hours
Studied and Quiz Score. The table shows data for students in an economics class. If we
were to graph these data and draw a line through the points, we would choose ______
to be the independent variable; the vertical intercept of our line would be ______; and
the slope of our line would be ______.
A) quiz score; y = 2; “2
B) quiz score; x = 0; “2
C) hours studied; y = 0; +2
D) hours studied; y = 2; +2
Figure: Demand and Supply
Look at the figure Demand and Supply. The curve labeled S indicates that a price of $2
is related to a quantity of:
A) 0.
B) 1.
C) 2.
D) 3.
Figure: Slope
Look at the figure Slope. This graph depicts ______ relation between X and Y.
A) a positive
B) a negative
C) an independent
D) no
If two points on a graph are (0, 8) and (12,15):
A) X is 0 when Y is 12.
B) X and Y have a positive relation.
C) the horizontal intercept is given by the point (0, 8).
D) the slope of a line connecting the two points is negative.
Figure: Illustrating Slope
Look at the figure Illustrating Slope. In the graph, line 2 has a slope of:
A) +1.
B) 0.
C) “1.
D) infinity.
The ratio of the change in the variable on the vertical axis to the change in the variable
on the horizontal axis, measured between two points on the curve, is the:
A) axis.
B) slope.
C) dependent variable.
D) independent variable.
Figure: Seasonally Adjusted Unemployment Rate
Look at the figure Seasonally Adjusted Unemployment Rate. The distance between
each labeled point on the horizontal axis is one year. Using this graph, the
unemployment rate was at a minimum in ______ and a maximum in ______.
A) 2003; 2000
B) 2007; 2001
C) 2003; 1999
D) 2000; 2003
Taylor sees a bar graph showing the average weight of adult males over the past 200
years and concludes that men get more obese over time. Taylor’s conclusion may be
wrong, since she did not consider:
A) the features of construction.
B) omitted variables.
C) reverse causality.
D) tangent lines.
The production possibility frontier illustrates that:
A) the economy will automatically end up at full employment.
B) an economy’s productive capacity increases one-for-one with its population.
C) if all resources of an economy are being used efficiently, more of one good can be
produced only if less of another good is produced.
D) economic production possibilities have no limit.
A production possibility frontier that is a straight line sloping down from left to right
suggests that:
A) more of both goods could be produced moving along the frontier.
B) the two products must have the same price.
C) the opportunity costs of the products are constant.
D) there are no opportunity costs.
The economy’s factors of production are not equally suitable for producing different
types of goods. This principle generates:
A) economic growth.
B) technical efficiency.
C) underuse of resources.
D) the law of increasing opportunity cost.
If an economy is producing a level of output that is on its production possibility
frontier, the economy has:
A) idle resources.
B) idle resources but is using resources efficiently.
C) no idle resources but is using resources inefficiently.
D) no idle resources and is using resources efficiently.
The _____ illustrates the trade-offs facing an economy that produces only two goods.
A) production possibility frontier
B) circular-flow diagram
C) all else equal assumption
D) income distribution
In Kessy’s old kitchen, he could bake 10 cookies or mix 15 glasses of lemonade in one
day. Now Kessy has a larger oven and refrigerator. How does this affect his production
possibility frontier?
A) It shifts his production possibility frontier out.
B) It shifts his production possibility frontier in.
C) He will be less efficient.
D) He will not be able to produce as much as before.
The slope of a typical production possibility frontier is:
A) 0.
B) vertical.
C) positive.
D) negative.
Figure: Bicycles and Radishes I
Look at the figure Bicycles and Radishes I. It shows production possibility frontiers for
two countries that produce only radishes and bicycles. The axes of the two graphs are
measured in equivalent units. Country A is operating at point M, and country B is
operating at point N. Suppose country A discovers a new technology that greatly
increases its ability to produce bicycles but has no effect on its ability to produce
radishes. This would:
A) lower the opportunity cost of producing radishes in country A.
B) increase the opportunity cost of producing radishes in country A.
C) not affect the opportunity cost of producing radishes in country A.
D) increase the opportunity cost of producing radishes in country B.
Figure: Bicycles and Radishes II
Look at the figure Bicycles and Radishes II. The country depicted in this figure is
operating at point M. It could achieve production at point I only if it:
A) used its resources more efficiently.
B) devoted more resources to radish production.
C) devoted more resources to bicycle production.
D) increased the quantities of capital, natural resources, or labor available or improved
its technology.
