Archives: Quiz

A comparative advantage is the ability of one person or nation to produce a good at an opportunity cost that is lower than that of another person or nation. In a barter economy, the exchange of goods trade requires a […]

Adverse supply shocks can cause a recession with increasing price level. The cost of unanticipated inflation is arbitrary redistribution of income and wealth. Answer: TRUE When you have a job and your employer compensates you for your time with money, […]

The price of a stock is equal to the present value of expected future dividend payments. A restriction on imports is likely to reduce further restrictions on trade. Answer: FALSE Higher tax rates lower the value of the spending multiplier […]

A product produced in a foreign country and purchase by residents of the home country is an import. The opportunity cost of a table is 5 chairs in nation A and 1 chair in nation B. If the nations specialize […]

If the exchange rate changes from 150 yen per U.S. dollar to 125 yen per U.S. dollar, then the U.S. dollar has appreciated. Personal disposable income is pre-tax income that flows directly to households. Answer: FALSE An increase in the […]

If inflation is eight percent, a nominal interest rate of six percent translates into a real interest rate of two percent. The full-employment level of output represents that maximum output that a country can produce. Answer: FALSE According to the […]

The opportunity cost of something is the gain you receive as a result of your sacrifice. When the federal government runs a budget deficit, it is possible for current taxpayers to pass the tax burden to future generations. Answer: TRUE […]

If the Federal Reserve raises the discount rate, banks will be inclined to borrow additional reserves and the money supply will increase. When people who are not working start looking for jobs, the labor-force participation rate increases. Answer: TRUE Rule-of-thumb […]

A reduction in the price level will shift the money demand curve to the right. In the United States, corporate profits are taxed twice. Answer: TRUE Recall Application 3, “The Broken Window Fallacy and Keynesian Economics,” to answer the following […]

If the opportunity cost of a table is 5 chairs in nation A and 1 chair in nation B, it makes sense for nation B to produce chairs. Economists argue that individuals should continue to consume until total benefit equals […]

Production inputs such as steel rods have prices that adjust very quickly. People acting in their own self interest try to gain at the expense of others in exchange leads to someone necessarily losing in a voluntary exchange. Answer: FALSE […]

One example of a microeconomic question is, “Should unemployment benefits be increased?” A decrease in the cost of production will shift the supply curve down and to the right. Answer: TRUE For a given interest rate, a higher level of […]

The income-expenditure model assumes that the aggregate supply curve is horizontal at a given price level. An inside lag is the time period it takes for the stabilization policies to take effect after they have been implemented. Answer: FALSE The […]

If GDP is higher than potential output, wages and prices will rise. Refer to Application 2, “Recovering From a Recession,” to answer the following questions: After reading the application, you can infer that the recession in 1973 was also caused […]

The reason why economists do not need details regarding the topography of a region when determining driving directions is because economics is because economics desires unrealistic assumptions. The deposit insurance is provided by a private corporation. Answer: FALSE The definition […]

If autonomous consumption (Ca) increases, the slope of the consumption function becomes steeper. Acquiring knowledge and skills by participating in the production process is called “learning by doing.” Answer: TRUE A larger labor force will allow the economy to produce […]

The velocity of money is the ratio of real GDP to the money supply. The Phillips curve is a graph showing the relationship between the rate of inflation and the unemployment rate. Answer: TRUE The multiplier increases as the MPC […]

If a central bank is credible in its desire to fight inflation, it can deter the private sector from taking aggressive actions that drive up prices. When demand changes and the demand curve shifts, equilibrium price and equilibrium quantity change […]

The standard way to measure the effect of debt in an economy is the stock of debt relative to the GDP. When you use money to fill your car with gas every week, you are using money as a unit […]

The substitution effect of a price change implies that as the price of a good falls, people are likely to buy less of the good whose price has fallen. Spending on consumer durables decreases as the interest rate increases. Answer: […]

Tax changes that favor people who save will also tend to favor those with relatively higher incomes. Decreases in taxes shift the aggregate demand curve to the right. Answer: TRUE As a component of GDP, consumption expenditures refers to purchases […]

Recall Application 4, “Coping with the Financial Chaos Caused by the Mortgage Crisis,” to answer the following questions: According to Application 4, the purchase of short term commercial paper from nonfinancial corporations is a function of the Fed that was […]

If the growth rate of money changes, there will be no long-run effects on real interest rates. A decrease in supply will cause the equilibrium price and quantity of a good to fall. Answer: FALSE Countries that devote a large […]

Recall Application 3, “The Effectiveness of Committees,” to answer the following questions: Supporters of stabilization policy argue that attempts to stabilize the economy can always be effective because of time lags. In the short run, higher taxes will lead to […]

The government uses the buying power of wages rather than face value or nominal value in reporting changes in “real wages” in the economy. The government spending multiplier is equal to the tax multiplier. Answer: FALSE The federal government has […]

