Test Bank For M Economics, The Basics, 4th Edition Mike Mandel Chapter 1-19 Answers are at the End o

Test Bank For M Economics, The Basics, 4th Edition Mike Mandel Chapter 1-19 Answers are at the End of Each Chapter Chapter 1 Student name:__________ 1) Technological change has always been the most critical factor in raising living standards, even going as far back as the development of the A) steam engine.

B) iPod. C) microprocessor.

D) fluorescent light.

2)

Globalization is the exchange of __________ among countries.

A) workers and jobs B) communications C) goods, services, ideas, and people D) money and other financial assets

3)

Which of the following is not part of an economy's financial markets?

A) The residential mortgage market B) The stock market C) Banks and brokerage firms D) Political action committees

4)

In a centrally planned economy, decisions are made by

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A) private businesses.

B) large corporations.

C) low-level government employees.

D) top-level government officials.

5)

In recent years, China and India have prospered economically by introducing A) more central planning.

B) greater government intervention.

C) a stronger central bank.

D) more competition through markets.

6)

Governments generally take responsibility for A) deciding what is produced by most businesses.

B) determining the moral code.

C) making sure the economy remains healthy.

D) the purchasing decisions of households.

7) Over the past 30 years, most countries have moved in the direction of less intervention by government, a process known as A) central planning.

B) economic competition.

C) deregulation.

D) marginalization.

8)

Historically, the most consistent force for economic growth and progress has been

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A) government regulation.

B) the gross domestic product.

C) technology integration.

D) economic competition.

9)

The gross domestic product is calculated by adding up the A) value of all goods and services produced by domestic companies abroad.

B) number of all tangible goods produced in a domestic economy.

C) value of all goods and services produced within the nation.

D) value of services produced domestically and goods produced overseas.

10)

Poorer countries started to develop economically when they A) pretended the rest of the world didn't exist.

B) began to produce what the rest of the world wanted.

C) raised tariffs on imported goods, such as steel and aluminum.

D) protected domestic manufacturing jobs.

11)

A laissez-faire economy has A) a large amount of government regulation.

B) a centrally planned economy.

C) rules that promote social equality.

D) very little government regulation of the economy.

12)

Top-down management of an economy by the government generally

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A) produces exceptional results in economic growth.

B) creates incentives and opportunities for businesses to expand.

C) causes significant increases in GDP. D) leads to low rates of economic growth.

13)

Which of the following is not a monetary measure of economic prosperity?

A) Annual household income B) Household consumption C) Life expectancy D) Gross domestic product

14)

Besides the gross domestic product, another measure of how well an economy is doing is A) annual household income.

B) government tax rates.

C) presidential popularity polls.

D) publications in economic journals.

15)

Which of the following countries is not among the 10 largest economies in the world?

A) Israel B) China C) Brazil D) India

16)

Which of the following is part of the U.S. economy’s safety net?

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A) Social Security B) Blue Cross and Blue Shield C) Church-affiliated soup kitchens D) Private health insurance

17) Which of the following is an example of a technological change that is transforming an industry?

A) Filet mignon B) Ralph Lauren clothing C) Electric scooters D) Starbucks coffee

18)

Financial markets do not include which of the following?

A) Banks B) Stock markets C) Government regulatory agencies D) Nonprofit organizations

19)

Federal taxes have which of the following effects on the economy?

A) If taxes are increased, the economy expands due to a balanced budget.

B) If taxes are decreased, businesses will invest the difference back into the economy.

C) There is no definitive agreement on the effect.

D) Lower federal taxes will cause budget surpluses.

20)

Over the past 30 years, most countries have moved toward

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A) more government regulation of the economy.

B) less government regulation of the economy.

C) planned central economies.

D) closing the economy to imports.

21)

Deregulation in the United States began with what industries in the 1970s?

A) The oil industry and the postal service B) The automobile and food service industries C) The agricultural and telecommunications industries D) The airline and trucking industries

22)

For the United States, one important benefit of foreign trade is A) less domestic competition.

B) higher tax revenues from tariffs.

C) reality checks in the economy.

D) access to cheaper goods and services.

23)

An example of a company that uses financial markets to raise money is A) a local television news website.

B) your local carryout restaurant.

C) Ford Motor Company.

D) the Social Security Administration.

24) The stock market hit bottom in early 2009, and over the next 10 years, average stock market prices

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A) continued to fall.

B) tripled in value.

C) remained roughly stable.

D) became increasingly volatile.

25) Economic competition sometimes has which of the following negative effects on a domestic economy?

A) It drives up interest rates.

B) It protects domestic jobs.

C) It increases the profits of foreign suppliers.

D) It drives down wages and profits.

26)

Closed economies generally do __________ open economies, in the __________ run.

A) better than; long B) worse than; long C) worse than; short and long D) better than; short and long

27)

Globalization can act as a reality check, forcing everyone to A) try harder and look for better ways of doing things.

B) ask for greater import protections.

C) pull up the drawbridge and pretend the rest of the world doesn't exist.

D) invest in larger factories.

28)

In what way does the government impact the U.S. housing market?

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A) By setting zoning rules and construction codes B) By setting housing prices C) By lending money directly to home buyers D) By building most new residential structures

29)

In the past decade, the income and wealth gap in the United States has A) virtually disappeared.

B) increased.

C) decreased.

D) returned.

30) The top __________ percent of U.S. households earn more than half of the country's income.

A) 10 B) 20 C) 30 D) 40

31)

Chinese leader Deng Xiaoping began what process in the 1980s?

A) The Chinese cultural revolution B) Moving the economy toward central planning C) Shifting away from a centrally planned economy D) The Chinese political revolution

32)

In 2018, the gross domestic product of the United States was

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A) $20.5 million.

B) $20.5 billion.

C) $20.5 trillion.

D) $59,800.

33) Which of the following countries have safety nets that offer better retirement benefits and more job security than the U.S. safety net?

A) European countries, such as France and Germany B) Asian countries, such as China and India C) Our nearest neighbors, Canada and Mexico D) South American countries, such as Venezuela and Brazil

34)

Technological change is generally A) uneven.

B) slow.

C) fair.

D) undisruptive.

35)

Nuclear power in the United States turned out to be A) a boon to the economy.

B) well worth the time and investment.

C) far more expensive and troublesome than expected.

D) a hazard-free source of limitless power.

36)

Supply and demand are examples of

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A) the tools of economics.

B) outdated economic theories.

C) technological advances.

D) a primary source of disagreement among economists.

37)

Renewable energy sources provided __________ of U.S. energy needs as of 2018.

A) 11 percent B) 14 percent C) 77 percent D) almost 100 percent

38) Which of the following best explains why countries are becoming more and more interconnected?

A) Technological change B) Increasing tariffs C) Decreasing global incomes D) Evolving financial markets

39)

Most people have mixed feelings about the financial markets because A) they can experience violent swings.

B) they are controlled by government regulators.

C) the stock market almost always falls in the long run.

D) they provide a means for the average person to become wealthy.

40)

Which is not an example of government intervention in the economy?

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A) The Food and Drug Administration B) The Troubled Asset Relief Program C) The Social Security Administration D) The Great Recession

41)

Which of the following is not mentioned in the textbook as one of its three goals?

A) Presenting the basic tools of economics B) Promoting an understanding of markets C) Showing the ways in which the possibilities of today's economy are expanding D) Teaching how to successfully invest money in the stock market

42) Which of the following is not mentioned in the textbook as a constraint that affects the economy?

A) Households must make purchasing choices based on income.

B) Businesses must make production choices based on technology.

C) Households must make purchasing choices based on government regulations.

D) Businesses must make production choices based on past investments in factories.

43) The textbook says that which of the following is among the key forces shaping today's economy?

A) Technological change B) Government regulations C) Changing consumer confidence D) Labor unions

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44) The textbook says that which of the following is among the key forces shaping today's economy?

A) Political scandals B) Government regulations C) Globalization D) Increasing income inequality

45) The textbook says that which of the following is among the key forces shaping today's economy?

A) Socialism B) Social networking C) Accounting scandals D) The evolution of financial markets

46)

Can economic competition be viewed as a positive force for growth and progress?

A) No, because economic competition historically had neither a positive nor a negative

effect.

B) No, because there is more poverty today than in the past.

C) Yes, because economic competition of any type always leads to growth and progress.

D) Yes, as long as it is conducted within a fair set of rules.

47) Suppose the government decides to eliminate some, but not all, of the rules that govern how investment banks conduct their business. This would be an example of A) a laissez-faire policy.

B) deregulation.

C) central planning.

D) economic competition.

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48) By total economic output (gross domestic product), the United States ranks as the __________ largest economy in the world.

A) first B) second C) third D) tenth

49)

Gross domestic product is

A) not a useful indicator of prosperity.

B) the only indicator of prosperity that economists use.

C) one of many indicators of prosperity, some of which are monetary and some of which are not.

D) one of many indicators of prosperity, all of which are monetary in nature.

50) Which of the following is presented in the text as an issue about which reputable economists might disagree?

A) Whether unemployment rose significantly during the Great Recession B) Whether the government should provide more scholarship funds C) The impact on the federal budget of an increase in military spending D) The definition of a market transaction

51) Which of the following does not explain why there are so many disagreements among economists?

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A) In some cases, there aren't enough data to answer the question.

B) In some cases, the controversy is aggravated by political agendas.

C) In some cases, individuals may stand to gain from policy changes.

D) In some cases, economists have simply not investigated the issue at hand.

52)

As one is beginning to learn economics, one should expect to learn A) a new way of thinking about the world.

B) everything one needs to become an economist.

C) the gross domestic product of every country in the world.

D) very little that will be useful in the real world.

53)

In a market, buyers and sellers A) are in the same place.

B) exchange goods and services for money.

C) compete with one another.

D) undermine the proper functioning of the economy.

54)

Suppose a tenant sues his landlord in court. Does this count as a market transaction?

A) Yes, because the landlord and tenant are in the same place negotiating.

B) Yes, because there is a buyer (tenant) and a seller (landlord).

C) No, because there is a third party (the judge) enforcing rules.

D) No, because there are no voluntary exchanges taking place.

55) Suppose Kyra purchases and downloads an eBook from Amazon.com. Does this count as a market transaction?