An economy is said to have a comparative advantage in the production of a good if it
can produce that good:
A) with more resources than another economy.
B) with a higher opportunity cost than another economy.
C) outside its production possibilities curve.
D) at a lower opportunity cost than another economy.
Economists generally believe that a country should specialize in the production of a
good or service if:
A) the production possibility frontier is further from the origin than that of any other
country.
B) the production possibility frontier is closer to the origin than that of any other
country.
C) the country can produce the product using more resources than any other country.
D) the country can produce the product while forgoing fewer alternative products than
any other country.
If countries engage in international trade:
A) they give up the ability to specialize in production.
B) worldwide levels of production are lower.
C) they will be consuming inside their production possibility frontiers.
D) they will be consuming outside their production possibility frontiers.
Look at the table Comparative Advantage I. The opportunity cost of producing 1 box of
herring for Finland is _____ box(es) of cell phones.
A) 10
B) 0.2
C) 5
D) 0.1
Dr. Colgate is a dentist who employs an assistant, Ms. Crest. If Dr. Colgate worked all
day at the front desk, she could answer 40 phone calls. If she worked all day with
patients, she could clean the teeth of 40 patients. If Ms. Crest worked all day at the front
desk, she could answer 60 phone calls. If she worked all day with patients, she could
clean the teeth of 20 patients. _____ has a(n) _____ advantage in _____.
A) Dr. Colgate; absolute; answering phones
B) Ms. Crest; comparative; answering phones
C) Ms. Crest; absolute; cleaning patients’ teeth
D) Dr. Colgate; comparative; answering phones
Mark and Julie are going to sell brownies and cookies for their third annual fundraiser
bake sale. In one day, Mark can make 40 brownies or 20 cookies, and Julie can make 15
brownies or 15 cookies. Based on this information, _____ has the absolute advantage in
making brownies and _____ has the absolute advantage in making cookies.
A) Mark; Julie
B) Mark; Mark
C) Julie; Mark
D) Mark; neither Mark nor Julie
Nations can gain from trade with other nations even if they are less productive in all
industries than the nations they trade with.
A) True
B) False
Explain how technological progress is a source of economic growth.
Look at the table Crab and Cake Production in Chesapeake. The table shows the
maximum annual output combinations of crabs and cakes. Given the scarce resources
and limited technology, as Chesapeake uses more resources for the production of cakes,
fewer resources are available to produce crabs. Can this nation produce 200 crabs and
500 cakes? Is this efficient? Explain.
Smallville has a linear production possibility frontier in the production of good X and
good Y. It can produce 6 of X per hour or 8 of Y per hour. Suppose it has 240 hours of
labor and divides labor hours equally between production of good X and good Y. What
is the MAXIMUM amount of good Y it can produce?
A) 960
B) 30
C) 14
D) 6
In one hour, the United States can produce 25 tons of steel or 250 automobiles. In one
hour, Japan can produce 30 tons of steel or 275 automobiles. This information implies
that:
A) Japan has a comparative advantage in the production of automobiles.
B) the United States has an absolute advantage in the production of steel.
C) Japan has a comparative advantage in the production of both goods.
D) the United States has a comparative advantage in the production of automobiles.
Figure: The Supply of DVD Rentals
Look at the figure The Supply of DVD Rentals. A decrease in the price of DVDs sold
by movie producers to rental stores would result in a change illustrated by the move
from:
A) n to o in panel A.
B) p to q in panel B.
C) s to t in panel C.
D) u to v in panel D.
Figure: Demand and Supply of Gasoline
Look at the figure Demand and Supply of Gasoline. What might cause the supply curve
to shift from S2 back to the initial supply curve S1?
A) The Organization of Petroleum Exporting Countries (OPEC) restricts the production
of crude oil.
B) OPEC increases the production of crude oil.
C) U.S. citizens want to buy more gas.
D) Technology in the refinement of gasoline greatly improves.
Figure: The Demand and Supply of Wheat
Look at the figure The Demand and Supply of Wheat. A temporary price of $4 in this
market would result in a _____ of _____ bushels.
A) surplus; 4,000
B) shortage; 2,000
C) shortage; 4,000
D) surplus; 2,000
Equilibrium quantity will always increase if:
A) supply and demand both increase.
B) supply increases and demand decreases.
C) supply and demand both decrease.
D) supply decreases and demand remains unchanged.
Suppose there is an excess supply of chemical engineers in India. Over time, the
salaries for chemical engineers will fall in India.
