Archives: Quiz

Along the short run supply curve, when the price level rises, there is an increase in aggregate quantity supplied. An excess demand for money drives interest rates down. Answer: FALSE The United States experienced a liquidity trap in the 1st […]

If current unemployment is close to the natural rate of unemployment, the level of real GDP is likely to be close to the level of potential output. Fiat money refers to a monetary system in which gold backs up paper […]

Corporate income is taxed twice. Unlike social insurance taxes, income taxes are paid on wages only. Answer: FALSE When there is imperfect competition, the role of government is to take control of production. Answer: FALSE The actual unemployment rate can […]

The federal income tax on wages is the largest source of revenue for the federal government. A principle is a self-evident truth that most people readily understand and accept. Answer: TRUE An import quota is the same as an import […]

If a person has a comparative advantage in some activity, she must have an absolute advantage in that activity as well. Recall Application 3, “Civil Liberties and the Efficiency of Government,” to answer the following questions: The returns to public […]

The marginal propensity to consume (MPC) is the fraction of additional income that is spent. An increase in the price level in the United States relative to the price level in Mexico will cause an appreciation of the dollar against […]

The long run aggregate supply curve is vertical. Fiscal actions to eliminate a recession are likely to decrease the federal budget deficit. Answer: FALSE Markets exist to facilitate exchange between people. Answer: TRUE Net interest payments made by the government […]

Social insurance taxes are paid by wages and investment income. Based in part on the budget surplus, in 2001 President Bush and Congress passed a permanent tax cut. Answer: FALSE Excess supply in an unregulated market will cause the price […]

Rational expectations of inflation means that when decisions are made regarding inflation, people use information rather than making assumptions that inflation will rise or decline in the future. Stocks and bonds are types of financial intermediaries. Answer: FALSE Economists assume […]

All economic activities are included in the GDP. As the price of a product falls, the demand for the product increases, ceteris paribus. Answer: FALSE On the “demand side” of a market, consumers indicate to producers what they are willing […]

The price of a stock is equal to the present value of expected future dividend payments from the stock. Growth that cannot be explained by increases in capital and labor must be caused by technological progress. Answer: TRUE Recall Application […]

The reason why economists do not need details regarding the topography of a region when determining driving directions is because the topography is irrelevant to complete your objective of getting to a certain place. The Bretton Woods exchange rate system […]

The cost of a bachelor’s degree in philosophy equals the tuition plus the cost of room and board. “Ricardian equivalence” is the proposition that it does not matter whether government expenditure is financed by taxes or by issuing debt. Answer: […]

In the short run, the level of GDP is determined primarily by the aggregate supply. If supply of a product increases and demand for the product decreases, equilibrium price will definitely change. Answer: TRUE The George W. Bush administration inherited […]

An increase in the price level increases the speculative demand for money. Intermediate goods are not counted as part of gross domestic product. Answer: TRUE Inside lags in fiscal policy tend to take a long time, usually longer than the […]

If a project costs $600 today and returns $630 next year, the highest interest rate at which the project should still be undertaken is five percent. An increase in checking account balances equals the initial deposit multiplied by total reserves. […]

If the opportunity cost of 1 wristwatch is 4 wall clocks in Japan and 2 wall clocks in Germany, it makes sense for Germany to produce wristwatches. Labor market equilibrium occurs at a real wage where the demand for labor […]

Excess reserves in a bank are the difference between required reserves and the bank’s total net worth. When prices rise, increases in real income are greater than increases in nominal income. Answer: FALSE The notion of opportunity cost allows the […]

Foreign investment can increase a country’s capital stock. When applying the marginal principle, you should pick the level at which the activity’s marginal benefit is less than its marginal cost. Answer: FALSE In the short run, it is likely that […]

Fiscal policy affects aggregate demand. Governments sometime create an excess supply of a product by setting a minimum price that is greater than the equilibrium price, resulting in a permanent excess supply of the product. This is known as a […]

Money is an example of a scarce factor of production. Tradeoffs involve an exchange of one thing for another because resources are limited and can be used in different ways. Answer: TRUE Additional factors beyond supply and consumer purchasing desire […]

Underground activities pertain to all illegal activities in the economy. When individuals or firms make an investment, they incur costs today in the hope of future gains. Answer: TRUE From 1948 to 2010, the United States has experienced only 4 […]

Economists will always reach the same conclusion in their positive analyses. The inside lags for monetary policy are relatively long compared to those for fiscal policy. Answer: FALSE If one variable A falls as the other variable B falls, then […]

When federal government spending amounts to less than tax revenues, the federal government runs a budget deficit. Money is anything that is regularly used in exchange. Answer: TRUE The government debt tends to rise when GDP rises, and tends to […]

The crisis in Mexico in 1994, Asia in 1997 and Argentina in 2002 were all caused by weak fundamentals. If the price level falls faster than the wage rate, then the real wage decreases. Answer: FALSE Unlike Classical economists, Keynes […]