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A) Yes, because there is a voluntary exchange of money for a good or service.

B) Yes, because Amazon.com is a well-known marketplace.

C) No, because Kyra and Amazon.com are not physically in the same place.

D) No, because eBooks are not tangible products.

56) Which of the following gives the best reason why the possibilitiesand choices of today’s economy are expanding?

A) Because laws continue to change, making more activities legal B) Because worldwide population continues to grow C) Because the constraints that affect the economy change every day D) Because people are more enlightened today than in the past

57) Due to the existence of financial markets, which of the following does not represent a constraint on businesses that limits what they can produce?

A) Technology B) Cash reserves C) Available factories D) Current production processes

58)

Who competes with whom in a market?

A) Buyers and sellers compete with each other.

B) Buyers and sellers compete with the government.

C) Sellers compete with other sellers; buyers are not part of the competition.

D) Buyers compete with other buyers and sellers compete with other sellers.

59)

Who makes decisions and trade-offs in the face of scarce resources?

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A) Individuals B) Businesses C) Governments D) All of these choices are correct.

60)

Why do individuals and businesses have to make decisions?

A) Because resources are scarce B) Because government regulations require it C) Because they want to avoid trade-offs D) Because it is the only way to increase income

61) Which of these is not presented in the chapter as an example of something that would have previously been impossible but that has now become commonplace?

A) People can buy almost anything online.

B) Businesses make production choices based on available technology.

C) Once-poor countries now challenge the United States in many market.

D) Ordinary people are able to invest in the stock market.

62)

Which of the following saw significant declines between late 2007 and early 2009?

A) The U.S. economy only B) Stock prices and housing prices only C) Housing prices only D) Stock prices, housing prices, and the U.S. economy

63)

Why didn't financial markets in the United States and in other countries collapse in 2009?

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A) Because governments actively intervened in these financial markets B) Because already in-place regulations passively protected financial markets C) Because investors saw the opportunity for big profits and continued to invest D) Because the financial markets were the healthiest part of these economies

64) The issue of online privacy is a good example of the difficulty associated with deciding the right level of government intervention in an economy because A) the government lacks the technical know-how to appropriately assess the problem.

B) companies spend significant resources lobbying for more regulation.

C) too much regulation and too little regulation can both have a negative economic impact.

D) the U.S. Constitution does not directly refer to online privacy.

65)

Which of the following is not a good indicator of prosperity?

A) Life expectancy B) Environmental quality C) Results from surveys of happiness D) The size of the safety net

66) What are the main forces shaping today's economy, and how are they impacting the economy?

67)

How does top-down management of an economy affect it?

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68)

Why is the gross domestic product one of the indicators of prosperity?

69)

What does an economic safety net provide, and why would a country want to have one?

70)

Why do economists disagree on so many economic policy questions?

71)

Technological change is a key force in shaping today's economy. ⊚ true ⊚ false

72) Globalization is the increasing exchange of goods, services, ideas, and people within a country. ⊚ true ⊚ false

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73)

Technological change is the only reason for globalization. ⊚ true ⊚ false

74) A laissez-faire economy has minimal government regulations or laws affecting the economy. ⊚ true ⊚ false

75) History suggests that economic competition is the most consistent force for economic growth and progress. ⊚ true ⊚ false

76) Deregulation includes reducing governmental control over some aspects of private industry, while increasing control of others. ⊚ true ⊚ false

77) The gross domestic product is the dollar value of all goods and services produced by the economy. ⊚ true ⊚ false

78) Most economists agree on the amount of government intervention necessary in an economy. ⊚ true ⊚ false

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79)

A centrally planned economy encourages investment and innovation. ⊚ true ⊚ false

80) Economics is the study of how individuals, businesses, and governments make decisions and trade-offs in the face of scarce resources. ⊚ true ⊚ false

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Answer Key Test name: chapter 1 1) A 2) C 3) D 4) D 5) D 6) C 7) C 8) D 9) C 10) B 11) D 12) D 13) C 14) A 15) A 16) A 17) C 18) D 19) C 20) B 21) D 22) D 23) C 24) B 25) D 26) B 21

27) A 28) A 29) B 30) B 31) C 32) C 33) A 34) A 35) C 36) A 37) A 38) A 39) A 40) D 41) D 42) C 43) A 44) C 45) D 46) D 47) B 48) A 49) C 50) B 51) D 52) A 53) B 54) D 55) A 56) C 22

57) B 58) D 59) D 60) A 61) B 62) D 63) A 64) C 65) D 71) TRUE 72) FALSE 73) FALSE 74) TRUE 75) TRUE 76) FALSE 77) TRUE 78) FALSE 79) FALSE 80) TRUE

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Student name:__________ 1)

The demand curve is the graphical counterpart to the A) demand schedule.

B) supply curve.

C) supply schedule.

D) market equilibrium.

2)

The law of demand suggests that most demand curves will be A) upward-sloping.

B) a straight line.

C) downward-sloping.

D) curved.

3)

A supply schedule illustrates the quantity supplied at A) various demand levels.

B) a single selling price.

C) different selling prices.

D) market equilibrium.

4)

A market supply schedule A) is all the products or services demanded in a market.

B) combines the quantities supplied by all businesses in a market.

C) has an upward-sloping demand curve.

D) is determined by adding demand and supply.

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5) The law of supply says that higher prices tend to ________ the quantity of a good or service ________, assuming no other changes.

A) increase; supplied B) decrease; supplied C) increase; demanded D) decrease; demanded

6)

Supply curves are generally A) upward-sloping.

B) downward-sloping.

C) straight lines.

D) responsive to demand curves.

7)

The demand schedule is a description of the behavior of ________ in a market.

A) sellers B) buyers C) labor D) goods or services

8)

Ceteris paribus, when used by economists, means A) for every action, there is a reaction.

B) things never change.

C) all other things equal.

D) buyer beware.

9)

Opportunity cost is defined as the value or benefit of the

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A) most valuable item.

B) least valuable item.

C) equilibrium price.

D) next best alternative.

10) A table showing how much lemonade consumers are willing to buy at different prices would be best described as a A) consumption table.

B) supply schedule.

C) equilibrium table.

D) demand schedule.

11)

The way that economists explain it, the worker is a ________ in the ________ market.

A) buyer; labor B) seller; labor C) buyer; job D) seller; job

12)

Global markets consist of buyers and sellers A) anywhere in the world.

B) only within their community.

C) within a nation.

D) within a state.

13)

The market price can sometimes be difficult to identify due to which of the following?

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A) The laws of supply and the law of demand B) Equilibriums and opportunity costs C) Satiation and zero prices D) Sale prices and negotiated prices

14) Which of the following goods is not an example of a good that carries an advance purchase discount?

A) Prepaid tuition plans B) Airline tickets C) "Early bird" conference registration D) Refrigerated milk

15)

A market demand schedule for hamburgers would not include which of the following?

A) Vegetarians, who buy no hamburgers B) People who eat a cheeseburger every day for lunch C) The concept of ceteris paribus D) The labor market

16) If at the market price of $10 per lawn Maya is willing to mow 15 lawns, and at the market price of $15 per lawn Maya is willing to mow 25 lawns, what does Maya's supply curve look like?

A) It slopes down and to the right.

B) It slopes up and to the right.

C) It is a horizontal line.

D) It is a vertical line.

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17)

According to the law of demand, when the price of a good falls A) the quantity of the good supplied will increase to meet the increased demand.

B) the quantity of the good demanded tends to rise.

C) the quantity of the good supplied will decrease to meet the decreased demand.

D) the quantity of the good demanded tends to fall.

18)

Which of the following is generally not an example of a zero price?

A) Watching another movie on Netflix B) Sending another text message C) Getting a refill of coffee at a restaurant D) Downloading another MP3 from iTunes

19) Which of the following is an example of a product that is sold primarily in a local market?

A) Cheese B) Butter C) Milk D) Oil

20)

Sale prices mean that a good’s price is A) temporarily reduced.

B) otherwise set above the market price.

C) equal to the equilibrium price.

D) a meaningless variable.

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21) Based on the law of demand, what would you expect to happen if the price of gasoline were to rise to $8.00 per gallon?

A) The quantity demanded would increase.

B) There would be no impact on demand or supply.

C) The quantity demanded would decrease.

D) The quantity supplied would increase.

22)

In economics, "satiation" means A) eventually the marginal value of the good consumed increases.

B) quantity demanded and quantity supplied rises.

C) eventually the marginal value of the good consumed decreases.

D) the market price has been attained.

23)

In contrast to the law of supply, sometimes ________ can reduce the quantity supplied.

A) an increased price B) a market supply curve C) a market demand curve D) a decreased price

24)

The textbook provides examples of markets that are A) local and global only.

B) national and global only.

C) individual, local, national, and universal.

D) local, national, and global.

25)

What would it mean if a demand curve sloped upward and to the right?

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A) Quantity demanded decreases as the price increases.

B) Quantity demanded increases as the price increases.

C) Quantity demanded and price both can only increase.

D) Quantity demanded and price both can only decrease.

26)

A vertical supply curve would mean A) as price decreases, quantity supplied decreases.

B) as price decreases, quantity supplied increases.

C) the price does not affect the quantity supplied.

D) market equilibrium has been reached.

27)

One of the biggest benefits of a market-based economy is A) centralized planning.

B) the ability to adapt quickly to change.

C) government regulation.

D) consumer protection policies.

28) If the quantity of a good that buyers are willing to buy rises sharply when the price falls, this illustrates what principle?

A) The law of supply B) The law of demand C) Market equilibrium D) Ceteris paribus

29)

Which of the following is not an example of a good or service provided by a market?

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A) Illegal sports betting B) Metered street parking in Sacramento, California C) Pizza in Toledo, Ohio D) The air we breathe

30)

Buying a used textbook from a fellow student is an example of what type of market?

A) Local B) National C) Global D) Labor

31)

The market price is A) the exact price a product sells for at a specific time.

B) the typical price at which a good or service sells.

C) always easy to determine.

D) usually higher than the equilibrium price.

32) What phrase do economists use to describe the assumption that everything else about a situation stays the same, allowing only one variable, such as price, to change?