A) True
B) False
The market for good Y, a perfectly competitive good, is made up of 15 producers who
each produce the same amount of good Y. If the price of good Y is $100 and the total
quantity supplied is 150, how many units of good Y is each producer supplying?
A) 10
B) 150
C) 100
D) 15
On a production possibility frontier, opportunity cost is:
A) the decrease in the output of one good when the output of the other good is
increased.
B) the rate at which people are willing to exchange goods as determined by demand and
supply.
C) the dollar cost of the good given up to get another good.
D) independent of the slope of the curve.
The United States must give up the production of 300 motorcycles to produce 20
additional SUVs with the same resources. In this case, the opportunity cost of
producing 5 SUVs is ________ motorcycles.
A) 5
B) 20
C) 100
D) 75
Which is NOT a source of comparative advantage?
A) In general, France has absolute advantage over Italy in production of goods and
services.
B) The United States’ technology for computer chip design is more advanced than
India’s.
C) Hawaii has a more favorable climate to grow pineapple than Italy.
D) In the market for lumber, Canada has many more trees than England.
Look at the table The Production Possibilities for Tractors and Crude Oil. _____ has
(have) an absolute advantage in producing crude oil.
A) The United States
B) Mexico
C) Both the United States and Mexico
D) Neither the United States nor Mexico
Figure: The Production Possibilities for Two Countries
Look at the figure The Production Possibilities for Two Countries. Malaysia has an
absolute advantage in producing:
A) radios.
B) tires.
C) both radios and tires.
D) neither radios nor tires.
Figure: Comparative Advantage and the Production Possibility Frontier
Look at the figure Comparative Advantage and the Production Possibility Frontier.
_____ has an absolute advantage in the production of _____ and a comparative
advantage in the production of _____.
A) The United States; computers; roses
B) Colombia; computers; roses
C) The United States; roses; computers
D) Colombia; roses; roses
If a nation imports a good when the economy is opened to trade, the domestic price of
the good will _____ and domestic consumption will _____.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Mexico produces lettuce but can also import it. If Mexico imports some lettuce:
A) Mexico has a comparative advantage in lettuce production.
B) the world price is lower than the domestic price.
C) the price in Mexico will rise to equal the world price.
D) the domestic quantity supplied will increase.
Figure: The Market for MP3 Players
Look at the figure The Market for MP3 Players. If the world price equals $100 and
there is free trade, producer surplus:
A) gains $1.5 million.
B) gains $2 million.
C) gains $750,000.
D) falls.
Assume an economy moves from autarky to free international trade. In the export
sector, consumer surplus _____, producer surplus _____, and the economy as a whole
_____.
A) rises; rises; gains
B) rises; falls; gains
C) falls; rises; gains
D) falls; rises; loses
When a business hires people in other countries to perform various tasks, _____ has
occurred.
A) comparative advantage
B) globalization
C) offshore outsourcing
D) pauper labor
Explain the difference between comparative advantage and absolute advantage.
Suppose a nation has freely imported sugar at the world price PW for many years.
However, a new government administration decides to levy a tariff on imported sugar,
and the price rises to Pt. Most economists report that this has caused inefficiency. How?
Advocates of trade barriers suggest that the barriers are needed for national security, job
creation, and to:
A) protect producers who are just starting out so that they can become more established.
B) eliminate the need for governments to become involved in the trade discussions.
C) enhance the comparative advantage nature of trade.
D) increase tariff revenue for government.
The World Trade Organization:
A) oversees trade agreements.
B) is an example of a trade agreement.
C) includes all nations.
D) was established before World War II.
A country’s real gross domestic product (GDP), undergoes periodic fluctuations called
a(n):
A) recession.
B) business cycle.
C) expansion.
D) trough.
Real per capita GDP is:
A) real GDP divided by the population.
B) real GDP divided by the amount of capital available in the economy.
C) not a useful measure of human welfare.
D) rarely used as a tool to compare countries’ possible resources.
Spending on inputs is _____ of GDP, and investment spending is _____ of GDP.
A) part; part
B) not a part; part
C) part; not a part
D) not a part; not a part
Households receive income in the form of all of the following EXCEPT:
A) wages.
B) dividends.
C) interest and rent.
D) investment spending.
GDP is:
A) the total dollar value of all transactions in a year.
B) the total value of all final goods and services produced in a year.
C) the total value of all final goods and services produced by Americans at home and
abroad in a year.
D) the total dollar value of all goods produced in the economy in a year.
GDP is the sum of:
A) personal consumption, investment, government purchases of goods and services,
exports, and imports.