The larger the marginal propensity to consume, the smaller the multiplier. If the required reserve ratio is 100%, the money multiplier is zero. Answer: FALSE The natural rate of unemployment is the unemployment rate during a period of full employment. […]

Recall Application 1, “The Chinese Yuan and Big Macs,” to answer the following questions: According to the application, the law of one price holds for Big Macs. The highest tax rate for individuals during the Kennedy Administration was lower than […]

The Federal Reserve is under the supervision of Congress. The investment rule states that you should invest in a project if the present value of the future payments from the project is less than or equal to the cost you […]

When the unemployment rate is greater than the natural rate, wages and prices will fall eventually. The marginal propensity to consume is the increase in consumption brought about by an increase in wealth. Answer: FALSE The aggregate demand curve is […]

Active fiscal policy is the main tool used by the Fed for economic stabilization. Insurance companies such as Farmers Insurance are considered as financial intermediaries. Answer: TRUE Economists who have studied economic growth find strong evidence of convergence. Answer: FALSE […]

Other things being equal, the higher the interest rate, the larger investment spending. National policy always overrides free trade in matters of environmental concern. Answer: FALSE The substantial increase in clear property rights has severely impeded growth in many developing […]

Recall Application 3, “The Effectiveness of Committees,” to answer the following questions: The time it takes policymakers to recognize the need for and implement an economic policy to stimulate the economy is known as the outside lag. The ratio of […]

Free trade makes the people of a country worse off. Firms react to a unplanned positive inventory investment by increasing output. Answer: FALSE Being self-sufficient in the production of everything we need is efficient. Answer: FALSE What matters to people […]

Most modern economic analysis is normative in nature, but involves questions with positive aspects. To determine an appropriate congestion tax, an economist has to assume that people respond to incentives. Answer: TRUE In the most simple model of the circular […]

Investments are actions that incur costs in the future but provide expected benefits today. Real business cycle theory emphasizes that shocks to technology can play a big part in causing economic fluctuations. Answer: TRUE The rate of interest that a […]

According to the principle of diminishing returns, an additional worker decreases total output. To draw the consumption possibilities curve for a particular nation you need to know the output of the good for which the nation has a comparative advantage […]

When considering a two-input production function, one of which is increasing while the other is fixed, at some point called the point of diminishing returns, output will increase at a decreasing rate. Slope is calculated as rise / run. Answer: […]

An increase in the benefit from undertaking an activity will result in an increase in the opportunity cost of that activity. The law of demand states that there is a negative relationship between price and quantity demanded, ceteris paribus. Answer: […]

Interest payments on the national debt are not a problem because we owe all of it to ourselves. As a lender of last resort, the Fed avoids most financial crisis by providing liquidity to the financial system. Answer: TRUE If […]

The unemployment that occurs as a result of the normal functioning of the labor market is called cyclical unemployment. Nominal wage increases will cause real wage increases. Answer: FALSE The price system always works instantaneously. Answer: FALSE The larger the […]

Two goods are complements if an increase in the price of one good leads to an increase in demand for the other. Economists assume that individuals make informed decisions and act in their own self-interest. Answer: TRUE Ceteris paribus means […]

The Fed has immense power and there are no limits to the extent to which it can effectively control the economy. The government can use contractionary fiscal policies to prevent a wage-price spiral. Answer: TRUE Taxation and government spending are […]

Higher taxes is an example of an expansionary fiscal policy. According to the Application, all countries that are involved in a war will experience hyperinflation. Answer: FALSE In the determination of production of goods or services with respect to GDP, […]

What matters to people is the face value of money or income. In the circular flow diagram, households and the firms interact in two markets: the product and the factor markets. Answer: TRUE The opportunity cost of a table is […]

If the economy is in long-run equilibrium at full employment, lowering taxes leads to a higher price level and a higher level of real GDP. Along a Keynesian short-run supply curve, when the price level rises, there is an increase […]

According to the application, shocks to aggregate demand are easily anticipated. Economics tells us what to choose given the tradeoffs. Answer: FALSE The multiplier is always larger than one because the marginal propensity to consume is always larger than one. […]

Economic analysis includes commuting time as part of the cost of traffic congestion. The exchange rate of currencies between countries affects the prices of the goods purchased and sold between them. Answer: TRUE In the United States today, the government […]

In a business cycle, the period following a trough is called an expansion. An economy is better off with an increase in the stock of capital. Answer: TRUE A tax cut of $10 billion will have less effect on the […]

M1 is larger than M2. Banks can obtain funds to make loans by borrowing reserves from other banks through the federal funds market. Answer: TRUE Fred wants to trade peanut butter for bread. Sally wants to trade bread for jelly. […]

An economy’s capital stock is increased when individuals and institutions use savings to increase capital investment in stocks and bonds. The notion of opportunity cost allows the measurement of tradeoffs. Answer: TRUE The interest rate quoted in financial markets is […]