A) E pluribus unum B) Caveat emptor C) Vini, vidi, vici D) Ceteris paribus

33) When you have to give up one opportunity in order to choose another, the value of the opportunity that is not chosen is called the

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A) opportunity price.

B) opportunity cost.

C) forgone value.

D) choice equilibrium.

34)

What might happen if the market price for haircuts increased?

A) Cutting hair would be less profitable.

B) Some stylists would work fewer hours.

C) Some salons might close.

D) Some hair salons might hire more stylists.

35)

The number of markets is A) fixed.

B) always changing.

C) infinite.

D) equal to the number of buyers.

36)

What is the name given to the price in a labor market?

A) The supply rate B) The demand rate C) The equilibrium rate D) The wage rate

37)

The law of demand

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A) can never be violated.

B) is the opposite of the law of supply.

C) works only in large markets.

D) is a general tendency.

38)

The demand schedule reports the quantity demanded at A) many different prices.

B) a zero price.

C) the average of all prices.

D) the market equilibrium price.

39)

The supply schedule is a description of the A) quantity demanded at a single price.

B) supply offered according to demand.

C) basis of calculating market price.

D) relationship between quantity supplied and market price.

40) The individual quantity demanded is the amount the ________ is willing to ________ at a given price.

A) seller; purchase B) buyer; purchase C) buyer; sell D) seller; sell

41)

Natural resources, such as crude oil and fish, are often sold in ________ markets.

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A) local B) national C) global D) labor

42) Households are generally buyers in the markets for products and sellers in ________ markets.

A) goods B) service C) natural resource D) labor

43) Price

Quantity Demanded

$0

1,000

$1

400

$2

200

$3

100

$4

25

Refer to the table, which shows the number of energy drinks demanded per day by the students at a certain university. Which of the following statements does not explain why the quantity demanded was not higher for a price of $0?

A) Students only need so much energy.

B) Drinking an energy drink takes time.

C) There is only so much room in the average backpack.

D) People prefer to pay for the beverages they consume.

44)

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Price

Quantity Demanded

$0

1,000

$1

400

$2

200

$3

100

$4

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Refer to the table, which shows the number of energy drinks demanded per day by the students at a certain university. Does this demand schedule conform to the law of demand?

A) Yes, because as the price falls, the quantity demanded rises B) Yes, because as the price falls, the quantity demanded also falls C) No, because there appears to be no relationship between price and quantity demanded D) No, but the demand for most goods does not follow the law of demand

45) Price

Quantity Demanded

$0

1,000

$1

400

$2

200

$3

100

$4

25

Refer to the table, which shows the number of energy drinks demanded per day by the students at a certain university. What would happen to the quantity of energy drinks demanded at a price of $2 if the university’s enrollment were to increase significantly?

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A) The quantity demanded would fall below 200 because there would be more students competing for energy drinks.

B) The quantity demanded would remain at 200 because the number of buyers in a market does not impact the market demand schedule.

C) The quantity demanded would increase above 200 because the market demand schedule is the sum of individual demand schedules, and more students means more individual demand schedules for energy drinks.

D) The quantity demanded would rise to exactly 400 because every number in the table would simply shift down one row.

46)

Does the law of supply apply to labor markets?

A) Yes, because all workers will increase the number of hours they work if their wages increase.

B) Yes, because some workers who are less committed to the labor force will decide to work if wages increase.

C) No, because the laws of supply and demand both apply only to product markets.

D) No, because workers have no control over the number of hours they work.

47) The average sale price of single-family homes in the United States increased from $264,700 to $306,100 from April 2015 to April 2019. All else equal, we would expect that during the same time A) quantity supplied also increased.

B) quantity demanded also increased.

C) quantity supplied decreased.

D) quantity demanded and quantity supplied both increased.

48) If the average market price for haircuts increases, all else equal, which of the following is least likely to occur as a result?

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A) More new salons will open.

B) Existing salons and barbershops will hire more stylists and barbers.

C) Some workers will leave other jobs in order to become hair stylists.

D) Many salons will go out of business due to a lack of customers.

49) The market for automobiles in China has experienced tremendous growth primarily because of A) relaxed emissions standards in China.

B) rising incomes in China.

C) higher wages of American workers.

D) the invention of new products.

50)

The market for smartphones did not exist 30 years ago because A) consumers did not need or want smartphones.

B) portable electronic devices were illegal.

C) the technology did not exist to produce smartphones.

D) smartphones were too expensive for most consumers.

51) Price per Pizza

Quantity Demanded

$1

?

$5

200

$10

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Refer to the table, which shows part of the weekly demand schedule for pizza in a certain town.

The current market price for pizza is $5 per pizza. According to the laws of economics, which of the following could be the missing number?

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A) 175 B) 500 C) 125 D) 0

52) Price per Pizza

Quantity Demanded

$0

500

$5

200

$10

75

Refer to the table, which shows part of the weekly demand schedule for pizza in a certain town.

If one were to plot these three points on a graph, what would the result be?

A) A downward-sloping demand curve B) A downward-sloping supply curve C) An upward-sloping demand curve D) An upward-sloping supply curve

53) Price per Yard

Quantity Supplied

$15

?

$25

20

Refer to the table, which shows part of the weekly supply schedule for fall leaf-raking in a certain neighborhood. According to the laws of economics, which of the following could be the missing number?

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A) 10 B) 20 C) 30 D) More information is needed.

54) Price per Yard

Quantity Supplied

$20

25

$?

15

Refer to the table, which shows part of the weekly supply schedule for fall leaf-raking in a certain neighborhood. According to the laws of economics, which of the following could be the missing number?

A) 0 B) 15 C) 25 D) 35

55) Which of the following is not provided in the textbook as something that might lead to the creation of a new market?

A) New buyers B) New sellers C) New services D) New laws

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56) The graph pictured above is most likely a A) demand curve, because it is upward-sloping.

B) supply curve, because it is upward-sloping.

C) demand curve, because it is downward-sloping.

D) supply curve, because it is downward-sloping.

57) The graph pictured above is most likely a A) demand curve, because as price rises, so does quantity.

B) supply curve, because as price rises, so does quantity.

C) demand curve, because as price rises, quantity falls.

D) supply curve, because as price rises, quantity falls.

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58)

Explain why a demand curve slopes downward.

59)

What determines a market supply schedule?

60)

What does an upward-sloping supply curve mean?

61)

Give two examples of how new markets are created.

62)

What do economists mean when they say ceteris paribus?

63)

The rate at which buyers exchange money for a good or service is known as the price. ⊚ true ⊚ false

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64)

Individuals in a market economy can be both buyers and sellers. ⊚ true ⊚ false

65) Buyers and sellers who are geographically close to each other are part of a national market. ⊚ true ⊚ false

66) The Internet has allowed an increasing number of goods and services to be traded in national markets. ⊚ true ⊚ false

67)

Crude oil is sold in a local market. ⊚ true ⊚ false

68)

The market price is the typical price at which a good or service sells. ⊚ true ⊚ false

69) The individual quantity demanded is the amount that the buyer is allowed to purchase at a given price. ⊚ true ⊚ false

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70) The law of demand says that in most cases, the lower the price, the lower the quantity demanded. ⊚ true ⊚ false

71)

Zero-price products and services exist only in the technology sector. ⊚ true ⊚ false

72) A demand schedule illustrates the quantities of a particular product or service that are demanded at different prices. ⊚ true ⊚ false

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Answer Key Test name: chapter 2 1) A 2) C 3) C 4) B 5) A 6) A 7) B 8) C 9) D 10) D 11) B 12) A 13) D 14) D 15) D 16) B 17) B 18) D 19) C 20) A 21) C 22) C 23) A 24) D 25) B 26) C Version 1

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27) B 28) B 29) D 30) A 31) B 32) D 33) B 34) D 35) B 36) D 37) D 38) A 39) D 40) B 41) C 42) D 43) D 44) A 45) C 46) B 47) A 48) D 49) B 50) C 51) B 52) A 53) A 54) B 55) D 56) B Version 1

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57) C 63) TRUE 64) TRUE 65) FALSE 66) TRUE 67) FALSE 68) TRUE 69) FALSE 70) FALSE 71) FALSE 72) TRUE Student name:__________ 1)

Market equilibrium is the point where quantity supplied and ________ are equal.

A) quantity demanded B) equilibrium supply C) quantity sold D) market price

2)

The price at which the quantity supplied equals quantity demanded is the A) opportunity cost.

B) negotiated price.

C) equilibrium price.

D) market price.

3)

A demand shift affects

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A) sellers' willingness to sell at various prices.

B) buyers' willingness to purchase at various prices.

C) sellers’ willingness to sell at the equilibrium price only.

D) buyers’ willingness to purchase at the equilibrium price only.

4) Movement along the demand curve means that the demand schedule ________ and the price ________.

A) stays the same; changes B) changes; stays the same C) stays the same; also stays the same D) changes; also changes

5)

After Hurricane Katrina, the supply curve for gasoline A) shifted to the right.

B) shifted to the left.

C) became steeper.

D) became flatter.

6) Between 2000 and 2007, many more furniture companies started producing furniture more cheaply in China. As a result, the A) supply curve for furniture shifted to the left.

B) supply curve for furniture shifted to the right.

C) demand curve for furniture shifted to the right.

D) demand curve for furniture shifted to the left.

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7) If a town begins requiring builders to build on one-acre lots, instead of on smaller quarter-acre lots, the supply curve for new homes will A) shift to the left.

B) shift to the right.

C) become steeper.

D) become flatter.

8)

In the case of normal goods, higher income for buyers means A) a movement up and to the left on the demand curve.

B) a movement down and to the right on the demand curve.

C) a rightward shift of the demand curve.

D) a leftward shift of the demand curve.

9)

A luxury good is one whose demand ________ as income increases.

A) rises proportionately B) rises sharply C) decreases sharply D) does not change

10)

Inferior goods are characterized by ________ demand as a result of increased income.

A) slightly higher B) lower C) no change in D) significantly higher

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11) If a frost suddenly destroyed a big portion of this year’s crop of oranges, a good with highly elastic demand, what would be the impact on quantity demanded and price?

A) Quantity demanded would decrease a lot, and price would decrease sharply.

B) Quantity demanded would increase a little, and price would rise slightly.

C) Quantity demanded would decrease a little, and price would increase sharply.