B) personal consumption, investment, government purchases of goods and services, and
net exports.
C) personal consumption, investment, government purchases of goods and services, and
net imports.
D) value added, net imports, and government purchases of goods and services.
The calculation of GDP includes the value of all of the following goods EXCEPT:
A) Firestone tires sold at your local garage.
B) Bridgestone tires purchased by Ford Motor Co.
C) Goodyear tires purchased by the United States Secret Service.
D) Michelin tires purchased by Canadian car collectors.
GDP may be calculated as the sum of:
A) consumer spending, investment spending, government purchases of goods and
services, and exports minus imports.
B) consumer spending, investment spending, government transfer payments, and
exports minus imports.
C) consumer spending, investment spending, government purchases of goods and
services, and exports.
D) exports and imports only.
The total value of all final goods and services produced in a given year, calculated using
the prices of a selected base year is:
A) real GDP.
B) nominal GDP.
C) net exports.
D) consumption spending
Suppose that nominal GDP is $1,000 in 2009 and $1,500 in 2010. If the overall price
level _____ between 2009 and 2010, we could say that real GDP _____.
A) increased by 50%; stayed constant
B) increased by less than 50%; decreased
C) increased by more than 50%; increased
D) increased by 50%; increased
Assume that the real GDP of the United States is approximately $12 trillion and the
population of the United States is approximately 300 million. What is per capita real
GDP?
A) $4,000
B) $36,000
C) $40,000
D) Real per capita GDP can’t be determined without more information.
In the Republic of Sildavia, a market basket of goods and services cost $130 in 2009,
$140 in 2010, and $160 in 2011. Based on this information and considering 2009 as the
base year, inflation from 2009 to 2011 was:
A) 7.14%.
B) 7.69%.
C) 14.28%.
D) 23.07%.
You read in the newspaper that the consumer price index in 2011 was 120. You
conclude that a typical market basket in 2011 would have cost _____ more than the
same market basket purchased in _____.
A) 20%; 2010
B) 120%; 2010
C) 20%; the base year
D) 120%; the base year
Look at the table Price Index. What is the inflation rate between 2010 and 2011?
A) 6.8%
B) 4%
C) 7%
D) 6%
Look at the table CPI. Suppose only bread, laptops, and movies are produced in this
economy. Calculate the consumer price index of 2012, using 2008 as the base year.
A) 81.9
B) 100
C) 75.8
D) 95
Look at the table CPI II. Prices _____ between 2010 and 2011.
A) fell by 5%
B) fell by 4%
C) increased by 4%
D) increased by 5%
The GDP deflator is equal to:
A) nominal GDP divided by real GDP times 100.
B) real GDP divided by nominal GDP times 100.
C) real GDP times nominal GDP times 100.
D) [(real GDP times nominal GDP) divided by real GDP] times 100.
Payments to Social Security recipients are indexed to the rate of inflation, as measured
by the consumer price index. This means that when the rate of inflation increases, the
_____ Social Security recipients _____.
A) market basket for; increases
B) market basket for; decreases
C) payments to; increase
D) payments to; decrease
Why do economists bother to compute real GDP? Why can’t we just compare nominal
GDP from one year to the next?
Suppose the consumer price index was 180.5 last year and this year is 202.2. What is
the rate of inflation between last year and this year? What is the rate of inflation
between the base year and this year?
You are given the choice of receiving $100 today or $115 one year from today. What
annual interest rate will make you indifferent between these two choices?
A) 5%
B) 10%
C) 15%
D) 20%
If goods A and B are substitutes, a decrease in the price of good B will:
A) increase the demand for good A.
B) increase the demand for good B.
C) decrease the demand for good A.
D) increase the demand for good B and decrease the demand for good A.
The introduction of ATMs:
A) increased the demand for cash because it made cash easier to get.
B) decreased the demand for cash because it reduced the cost of moving from other
assets into cash.
C) did not change the demand for cash because it is proportional to the price level.
D) did not change the demand for cash, as ATMs do not affect public spending habits.
Crowding out hampers the economy by:
A) decreasing government borrowing.
B) decreasing consumption.
C) increasing private borrowing.
D) reducing private investment spending on physical capital.
If a country’s currency appreciates, all other things equal, exports _____ and imports
_____ .
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
In an economy with no taxes or imports, if disposable income decreases by $2,000 and
consumption decreases by $1,500, the multiplier is “4.
A) True
B) False
GDP per capita measures the value of all intermediate goods and services produced in
the economy.