One of the key economic questions is “where should products be produced?” The balanced-budget multiplier is calculated as the government spending multiplier minus the tax multiplier. Answer: FALSE Macroeconomics helps explain economic fluctuations, why the economy shrinks and expands and […]

GDP ignores transactions that take place in the underground economy. In the long run, the real rate of interest does not depend on monetary policy but the nominal rate of interest does. Answer: TRUE In the last few decades there […]

Transfer payments are excluded from GDP. The Mexican financial crisis of 1994 was due to international investors’ loss of confidence in the country. Answer: TRUE If the actual interest rate in the money market is higher than the equilibrium interest […]

The Federal Reserve is a privately-operated commercial bank. Recall Application 2, “Economic Equality May Sustain Economic Growth,” to answer the following questions: According to the Application, intangible capital measurements is based on expenditures on research and development, marketing, design and […]

A large technological improvement will shift the short-run aggregate supply curve to the right. Excess supply in an unregulated market will cause the price of a product to fall. Answer: TRUE According to the real business cycle theory, technological progress […]

The relationship between the level of saving and the level of consumption is called the savings function. Labor supply curves are always upward-sloping. Answer: FALSE Hyperinflation can be thought of as a monetary policy phenomenon. Answer: TRUE The dollar will […]

Estate and gift taxes account for a very small portion of total tax revenues collected by the federal government because taxes are levied only on large estates. The only way governments can finance a deficit is by printing new money. […]

When Jimmy produces one guitar his costs total $250. When he produces two guitars his total costs are $400. This means that Jimmy’s marginal cost of producing the second guitar is $200. Active economic policies are more likely to destabilize […]

Price level is held constant when moving along the planned expenditures curve. Recall Application 3, “Oil Supply Disruptions, Speculation and Supply Shocks,” to answer the following questions: Oil price speculators cause an increase in the price of oil both now […]

The absolute value of the tax multiplier is equal to the absolute value of the government spending multiplier. The market demand curve shows the relationship between the price and the quantity demanded by all consumers, everything else being equal. Answer: […]

If the economy is experiencing inflation, then nominal GDP is always greater than real GDP. The Asian financial crisis of 1997 was avoided thanks to the coordination of large scale international lending. Answer: FALSE Citibank is a financial intermediary. Answer: […]

When the Fed conducts an open market sale, it leads to a higher level of investment and output in the economy. People will buy more of a normal good when their income decreases. Answer: FALSE Capital deepening will occur as […]

The outside lags related to monetary policy tend to be quite long. A decrease in the population of an economy is likely to lead to lower wages and a lower quantity of labor used. Answer: FALSE If the net international […]

If a country is experiencing inflation, nominal GDP is always greater than real GDP. Capital deepening is the only mechanism by which economies can grow. Answer: FALSE Accurate predictions for exchange rates can be determined by considering purchasing power parity. […]

The federal budget acts as an automatic economic stabilizer because the President has the power to authorize additional discretionary spending. Governments occasionally get involved in creating a market equilibrium by setting a maximum price that is less than the equilibrium […]

If there is inflation, real interest rates will be greater than nominal interest rates. A “market” is an arrangement that enables people to exchange goods and services. Answer: TRUE In order to go to college, James incurs an opportunity cost […]

The marginal propensity to consume is always greater than unity. A government’s budget deficit or surplus is the difference between what it spends and what it collects in taxes in a year. Answer: TRUE In the short run, the price […]

The multiplier for investment represents the ratio of the change in income to the change in investment spending. According to Keynesian economics, prices and wages determine the level of output in the economy. Answer: FALSE Inflation distorts the operation of […]

Hyperinflation refers to an inflation rate which exceeds 5 percent per month. Uncertainty about the future is likely to increase current consumption spending. Answer: FALSE An excess supply of dollars will cause an appreciation of the pound relative to the […]

Opportunity cost is the difference between the nominal and real cost of some action. In a closed economy, when the government runs a budget deficit, national saving is reduced, interest rates rise, and investment falls, holding all else constant. Answer: […]

A key assumption of most economic analysis is that people act rationally and in their own self-interest. A nation’s exports are NOT impacted by the multiplier effect. Answer: FALSE The opportunity cost of going to a particular college is not […]

If one variable declines as the other variable declines, the two variables are negatively related. The origin of a graph is the intersection of the two axes, where the value of both variables is zero. Answer: TRUE The term “crowding […]

Long-run money neutrality means that an increase in the money supply has no effect on real interest rates, investment, or output in the long run. When decisions are made regarding inflation using the rule-of-thumb, decision makers assume that inflation next […]

The marginal output of labor is the amount of output that can be produced if one more unit of labor is added. The marginal propensity to consume is the slope of the consumption function. Answer: TRUE According to the quantity […]

A Bank has excess reserves if the actual reserves that the bank holds is less than the required reserves. A decrease in population would shift the demand curve to the left. Answer: TRUE Money solves the problem of double coincidence […]