D) Quantity demanded would decrease a lot, and price would rise slightly.

12)

Demand is inelastic if

A) the quantity demanded changes more or less proportionately with the price.

B) the quantity demanded does not change very much even if the price changes dramatically.

C) the demand curve is bowed inward towards the origin.

D) the demand curve is bowed outward away from the origin.

13)

If the supply of a good increases, the equilibrium price of that good A) falls while quantity demanded rises.

B) rises while quantity demanded also rises.

C) falls while quantity demanded also falls.

D) rises while quantity demanded falls.

14)

If supply is inelastic, then a demand shift will have a ________ effect on ________.

A) smaller; quantity than on price B) smaller; price than on quantity C) bigger; quantity than on price D) bigger; price than on quantity

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15)

If the interest rates on new car loans increase, the quantity of new cars supplied will A) remain unchanged.

B) decrease.

C) increase.

D) shift to the right.

16)

How might a government cause a demand shift to the right?

A) By increasing taxes B) By requiring consumers to purchase certain products C) By regulating supplies D) By causing a shift in consumer tastes

17) Because of global warming, countries that are cooler may see ________ grain and agricultural products.

A) an increase in the supply of B) an increase in the demand for C) a decrease in the supply of D) a decrease in the demand for

18)

What caused the decline in demand for red delicious apples?

A) The number of different apple varieties B) Distribution and logistics problems C) The taste of the apples D) Consumer fear of genetic modification

19)

Which is not an example of inelastic supply?

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A) Golf courses in a county B) Hotel rooms in a city during a convention C) Bottled water D) Tickets to a sold-out concert

20) the

The gap between quantity supplied and quantity demanded is usually closed over time by

A) demand curve.

B) supply curve.

C) market mechanism.

D) invisible face.

21)

How does a lower price alleviate the problem of excess supply?

A) A lower price increases the number of potential sellers and the number of potential

buyers.

B) A lower price increases the number of potential sellers and decreases the number of potential buyers.

C) A lower price decreases the number of potential sellers and the number of potential buyers.

D) A lower price decreases the number of potential sellers and increases the number of potential buyers.

22) Given that the U.S. population is getting older and nursing wages have not risen very much, the market for nurses probably reflects which market condition?

A) Excess demand B) Excess supply C) Market equilibrium D) Elastic supply and demand

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23) In the long run, hotel room prices that are falling as a result of excess supply will ________ the quantity of hotel rooms supplied in a market.

A) destabilize B) increase C) decrease D) stabilize

24) The market equilibrium can be found on a supply and demand diagram as the point at which A) the demand and supply curves cross the price axis.

B) the demand and supply curves cross the quantity axis.

C) the demand and supply curves intersect.

D) the distance between the demand and supply curves is maximized.

25)

Most markets, if left alone, will tend toward A) the equilibrium price.

B) zero price.

C) the market price.

D) demand elasticity.

26) On the basic supply-demand graph, the point at which the demand curve and the supply curve intersect is located at A) equilibrium demand and equilibrium supply.

B) market price and market quantity.

C) quantity demanded and quantity supplied.

D) equilibrium price and equilibrium quantity.

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27) When necessary, a higher price will simultaneously ________ the quantity supplied and ________ the quantity demanded, thus reducing the amount of excess demand.

A) increase; decrease B) increase; increase C) decrease; increase D) decrease; decrease

28) An increase in supply is shown graphically as a ________ shift of the supply curve, and as a result of an increase in supply, equilibrium price will ________.

A) rightward; decrease B) rightward; increase C) leftward; decrease D) leftward; increase

29) Movies delivered over the Internet might have what effect on the market for movies in movie theaters?

A) A demand shift to the right B) A demand shift to the left C) A supply shift to the left D) A supply shift to the right

30) Hurricane Katrina caused refineries and oil rigs in New Orleans and in the Gulf of Mexico to close down. In the market for gasoline, Hurricane Katrina caused

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A) an increase in demand.

B) a decrease in demand.

C) an increase in supply.

D) a decrease in supply.

31)

In a movement along the demand curve, the demand schedule A) stays the same, as does the price.

B) increases, as does the price.

C) decreases, as does the price.

D) stays the same, but the price changes.

32) In recent years, the demand curve for IT workers has moved to the right. What does this mean?

A) At any price, the quantity demanded is now lower.

B) At any price, the quantity demanded is now higher.

C) At the market price only, the quantity demanded is now lower.

D) At the market price only, the quantity demanded is now higher.

33)

A demand shift to the right generally leads to A) higher prices and lower quantities.

B) lower prices and higher quantities.

C) higher prices and higher quantities.

D) lower prices and lower quantities.

34)

After Hurricane Katrina, the supply curve for oil shifted to the left, and as a result

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A) gas prices remained at the equilibrium price.

B) a new equilibrium price was reached.

C) there was a corresponding shift of the demand curve.

D) the equilibrium point moved along the supply curve.

35)

When a demand curve shifts to the right

A) demand has increased, so equilibrium price increases, and equilibrium quantity increases.

B) demand has decreased, so equilibrium price decreases, and equilibrium quantity decreases.

C) demand has increased, so supply also shifts to the right, and the equilibrium price increases.

D) demand has decreased, so supply also shifts to the right, and the equilibrium price decreases.

36)

Stricter loan standards in the mortgage lending sector could cause A) a demand shift to the right in the housing market.

B) a supply shift to the right in the housing market.

C) a demand shift to the left in the housing market.

D) a supply shift to the left in the housing market.

37) If federal financial aid were severely reduced, what would happen to the equilibrium quantity of education supplied by educational institutions?

A) The quantity supplied would increase.

B) The quantity supplied would remain unchanged.

C) The quantity supplied would fall.

D) It depends on whether the demand effect or supply effect is larger.

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38)

Higher interest rates can cause the ________ curve for new cars to ________.

A) supply; shift to the left B) demand; shift to the right C) demand; shift to the left D) supply; shift to the right E) supply; shift to the left

39)

An increase in oil prices may cause A) demand to shift to the right.

B) a reduction in the quantity of oil demanded.

C) market equilibrium to rise.

D) market price reductions.

40)

Which of the following is least likely to be an example of a normal good?

A) Routine medical care B) Housing C) Motor vehicles D) Store-brand breakfast cereal

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41) Refer to the figure. In the market for medium cheese pizzas, the equilibrium price is A) $10.

B) $8.

C) $5.

D) $0.50.

42) Refer to the figure. Which of the following is true?

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A) At a price of $10, there would be neither excess demand for nor excess supply of pizza.

B) At a price of $8, there would be excess demand for pizza.

C) At a price of $5, there would be neither excess demand for nor excess supply of pizza.

D) At a price of $0.50, there would be excess supply of pizza.

43) Price

Quantity Demanded

Quantity Supplied

$0

200

0

$1

150

40

$2

100

80

$3

50

120

$4

0

160

Refer to the table. In this market, the equilibrium price A) does not exist.

B) is between $2 and $3.

C) is greater than $4.

D) is equal to exactly $2.

44) Price

Quantity Demanded

Quantity Supplied

$0

200

0

$1

150

40

$2

100

80

$3

50

120

$4

0

160

Refer to the table. In this market, the equilibrium price occurs where quantity demanded and quantity supplied are both

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A) greater than 50 but less than 80.

B) greater than 80 but less than 100.

C) greater than 100 but less than 120.

D) greater than 120.

45)

Government action can cause a shift in A) supply only.

B) demand only.

C) either supply or demand.

D) neither supply nor demand.

46) If a new major oil field is discovered in Africa, the world ________ curve for oil would shift to the ________.

A) demand; left B) demand; right C) supply; left D) supply; right

47) For which pair of goods below would an increase in income shift both demand curves in the same direction?

A) A normal good and an inferior good B) An inferior good and a luxury good C) A normal good and a luxury good D) A superior good and a normal good

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48) To determine whether a particular good is a normal good, a luxury good, or an inferior good, you would want to observe what happens to demand for the good when ________ changes.

A) supply B) price C) the price of raw materials D) income

49) In the short run, the quantity of available hotel rooms is not particularly responsive to changes in price because hotels take time to build and to destroy. This implies that the short-run supply of hotel rooms is A) elastic.

B) inelastic.

C) in equilibrium.

D) greater than demand.

50) Price

Quantity Demanded

Quantity Supplied

$0

200

0

$1

150

40

$2

100

80

$3

50

120

$4

0

160

Refer to the table. If the current price in this market is $2 then there is A) excess demand and pressure on the price to fall.

B) excess demand and pressure on the price to rise.

C) excess supply and pressure on the price to fall.

D) excess supply and pressure on the price to rise.

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51) Price

Quantity Demanded

Quantity Supplied

$0

200

0

$1

150

40

$2

100

80

$3

50

120

$4

0

160

Refer to the table. If the current price in this market is $3, then there is A) excess demand and pressure on the price to fall.

B) excess demand and pressure on the price to rise.

C) excess supply and pressure on the price to fall.

D) excess supply and pressure on the price to rise.

52)

In response to an increase in income, a buyer’s demand for a particular good A) will always rise.

B) will usually fall.

C) rarely changes.

D) may rise or fall.

53)

If the price of gasoline rises, buyers will probably A) spend more on gasoline since the supply for gasoline is probably elastic.

B) spend less on gasoline since the supply for gasoline is probably inelastic.

C) spend more on gasoline since the demand for gasoline is probably inelastic.

D) spend less on gasoline since the demand for gasoline is probably elastic.

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54) If more and more states legalize casino gambling in the future, what will likely happen to the market for casino gambling in the states where it is currently legal?

A) The supply curve will shift to the right.

B) The supply curve will shift to the left.

C) The demand curve will shift to the right.

D) The demand curve will shift to the left.

55) Suppose that in a certain market there is an increase in demand, but the market price does not quickly adjust to a new equilibrium price. What situation will exist in this market until the price adjusts?

A) Excess demand, because the market price is higher than the equilibrium price B) Excess demand, because the market price is lower than the equilibrium price C) Excess supply, because the market price is higher than the equilibrium price D) Excess supply, because the market price is lower than the equilibrium price

56)

What will happen as a result of an increase in demand?

A) Equilibrium price and quantity both rise.

B) Equilibrium price and quantity both fall.