A) True
B) False
The inflation or deflation rate is:
A) the change in a price index divided by the initial value of the index.
B) the change in a price index divided by the new index number.
C) the difference between the initial price index number and the new price index
number.
D) computed by dividing the old price index number by the new price index number.
Which of the following is FALSE? At the time of the Great Depression:
A) the measurement of the business cycle was well advanced.
B) there was no widely accepted theory of the causes of depressions.
C) economists recognized that the economy did not always grow smoothly.
D) the U.S. economy was substantially agricultural.
If real GDP is greater than planned aggregate spending:
A) unplanned inventory investment is negative.
B) real GDP will fall.
C) the economy is in equilibrium.
D) real GDP will rise.
Countries A and B trade freely with each other. Suppose interest rates in the loanable
funds market in country A are lower than in the country B. This means:
A) funds will flow from country A to country B.
B) this interest rate differential will persist as long as citizens view domestic assets as
substitutes for foreign assets.
C) funds will flow from country B to country A.
D) interest rate differentials cannot be changed.
The financial slump that began in the United States in the summer of 2007 was a result
of:
A) falling energy prices.
B) massive tax increases necessary to balance the federal budget.
C) a crisis in the foreign exchange market.
D) a sharp fall in housing prices.
Suppose a panel of economists predicts that a nation’s real GDP per capita will have an
average annual growth rate of 2%. According to the rule of 70, how many years will it
take for this nation’s real GDP per capita to double?
A) 35
B) 70
C) 140
D) 20
Scenario: Money Creation
The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and
deposits the money in his checking account. The bank does NOT want to hold excess
reserves.
Look at the scenario Money Creation. Immediately after the deposit, reserves _____
and demand deposits _____ by $1,000.
A) increase by $1,000; increase
B) increase by $1,000; decrease
C) decrease by $1,000; decrease
D) decrease by $200; increase
Government borrowing will not crowd out private investment spending if
unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n)
_____ in saving at each interest rate.
A) high; increase; increase
B) high; increase; decrease
C) low; increase; decrease
D) low; decrease; decrease
Table: Per Capita GDP
Look at the table Per Capita GDP. The growth rate of per capita real GDP from 2011 to
2014 was:
A) 200%.
B) 50%.
C) “50%.
D) “33%.
The government has almost eliminated the possibility of bank runs by instituting
protective measures. All of the following are such measures EXCEPT:
A) capital requirements.
B) reserve requirements.
C) loan guarantees.
D) deposit insurance.
Abe starts exercising regularly, and after a few months he can do twice as much of
everything. In a single day Abe can now make 10 hamburgers or 8 milkshakes rather
than the 5 hamburgers and 4 milkshakes he made in the past. We now know that Abe’s
production possibility frontier has _____, but his opportunity costs of making
milkshakes _____.
A) shifted right; are unchanged
B) shifted right; have decreased
C) not changed; have increased
D) not changed; have decreased
Figure: Expanded Circular-Flow Model
Look at the figure Expanded Circular-Flow Model. How does the government finance
its spending?
A) taxes of $150 plus borrowing of $70
B) foreign borrowing and sales of stock of $110
C) investment spending of $120
D) net exports of $80
Look at the figure Wine and Wheat. The opportunity cost of moving from producing
ONLY wheat to producingONLY wine is _____ tons of wheat.
A) 3
B) 6
C) 9
D) 15
People who live in large cities decide to spend less in their day-to-day activities. This
will most likely lead to:
A) less income for other people.
B) more income for other people.
C) no impact on other people.
D) inflation.
The idea that the interest rate is determined by the supply and demand for money is
known as:
A) the liquidity preference model.
B) the quantity theory of money.
C) the monetarist theory.
D) the loanable funds theory.
Financial markets make borrowing large amounts of money easier because they
simplify negotiation between borrowers and lenders. This is an example of:
A) reducing transaction costs.
B) reducing risk.
C) providing liquidity.
D) acting as a lender of last resort.
Fiat money is:
A) the same as commodity money.
B) money backed by a government’s decree that it be accepted as a means of payment.
C) money backed by gold or silver.
D) used in barter exchanges.
You receive an email from a firm proposing the following business deal. The firm will
send you $1,000 now, and in exchange you will send it $1,100 in one year. You will just
break even if the annual interest rate is:
A) 12%.
B) 4%.
C) 6%.
D) 10%.
The aggregate consumption function can shift because of changes in expected
disposable income and in aggregate wealth.