C) Equilibrium price rises and equilibrium quantity falls.

D) Equilibrium price falls and equilibrium quantity rises.

57)

What will happen as a result of an increase in supply?

A) Equilibrium price and quantity both rise.

B) Equilibrium price and quantity both fall.

C) Equilibrium price rises and equilibrium quantity falls.

D) Equilibrium price falls and equilibrium quantity rises.

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58)

What will happen as a result of a decrease in demand?

A) Equilibrium price and quantity both rise.

B) Equilibrium price and quantity both fall.

C) Equilibrium price rises and equilibrium quantity falls.

D) Equilibrium price falls and equilibrium quantity rises.

59)

What will happen as a result of a decrease in supply?

A) Equilibrium price and quantity both rise.

B) Equilibrium price and quantity both fall.

C) Equilibrium price rises and equilibrium quantity falls.

D) Equilibrium price falls and equilibrium quantity rises.

60) When Mehdi's income fell by 10%, he completely gave up taking his dress shirts to the local dry cleaner and instead began to press his shirts himself at home. For Mehdi, what kind of good is having his shirts professionally pressed at the dry cleaner?

A) An inferior good B) A normal good C) A luxury good D) An elastic good

61)

When does market equilibrium change in a given market?

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62) When music downloading was introduced, what impact did that have on the demand curve for CDs?

63) What happened to the market for automobiles when Henry Ford introduced the Model T—the first mass-produced automobile—in 1913?

64)

What happens when a supply curve shifts right?

65)

What are three potential causes of market shifts in a given economy?

66)

Excess demand generally causes prices to fall. ⊚ true ⊚ false

67) Excess supply occurs when suppliers are prepared to sell more at a certain price than buyers are prepared to purchase. ⊚ true ⊚ false

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68)

Left to themselves, most markets will tend toward market equilibrium. ⊚ true ⊚ false

69)

A demand shift is a change in the amount sellers want to supply at various prices. ⊚ true ⊚ false

70)

Government action can cause a significant market demand shift. ⊚ true ⊚ false

71) For most goods and services, an increase in income will cause the demand curve to shift to the left. ⊚ true ⊚ false

72)

With inferior goods, demand will increase with an increase in income. ⊚ true ⊚ false

73)

Globalization is one important cause of market shifts. ⊚ true ⊚ false

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74) If supply is inelastic, then a demand shift will have a bigger effect on quantity than on price. ⊚ true ⊚ false

75)

For all normal goods, demand rises sharply as income increases. ⊚ true ⊚ false

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Answer Key Test name: chapter 3 1) A 2) C 3) B 4) A 5) B 6) B 7) A 8) C 9) B 10) B 11) D 12) B 13) A 14) D 15) B 16) B 17) A 18) C 19) C 20) C 21) D 22) A 23) C 24) C 25) A 26) D Version 1

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27) A 28) A 29) B 30) D 31) D 32) B 33) C 34) B 35) A 36) C 37) C 38) C 39) B 40) D 41) C 42) C 43) B 44) B 45) C 46) D 47) C 48) D 49) B 50) B 51) C 52) D 53) C 54) D 55) B 56) A Version 1

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57) D 58) B 59) C 60) C 66) FALSE 67) TRUE 68) TRUE 69) FALSE 70) TRUE 71) FALSE 72) FALSE 73) TRUE 74) FALSE 75) FALSE Student name:__________ 1)

What word describes the money that customers pay for the output of a business?

A) Cost B) Revenue C) Input D) Output

2) What word describes the goods and services that are used to produce outputs for a business?

A) Production B) Cost C) Revenue D) Inputs

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3)

What word describes the money that a business pays for its inputs?

A) Cost B) Output C) Revenue D) Outlay

4)

What is the difference between revenue and cost?

A) Production B) Input C) Output D) Profit

5)

The main objective of a business in a market economy is to A) maximize profit.

B) control costs.

C) decrease revenue.

D) optimize the production function.

6) What name is given to the process of turning inputs into outputs that a business will sell to customers?

A) Revenue B) Profit C) Profit maximization D) Production

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7)

Inputs used by a business in the production process include A) revenue.

B) profit.

C) labor.

D) cost.

8)

Economists generally assume that the main goal of most businesses in the economy is to A) be responsible corporate citizens.

B) maximize profits.

C) provide jobs for the local population.

D) avoid having to make very many decisions.

9)

The hours of work supplied by various types of workers are referred to by economists as A) labor.

B) wage hours.

C) business know-how.

D) the marginal product.

10) The long-lived physical equipment,software, and structures that a business uses in its production process are called A) inventory.

B) intermediate inputs.

C) capital.

D) outputs.

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11) The goods or services purchased by a business for immediate use in the production process are known as A) intermediate inputs.

B) intermediate outputs.

C) production inputs.

D) production outputs.

12)

The technology or knowledge necessary for a production process is called A) the production function.

B) business know-how.

C) marginal product.

D) implicit capital.

13)

Many times, technology is __________ the equipment a company buys.

A) embodied in B) undermined by C) produced by D) a substitute for

14) Economists think of a business as a machine, where you put inputs in one end and get outputs from the other end. This metaphor is called the A) revenue function.

B) cost function.

C) profit maximum.

D) production function.

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15)

In a simple grass-mowing business, the lawn mower and the labor would be A) outputs.

B) inputs.

C) production.

D) profits.

16) In a simple lawn-mowing business where you have a push mower and labor as inputs, what would be the impact on output of adding an additional unit of capital in the form of a gaspowered, self-propelled mower?

A) Output would remain the same.

B) Output would decrease.

C) Output would increase.

D) Labor would decrease.

17) The extra amount of output a business can generate by adding one more hour of labor is called A) marginal revenue.

B) average product.

C) marginal cost.

D) marginal product.

18)

If you add too much of any one input, your business is likely to experience A) increasing marginal revenue.

B) diminishing marginal product.

C) diminishing marginal cost.

D) accelerated product function.

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19)

Output divided by the number of hours worked or by the number of workers is called A) average input.

B) average product.

C) marginal product.

D) marginal revenue.

20) Businesses can raise their average product by investing in new equipment, by reorganizing work to be more efficient, or by A) eliminating variable costs.

B) reducing the marginal product.

C) outsourcing part of their operations.

D) insourcing profits.

21)

The priceper unit of labor times the amount of labor used equals the A) marginal cost.

B) marginal labor.

C) labor cost.

D) labor input.

22)

The total cost of production is determined by adding the costs of which of the following?

A) Labor, capital, land, intermediate inputs, and business know-how B) Labor, capital, revenue, and marginal product C) Labor, capital, land, and revenue D) Business know-how, capital, and land

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23)

______ shows the potential cost for each level of output.

A) The product function B) The average marginal cost C) The cost function D) The production process

24)

The added expense of producing one more unit of output is called the A) marginal product.

B) marginal cost.

C) average cost.

D) production cost.

25)

Marginal cost generally rises as A) quantity produced rises.

B) quantity produced falls.

C) average cost rises.

D) average cost falls.

26)

Variable costs are also known as A) long-term costs.

B) short-term costs.

C) production costs.

D) variable average product.

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27)

An example of a variable cost is A) rent on the building a business occupies.

B) interest on loans for equipment.

C) wages paid to hourly labor.

D) premiums on insurance to protect assets.

28)

Variable costs are more relevant for A) long-term planning than for short-term decisions.

B) short-term decisions than for long-term planning.

C) average cost than for marginal cost.

D) calculating revenue than for calculating profit.

29)

The short-term cost function assumes that A) all variable costs are equal.

B) fixed costs can be easily changed.

C) fixed costs can't be changed.

D) variable costs can be fixed.

30)

________ is the amount of money a company receives for selling its product or service.

A) Profit B) Revenue C) Cost D) Average marginal revenue

31) is

The additional money a business gets from producing and selling one more unit of output

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A) marginal product.

B) long-term revenue.

C) marginal revenue.

D) average profit.

32)

A profit-maximizing business will increase production as long as A) marginal cost exceeds marginal revenue.

B) marginal price exceeds average product.

C) average product exceeds marginal price.

D) marginal revenue exceeds marginal cost.

33) In short-run profit maximization, businesses focus on the __________, which holds fixed costs constant.

A) long-term cost function B) average input cost C) short-term cost function D) short-term production function

34) In the process of long-term profit maximization, the business makes decisions under the assumption that it can A) change only short-term costs.

B) change only long-term costs.

C) vary all of its inputs.

D) not change any of its costs.

35)

One strategy for long-term profit maximization is

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A) innovation.

B) offering consistently higher prices.

C) being the lowest-price competitor.

D) utilization of private business incubators.

36)

Inputs to production do not include A) labor.

B) land.

C) financial capital.

D) business know-how.

37)

Profit is the difference between revenue and A) output.

B) production.

C) marginal revenue.

D) cost.

38)

The __________ summarizes the output of the business, given the level of inputs.

A) cost function B) average cost C) marginal revenue D) production function

39) Suppose the cost for a baker to produce 10 pies is $48 and the cost to produce 11 pies is $55. The marginal cost of the 11th pie is

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A) $4.80.

B) $5.00.

C) $5.50.

D) $7.00.

40) Marginal ________ is the added revenue from producing and selling one more unit of output.

A) income B) profit C) cost D) revenue

41)

Which of the following is an example of a profit-maximizing business?

A) A charitable organization that provides medical care for disaster victims.

B) A local government that provides a police force C) A household in which a family member takes care of the children D) An accountant who makes her living preparing tax returns for other people

42) Theodore can make 6 pizzas in one hour. If Theodore's labor has a diminishing marginal product, what must be true about the number of pizzas that Theodore can make in three hours?

A) It must be less than 12.

B) It must be less than 18.

C) It must be equal to 18.

D) It must be greater than 18.

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43) What happens to the marginal product of labor if more capital is added to a production process?

A) More capital generally causes the marginal product of labor to rise.

B) More capital will cause the marginal product of labor to diminish at a lower rate.

C) More capital generally causes the marginal product of labor to fall.

D) More capital will affect the marginal product of capital, not the marginal product of labor.

44) If Sara can produce 25 muffins for a total cost of $15, but her production process is subject to increasing marginal costs, which of the following could be the total cost of producing 100 muffins?