A) True
B) False
The circular-flow diagram illustrates how households _____ goods and services and
_____ factors of production.
A) buy; sell
B) buy; buy
C) own; buy
D) own; sell
Disposable income equals:
A) income plus government transfers minus taxes.
B) income plus government spending minus taxes.
C) income minus taxes plus government spending.
D) income minus taxes minus government transfers.
The rule of 70 is most useful in:
A) identifying the causes of economic growth.
B) identifying the sources of economic growth.
C) estimating the productivity of labor.
D) estimating the doubling time of real GDP for a given growth rate.
If the price level increases, real wages will:
A) increase.
B) decrease.
C) remain constant.
D) fluctuate randomly.
Which of the following is TRUE of a normal good?
A) When income increases, the demand for the good remains unchanged.
B) When income increases, the demand for the good decreases.
C) When income increases, the demand for the good increases.
D) Income and the demand are unrelated.
Keynesian economics emphasized that economic downturns could be due to:
A) inflation.
B) technological shocks.
C) a decline in business confidence.
D) deflation.
Figure: Aggregate Expenditures and Real GDP
Look at the figure Aggregate Expenditures and Real GDP. At a real GDP of $9,000
billion:
A) planned investment is less than actual investment.
B) planned investment equals actual investment.
C) planned investment is greater than actual investment.
D) there will be no unplanned investment.
Which of the following statements is TRUE?
A) The number of people not working but who have looked for work in the past year
are is equal to the number of unemployed people.
B) The labor force is the total number of people working plus those who are
unemployed.
C) The unemployment rate is the number of people unemployed expressed as a
percentage of the population.
D) The labor force is the same as the population.
Which of the following does NOT explain why the official chronology of past U.S.
business cycles maintained by the National Bureau of Economic Research goes back
only to 1854?
A) The further back in time you go, the fewer economic data are available.
B) There may not have been business cycles in the modern sense much before 1854.
C) Before 1854 the U.S. economy was mostly agricultural, and therefore the short-run
aggregate supply curve was probably close to vertical.
D) There were no banks before 1854.
Your business has $100,000 of excess cash and is considering the purchase of some real
estate. The land will cost your firm $100,000 today, but you hope that in a year its value
will have increased because of a new shopping mall being built nearby, and you plan to
sell it for a profit. Your banker tells you that the annual rate of interest being offered to
savers is 12%. What price must you receive for the land next year for this investment to
be profitable?
The economy is in a recession. The head of the President’s Council of Economic
Advisers is an ardent monetarist. What will this monetarist recommend or not
recommend? Explain.
Using gold as an example, what is the difference between commodity money and
commodity-backed money?
What is the goal of expansionary monetary policy, and how does it work in the short
run?
The economy is in a recession. The head of the President’s Council of Economic
Advisers is a student of economic history, and his philosophy tends to follow the Great
Moderation consensus. What will this economist recommend or not recommend?
Explain.
Most economists do not support a law that requires the federal budget to be balanced
every year. Explain why.
The money demand curve is shown in a graph with the interest rate on short-term assets
on the vertical axis. Why use this short-term interest on the vertical axis and not the rate
of return on other financial assets?
Suppose that real GDP is $1,500, potential GDP is $1,200, and the marginal propensity
to consume is 0.8. If the government is going to close the gap by changing government
purchases of goods and services and imposes no taxes, what specific fiscal policy action
should policy makers take?
What is the opportunity cost of holding money?
How did the banking crises of the early 1930s exacerbate the severity of the Great
Depression?
Prior to the 1930s, classical economics was the predominant theory about the behavior
of the aggregate price level, aggregate output, and the appropriate role of monetary
policy. Describe how classical economists believed the economy would be affected by
an increase in the money supply.
Explain what the Fisher effect implies. What does this effect tell us about the
relationship between inflation expectations and the market for loanable funds?
Suppose that the natural rate of unemployment is 5% and that the economy is operating
at 101% of potential output. Use Okun’s law to determine the unemployment rate.
Figure: The Aggregate Production Function
Look at the figure The Aggregate
Production Function. Does it exhibit diminishing returns to physical capital? Explain.
The economy is in a recession. The head economist at the central bank is concerned
about the growing possibility of a liquidity trap. The head of the President’s Council of
Economic Advisers is an ardent Keynesian. What will this Keynesian economist
recommend or not recommend? Explain.
Suppose that the marginal propensity to consume is 0.80 and the government spends
$10 million to repair a bridge. Assuming no taxes and no international trade, explain
how the $10 million of government spending will increase GDP by $50 million.