A) $15 B) $20 C) $60 D) $80

45) Fixed costs are also known as __________ costs because they are much harder for a business to change.

A) short-term B) long-term C) variable D) static

46) When a business expands production and increases its sales, what generally happens to revenue, all else equal?

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A) Revenue falls because costs also rise.

B) Revenue rises because the business is selling more output.

C) Revenue is unaffected by the level of production or the number of sales.

D) It depends on whether the firm has increasing or diminishing marginal revenue.

47) If June can earn $1,500 in revenue from painting two houses, how much can she earn in revenue from painting three houses? (Assume she is just one house painter in a large market of house painters, and that she can easily find a third customer.)

A) Exactly $2,250 B) Less than $2,250 C) More than $2,250 D) Exactly $4,500

48) As the market price of a good rises, businesses will respond by producing more of that good because A) the rising price causes marginal cost to fall.

B) marginal cost exceeds marginal revenue after the price increase.

C) laws and regulations require them to do so.

D) marginal revenue exceeds marginal cost after the price increase.

49) term

The difference between long-term and short-term profit maximization is that, in the short

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A) businesses focus on achieving as much profit as they can, given that fixed costs cannot be changed.

B) businesses focus on achieving as much profit as they can, given that they can vary all inputs, even to the point of shutting down.

C) businesses are not able to maximize profits because they can vary all of their inputs, making the calculations too complicated.

D) businesses focus on achieving as much profit as they can, but in the long term, businesses always eventually shut down.

50) In a simple lawn-mowing business where you have a push mower and labor as inputs, what would be the impacton output of adding an additional unit of capital in the form of a gaspowered, self-propelled mower?

A) Average product and marginal product would rise.

B) Average product and marginal product would fall.

C) Average product would rise, and marginal product would rise.

D) Average product would fall, and marginal product would rise.

51)

Which of the following formulas is correct?

A) Profit = Revenue + Cost B) Profit = Revenue − Cost C) Revenue = Profit − Cost D) Revenue = Profit ÷ Cost

52) Suppose a local food truck owner incurs a total cost of $200 per month even if he makes and sells no food, but that his total cost rises to $202 if he makes and sells one hamburger.

Which of the following is true?

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A) His marginal cost is $200, and the average cost of the first hamburger is $2.

B) His fixed cost is $200, and the marginal cost of the first hamburger is $202.

C) His variable cost is $200, and the fixed cost of the first hamburger is $2.

D) His fixed cost is $200, and the marginal cost of the first hamburger is $2.

53) Suppose a local food truck, representing a small part of an overall very large market, can sell 20 hamburgers for $100 total and can sell 30 hamburgers for $150 total. Which of the following is not true?

A) The total revenue of the 20th hamburger is $5.

B) The marginal revenue for the 30th hamburger is $5.

C) The marginal revenue for the 20th hamburger is $5.

D) The price of a hamburger is $5.

54) If by selling one more unit of a good, a certain business can increase revenue from $500 to $525, what is the marginal revenue in this case?

A) $25 B) $500 C) $525 D) Marginal revenue cannot be calculated without knowing the quantity.

55) Quantity

Total Cost

0

$0

1

$20

2

$45

3

$75

4

$110

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Consider the cost function above. If the price that this business faces is $25, how much output should this business produce in order to maximize profit?

A) Zero units B) Two units C) Three units D) Four units

56)

Which of these is an example of an input?

A) The clothing that a local dressmaker sells through her website B) The number of hours a barber spends cutting hair C) The aroma from a barbecue restaurant that attracts customers D) The interest a landscaper pays to finance the purchase of a new truck

57) In 2018, Starbucks had $24.7 billion in revenue and made a profit of $3.9 billion. What were its costs in 2018?

A) $2.1 billion B) $14.3 billion C) $20.8 billion D) $28.6 billion

58) Your friend Kamala tells you that internet companies like Amazon.com and Google don't need all of the inputs listed in the textbook (labor, capital, land, intermediate inputs, and business know-how). Is Kamala correct?

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A) Yes, because internet companies don't need land; they operate virtually.

B) Yes, because internet companies don't need intermediate inputs, such as raw materials or ingredients.

C) Yes, because internet companies create business know-how rather than using it.

D) No, large corporations of any type use all of the inputs mentioned in the textbook.

59) Quantity 0 1 2 3 4

Total Cost $ 0 $ 20 $ 45 $ 75 $ 110

Consider the cost function above. If the price that this business faces is $25, what is the maximum amount of profit this business can earn?

A) −$5.00 B) $0.00 C) $5.00 D) $10.00

60) Quantity 0 10 20 30 40

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85

Consider the cost function above. If this business faces a constant price of $12, then it can reach a maximum profit of __________ by producing __________.

A) $10; 20 units B) $10; 0 units C) $0; 30 units D) $0; 10 units

61)

Explain how marginal product can be negative.

62)

Explain, with an example, the type of short-term decisions retailers often have to make.

63) Why would a business consider both short-term and long-term cost functions in planning?

64) Explain one of the ways a business may find more revenue from the products or services it sells.

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65) If a landscaper can hire an additional employee for $300 weekly, what is one concept the landscaper could use to determine whether hiring this employee is a good idea?

66)

Inputs for a business are the goods and services that it sells to its customers. ⊚ true ⊚ false

67)

The word "outputs" refers to physical goods produced by businesses. ⊚ true ⊚ false

68)

Revenue is the money that customers pay for the output of a business. ⊚ true ⊚ false

69)

Cost is what a business receives after subtracting expenses from revenue. ⊚ true ⊚ false

70)

A production function tells you, given the inputs, what the output will be. ⊚ true ⊚ false

71) The marginal product of labor is the extra amount of output a firm can generate by adding one more unit of labor.

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⊚ ⊚

true false

72) The average product is calculated by dividing total inputs by the number of hours worked. ⊚ true ⊚ false

73)

Marginal cost is the added expense of producing one more unit of output. ⊚ true ⊚ false

74)

Variable costs are short-term costs, and fixed costs are long-term costs. ⊚ true ⊚ false

75) Marginal revenue is the additional revenue a business gets from producing or selling one more unit of input. ⊚ ⊚

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Answer Key Test name: chapter 4 1) B 2) D 3) A 4) D 5) A 6) D 7) C 8) B 9) A 10) C 11) A 12) B 13) A 14) D 15) B 16) C 17) D 18) B 19) B 20) C 21) C 22) A 23) C 24) B 25) A 26) B Version 1

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27) C 28) B 29) C 30) B 31) C 32) D 33) C 34) C 35) A 36) C 37) D 38) D 39) D 40) D 41) D 42) B 43) A 44) D 45) B 46) B 47) A 48) D 49) A 50) C 51) B 52) D 53) A 54) A 55) B 56) B Version 1

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57) C 58) D 59) C 60) A 66) FALSE 67) FALSE 68) TRUE 69) FALSE 70) TRUE 71) TRUE 72) FALSE 73) TRUE 74) TRUE 75) FALSE Student name:__________ 1)

Monopolistic competition is characterized by A) a large number of sellers with similar products.

B) one seller with a standardized product.

C) a limited number of sellers with a variety of products.

D) one seller with a variety of products.

2)

An oligopoly occurs when there A) are a large number of sellers in a market producing a variety of products.

B) are only a few sellers in a market.

C) is only one seller in a market.

D) are a large number of sellers producing similar products.

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3) If two or more oligopolistic companies work together to keep their prices high and split the market between them, this is called A) perfect competition.

B) collusion.

C) profit splitting.

D) market sharing.

4) __________ collusion can occur even when oligopolistic businesses do not directly communicate with each other.

A) Explicit B) Implicit C) Ordinary D) Marginal

5)

A market where there is only one seller, and buyers have no good alternative, is called A) an oligopoly.

B) monopolistic competition.

C) a monopoly.

D) perfect competition.

6) A __________ monopoly is an industry in which it makes economic sense to have only one provider.

A) specific B) original C) natural D) competitive

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7)

Natural monopolies include A) cell phone companies.

B) fast-food outlets.

C) colleges and universities.

D) the local water company.

8) __________ is the ability to raise prices above the level that perfect competition would produce by restricting the quantity supplied.

A) Market power B) Monopolistic power C) Oligarchic power D) Perfect marketing

9) In perfect competition, a profit-maximizing business will expand production until its __________ equals the market price.

A) marginal product B) average cost C) marginal revenue D) marginal cost

10) In perfect competition, all businesses in a market produce at the point where __________ equals __________.

A) market price; marginal cost B) marginal price; marginal cost C) average revenue; average cost D) average price; average cost

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11) A __________ is anything that might make it more difficult for a competitor to enter a market.

A) monopolistic hurdle B) marginal barrier C) barrier to entry D) perfect competition

12)

An example of a barrier to entry is A) plentiful natural resources.

B) low-cost resources.

C) lack of a key resource.

D) helpful government regulation.

13) __________ is paid communication with potential customers in a public medium, such as newspapers and television.

A) Journalism B) Advertising C) Public relations D) Brand identification

14)

A good example of monopolistic competition is A) neighborhood restaurants.

B) defense contractors.

C) airlines serving a small city.

D) brain surgeons.

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15)

If the music industry was perfectly competitive, then all performers would A) charge the same price for concerts, but not necessarily play the same music.

B) play the same music, but not necessarily charge the same price for concerts.

C) play the same music and charge the same price for concerts.

D) produce a nonstandardized product.

16) Companies will often spend considerable amounts of money to create a __________ with respect to their brand name.

A) market effect B) product orientation C) relational effect D) reputation effect

17)

The four main types of market structure are A) perfect competition, monopolistic competition, oligopoly, and monopoly.

B) land, labor, capital, and business know-how.

C) average product, average cost, long run, and short run.

D) marginal cost, marginal revenue, product, and price.

18) Marginal revenue is generally __________ for businesses that do not operate under conditions of perfect competition.

A) lower than the average cost B) higher than the price C) lower than the price D) lower than the marginal product

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19)

In the long run, monopolistic competition starts to look like A) perfect competition.

B) monopoly.

C) oligopoly.

D) a market in disequilibrium.

20)

The profit-maximizing rule says that any seller will expand output up to the point where A) marginal revenue equals price.

B) marginal revenue equals marginal cost.

C) marginal revenue is less than the price.

D) marginal cost equals price.

21) If two bodegas in a market agree verbally that they will both sell Fritos at a higher price, and neither will undercut the other, this is called A) monopolistic competition.

B) perfect competition.

C) implicit collusion.

D) collusion.

22)

Monopolies generally __________ technology and globalization.

A) lead to an increase in B) thrive with C) are reduced in number by D) are unaffected by

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23)

The easiest way to have a monopoly today is A) to be in a socialistic country.

B) to have the government protect you.

C) to own everything in your market.

D) with a strong business plan.

24)

Does the stock market resemble a perfectly competitive market?

A) No, because there are not enough buyers and sellers in the stock market.

B) No, because the products (stocks) in the market are not standardized well enough.

C) No, because the buyers and sellers in the market lack access to reliable information about prices in the market.

D) Yes, the stock market does resemble a perfectly competitive market.

25)

Market power is A) the combination of price and product.

B) the balance between average and marginal product.

C) another term for equilibrium.

D) the ability to raise prices above perfectly competitive prices.

26)

A business with market power may A) be less innovative than businesses in perfect competition.

B) force employees to work harder and longer.

C) create new markets due to competitive forces.

D) sometimes use high profits to research new technologies.

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27)

AT&T is an example of a business that used market power to A) avoid government regulation.

B) invest in important research benefiting society.

C) minimize average costs of production.

D) squash the competition.

28)

An example of an oligopoly is the A) airline industry.

B) convenience store industry.

C) car wash industry.

D) photocopying services industry.

29) It could be argued that Microsoft's two main products, Windows and Office, are examples of A) perfect competition.

B) monopolistic competition.

C) natural monopoly.

D) oligopoly.

30) For a given market, a profit-maximizing monopolist would always charge __________ a firm in perfect competition.

A) a lower price than B) a higher price than C) a price equal to marginal cost, just like D) a price equal to marginal cost, unlike

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31) When businesses have market power, they are able to charge a price higher than the price charged by a business in perfect competition. Thus, the market power equilibrium on a supply and demand diagram will be A) higher and to the right of the perfect competition equilibrium.

B) higher and to the left of the perfect competition equilibrium.

C) lower and to the right of the perfect competition equilibrium.

D) lower and to the left of the perfect competition equilibrium.

32) If all of the restaurants in a small town colluded and agreed to raise dinner prices, this would lead to a loss to society because A) some dinners that could be served would not be served.

B) the number of dinners served stays the same, but the buyers face higher prices.

C) collusion is illegal.

D) the restaurants would become too crowded with new customers.

33)

From World War II to the early 1970s, GM, Ford, and Chrysler enjoyed A) perfect competition.

B) a natural monopoly.

C) market power.

D) market advantage.

34)

In perfect competition, P = MC means A) profit equals marginal cost.

B) price equals market cost.

C) price equals marginal cost.

D) profit equals market cost.

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35)

Natural monopolies have been slowly eroded by A) perfect competition.

B) technological change.

C) market imbalances.

D) rising costs.

36) The local department store might have been considered __________ before technological change.

A) a monopoly B) a perfect competitor C) an oligopoly D) a natural monopoly

37)

A profitable business will attract A) new competitors.

B) government regulation.

C) increases in marginal revenue.

D) existing businesses.

38)

In perfect competition, higher-cost businesses A) thrive and grow.

B) increase marginal revenue.

C) tend to go out of business.

D) tend toward oligopolies.

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39)

Differentiating one's product from the products of one's competitors is a way to A) become a price-taker.

B) escape perfect competition.

C) cause profits to tend toward zero.

D) increase the degree of competition.

40)

Which of the following is not an example of a barrier to entry?

A) Lower costs B) Scarce land C) Rare natural minerals D) Heavy government regulations

41)

Which of the following is most likely to be sold in a perfectly competitive market?

A) Graduate Management Admission Test (GMAT) tutoring B) Wheat C) Fast-food D) Automobiles

42) Output (Bushels of Barley) 10 bushels

Marginal Cost (Dollars) $ 0.30

20 bushels

$ 0.60

30 bushels

$ 0.90

40 bushels

$ 1.20

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Refer to the table above, which gives Farmer McColl's marginal cost function for barley. If Farmer McColl is currently producing 25 bushels of barley, which of the following could be the market price for a bushel of barley?

A) $0.75 B) $1.88 C) $7.50 D) $18.75

43) Output (Bushels of Barley) 10 bushels

Marginal Cost (Dollars) $ 0.30

20 bushels

$ 0.60

30 bushels

$ 0.90

40 bushels

$ 1.20

Refer to the table above, which gives Farmer McColl's marginal cost function for barley. If the current market price for barley is $1.00 per bushel, how much barley should Farmer McColl produce?

A) Exactly 30 bushels B) Exactly 40 bushels C) Between 30 and 40 bushels D) More than 40 bushels

44) Output (Bushels of Barley)

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102

10 bushels

$ 0.30

20 bushels

$ 0.60

30 bushels

$ 0.90

40 bushels

$ 1.20

Refer to the table above, which gives Farmer McColl's marginal cost function for barley.

Suppose Farmer McColl is one of 20 farmers in the barley market, and all of the farmers have identical marginal cost functions. If the market price of barley is $1.00 per bushel, which of the following could be the total amount of barley produced in the market?

A) 700 B) 33 C) 340 D) 600

45) Output (Bushels of Barley) 10 bushels

Marginal Cost (Dollars) $ 0.30

20 bushels

$ 0.60

30 bushels

$ 0.90

40 bushels

$ 1.20

Refer to the table above, which gives Farmer McColl's marginal cost function for barley. If Farmer McColl is currently producing 20 bushels of barley, which of the following is the market price for a bushel of barley?

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A) $0.60 B) $1.20 C) $6.00 D) $12.00

46)

Government regulations, such as zoning laws, can act as A) barriers to entry.

B) marginal costs.

C) long-term costs.

D) Big Squeezers.

47) In a market where businesses are earning high profits, new entrants will cause the supply curve to shift to the __________ and thus cause the market price to __________.

A) left; rise B) left; fall C) right; rise D) right; fall

48) If a local diner can sell 50 burgers per day at a price of $5 each, but must reduce the menu price to $4.95 to sell one more burger, what is the marginal revenue of the 51st burger?

A) −$0.05 B) $2.45 C) $4.95 D) $252.45

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49) If a local car dealership can sell 8 cars per day at a price of $25,000 each, but must reduce the price to $24,000 to sell one more car, what is the marginal revenue of the 9th car?

A) −$1,000 B) $16,000 C) $24,000 D) $216,000

50) Compared to businesses with market power, businesses in perfect competition will charge __________ prices and sell __________ output.

A) higher; more B) higher; less C) lower; more D) lower; less

51) If Patricia, an accountant, is a price-taker in her local market for tax return preparation, which of the following must be true?

A) Patricia would lose all of her clients if she raised her prices.

B) Patricia is one of only a few accountants in her local market.

C) Patricia’s clients are not well-informed about other accountants’ prices.

D) Patricia spends at least some of her revenue on advertising.

52) Why does price equal marginal cost (P = MC) in a perfectly competitive market in equilibrium?

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A) In perfect competition marginal revenue equals marginal cost (MR = MC), and profit-maximizing businesses set marginal revenue equal to price (MR = P).

B) In perfect competition marginal revenue equals price (MR = P), and profitmaximizing businesses set marginal revenue equal to marginal cost (MR = MC).

C) In perfect competition, buyers set marginal revenue equals marginal cost (MR = MC) and sellers set marginal revenue equal to price (MR = P).

D) In perfect competition, sellers set marginal revenue equals marginal cost (MR = MC) and buyers set marginal revenue equal to price (MR = P).

53)

Which of the following is an example of The Big Squeeze?

A) High profits attract new entrants, which increases supply, driving up prices.

B) High profits drive out businesses, which increases supply, driving up prices.

C) High profits attract new entrants, which increases supply, driving down prices.

D) High profits drive out businesses, which increases supply, driving down prices.

54) What will happen in the long run if businesses in perfect competition are experiencing losses?

A) Some sellers will go out of business, causing demand to increase and prices to rise.

B) Some sellers will go out of business, causing demand to increase and prices to fall.

C) Some sellers will go out of business, causing supply to decrease and prices to fall.

D) Some sellers will go out of business, causing supply to decrease and prices to rise.

55) Suppose the price you are willing to pay for a new car is greater than the marginal cost of producing that new car. Under which market structure could you be most confident that you would be able to buy that new car?

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A) Perfect competition B) Monopolistic competition C) Oligopoly D) Monopoly

56)

Why does perfect competition often lead to a market in which profits tend toward zero?

57)

Why does the government sometimes support a monopoly?

58)

Over the long run, why do low-cost providers generally prevail?

59) In monopolistic competition, a business may enjoy a unique advantage in the short term.

In the long term, what could happen to this unique advantage?

60)

What are some of the benefits of perfect competition?

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61)

Most markets meet all of the conditions for perfect competition. ⊚ true ⊚ false

62)

In perfect competition, all buyers and sellers are price takers. ⊚ true ⊚ false

63)

Perfect competition requires a nonstandardized product. ⊚ true ⊚ false

64) In perfect competition, a profit-maximizing business will expand until its marginal cost equals the market price. ⊚ true ⊚ false

65) In a market with perfect competition, given enough time and no barriers to entry, profits will tend toward zero in the long run. ⊚ true ⊚ false

66) In perfect competition, if there are no barriers to entry, only the lowest-cost businesses will survive in the long run.

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⊚ ⊚

true false

67) Marshall Field's and Stern’s department stores were good examples of low-cost producers operating in perfect competition. ⊚ true ⊚ false

68)

Businesses will generally shut down if they lose money for one or two years. ⊚ true ⊚ false

69)

A business can escape perfect competition by building a better, more innovative product. ⊚ true ⊚ false

70)

Advertising a brand can help create a reputation effect. ⊚ true ⊚ false

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Answer Key Test name: chapter 5 1) A 2) B 3) B 4) B 5) C 6) C 7) D 8) A 9) D 10) A 11) C 12) C 13) B 14) A 15) C 16) D 17) A 18) C 19) A 20) B 21) D 22) C 23) B 24) D 25) D 26) D Version 1

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27) B 28) A 29) C 30) B 31) B 32) A 33) C 34) C 35) B 36) A 37) A 38) C 39) B 40) A 41) B 42) A 43) C 44) A 45) A 46) A 47) D 48) B 49) B 50) C 51) A 52) B 53) C 54) D 55) A 61) FALSE Version 1

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62) TRUE 63) FALSE 64) TRUE 65) TRUE 66) TRUE 67) FALSE 68) FALSE 69) TRUE 70) TRUE Student name:__________ 1)

The inefficiency of taxation means that imposing a tax on a good or service typically A) reduces the amount produced.

B) increases the amount produced.

C) causes backlogs and surpluses.

D) increases costs across the board.

2)

As one of the New Deal programs, the WPA was a government agency that A) regulated the banking industry.

B) regulated the securities industry.

C) regulated the trucking and interstate commerce industries.

D) increased employment through construction projects.

3)

The New Deal was

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A) the name of a television game show in the 1930s.

B) a government agency that regulated auto dealerships.

C) the cornerstone of the Kennedy administration.

D) legislation passed by the Roosevelt administration.

4)

Which of the following was not part of the New Deal?

A) Social Security B) Unemployment insurance C) The federal minimum wage D) Medicare

5) Between 1961 and 1972, the federal government spent as much on __________ as it did on building highways.

A) welfare B) Medicare C) crop subsidies D) space exploration

6)

The Public Broadcasting Service and National Public Radio are examples of A) private nonprofit organizations.

B) private for-profit companies.

C) nonprofit government-funded organizations.

D) government agencies.

7)

The oil price shock of 1973 was caused by

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A) a series of earthquakes in Venezuela.

B) the overthrow of the Iranian government by terrorists.

C) the drying up of two major U.S. oil wells.

D) an embargo by the Organization of Petroleum Exporting Countries (OPEC).

8)

Which legislation was not signed into law by Richard Nixon?

A) The Environmental Protection Agency Act (EPA) B) The Occupational Health and Safety Act (OSHA) C) The Equal Employment Opportunity Commission Act (EEOC) D) The Social Security Administration Act (SSA)

9)

The Airline Deregulation Act A) allowed airlines to enter new markets, with government permission.

B) allowed airlines to change prices, with government consent.

C) created a new regulatory body called American Airlines.

D) subjected new airlines only to safety regulations.

10)

The government’s share of employment peaked during the A) 1930s.

B) 1940s.

C) 1960s.

D) 1970s.

11) Among industrialized countries, the United States has one of the __________ public sectors, as a percentage of government spending and the economy.

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A) smallest B) largest C) fastest-growing D) slowest-growing

12) Which of the following programs that expanded the government's role in the economy was enacted by a Republican president?

A) The interstate highway program B) The Environmental Protection Agency (EPA) C) The Occupational Safety and Health Administration (OSHA) D) All of these were enacted by Republican presidents.

13)

Which is an example of the government command approach?

A) The growth of community banks B) Fast-food franchise growth C) Public schools D) Private college education

14)

The Wage and Price Controls of 1971 were an example of A) a command-and-control approach.

B) free enterprise.

C) market-based economics.

D) a mixed approach.

15)

The original research that culminated in the Internet was sponsored by

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A) Al Gore.

B) Microsoft.

C) NASA. D) The Defense Department.

16) The era of deregulation, when the role of the government in the economy steadily decreased, began A) shortly after WWII. B) in the mid-1970s.

C) with the presidency of Dwight Eisenhower.

D) with the presidency of Ronald Reagan.

17)

Rent-seeking behavior refers to

A) companies that try to increase profit by cutting costs or improving products.

B) companies that spend money on influencing government rather than on profitincreasing strategies.

C) consumer real estate studies that focus on renting versus buying.

D) a transfer of knowledge between private and public sectors.

18)

Rent-seeking behavior can sometimes cause A) housing rental prices to increase.

B) a decrease in government spending.

C) corruption in public officials.

D) a sharp increase in economic activity.

19)

Imposing a tax on a market generally hurts

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A) both buyers and sellers.

B) buyers more than sellers.

C) sellers more than buyers.

D) either buyers or sellers, but never both.

20)

What happens to the market price that buyers face as a result of taxation?

A) It is greater than before the tax was imposed.

B) It is less than before the tax was imposed.

C) Taxation has no effect on price, only output.

D) Taxation affects average cost only.

21)

Which of the following is not a type of tax?

A) Estate tax B) Payroll tax C) Excise tax D) Family tax

22)

Which of the following is not an appropriate role for government to play in the economy?

A) Regulating markets B) Promoting free speech in marketing C) Addressing externalities D) Redistributing income

23)

Which of the following is not a public good?

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A) Police protection B) Fire protection C) Primary and secondary education D) Broadband internet service

24)

The free-rider problem can occur when A) government deregulates the public transit system.

B) public goods are provided to an individual who receives the benefit but does not pay

for it.

C) the government taxes a good or service.

D) welfare programs are not regulated well enough.

25)

__________ means that government sets the rules for market competition.

A) Market regulation B) Market dynamics C) Market economics D) Government metrics

26)

The Uniform Commercial Code governs A) what can be broadcast on public airways.

B) commercial transactions between companies and consumers.

C) commercial transactions between the United States and foreign countries.

D) international commerce transactions.

27)

The Federal Reserve Board is responsible for

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A) maintaining adequate supervision of insurance companies.

B) protecting consumers from antitrust violations.

C) supervising the financial and monetary system.

D) regulating privacy issues relating to health care providers.

28)

The Federal Trade Commission is responsible for enforcing A) health care.

B) antitrust law.

C) interstate commerce.

D) communications law.

29)

Corruption is A) the creation of oxidized material on metal.

B) legal activities to promote a viewpoint.

C) illegal activities to create an unfair advantage.

D) found only within local governments.

30) Among other things, the U.S. Consumer Product Safety Commission is responsible for regulating A) cell phone company billing practices.

B) the flammability of mattresses.

C) the safety of aircraft.

D) consumer financial markets.

31)

Which of the following does not provide a positive externality?

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A) Actions that benefit others B) The proliferation of e-mail accounts C) Airport and aircraft noise D) Getting a flu vaccine

32)

In the United States, the government does not play much of a role in A) managing globalization.

B) encouraging technological change.

C) inspiring consumer preferences.

D) shaping financial markets.

33)

The Securities and Exchange Commission regulates A) security and alarm companies.

B) nonmonetary exchanges, like bartering.

C) stock markets.

D) auto insurance companies.

34)

Which of the following is not a type of externality?

A) Network externality B) Positive externality C) Negative externality D) Market externality

35) Which of the following is mentioned in the textbook as a deficiency in private markets for which government action can provide a remedy?

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A) Pollution B) High prices C) Low interest rates D) Excessive levels of debt

36)

What percentage of college students attends a publicly funded college or university?

A) 20 percent B) 75 percent C) 40 percent D) 30 percent

37)

The New Deal legislation passed by President Roosevelt was inspired by A) the Irish potato famine of 1927.

B) economic problems caused by World War I. C) the Great Depression.

D) normal business cycles.

38)

The disadvantages of government intervention include A) achieving desirable goals.

B) lower taxation.

C) incentive problems.

D) reduced regulation.

39)

Which president signed into law the creation of the Environmental Protection Agency?

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A) Richard Nixon B) John F. Kennedy C) Jimmy Carter D) Lyndon Johnson

40)

The unintentional impact that the actions of an individual can have on others is called A) an externality.

B) a public good.

C) the network effect.

D) the free-rider problem.

41)

Imposing a tax on a market typically hurts sellers because A) buyers are able to completely pass any taxes along to sellers.

B) buyers pay less than they would in competitive equilibrium.

C) they receive less than they would in competitive equilibrium.

D) they have to produce more output than they would in competitive equilibrium.

42)

After a tax is placed on a good or service, which of the following does not occur?

A) Buyers pay more for the good or service.

B) Sellers receive less when they produce and sell the good or service.

C) Government revenues decrease.

D) The total volume of sales of the good or service increases.

43) Price

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$0

0

300

$1

10

250

$2

50

180

$3

90

150

$4

120

120

$5

150

90

$6

180

50

Refer to the table above, which gives the daily supply and demand schedules for cups of coffee at a kiosk in a shopping mall. If there is no tax placed on coffee, how many cups of coffee will be bought and sold?

A) 50 B) 90 C) 120 D) 150

44) Price

Quantity Supplied Quantity Demanded

$0

0

300

$1

10

250

$2

50

180

$3

90

150

$4

120

120

$5

150

90

$6

180

50

Refer to the table above, which gives the daily supply and demand schedules for cups of coffee at a kiosk in a shopping mall. If the government places a $2 per cup tax on coffee, how many cups of coffee will be bought and sold after the tax is imposed?

A) 50 B) 90 C) 120 D) 150

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45) Price

Quantity Supplied Quantity Demanded

$0

0

300

$1

10

250

$2

50

180

$3

90

150

$4

120

120

$5

150

90

$6

180

50

Refer to the table above, which gives the daily supply and demand schedules for cups of coffee at a kiosk in a shopping mall. If the government places a $4 per cup tax on coffee, how many cups of coffee will be bought and sold after the tax is imposed?

A) 50 B) 90 C) 120 D) 150

46)

The potential profit from new technological advancements and innovations

A) gives the private sector a better incentive to commercialize new technologies.

B) gives the public sector a better incentive to make investments into farsighted research.

C) leads to rent-seeking behavior and corruption in government.

D) provides similar incentives to the private and public sectors with respect to researching new technologies.

47) The laws that prevent companies from unfairly trying to gain market power or reduce the amount of competition in a market are known as

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A) the Universal Commercial Code.

B) antitrust laws.

C) free-rider laws.

D) OSHA, EPA, and FCC.

48) When one person's actions harm others (such as in the case of pollution), economists say that a(n) __________ is present.

A) network externality B) antitrust externality C) negative externality D) market externality

49) Which of the following is not one of the programs through which the U.S. government attempts to redistribute income to the poor?

A) The Supplemental Nutrition Assistance Program (food stamps) B) Medicare C) Unemployment insurance D) The Works Progress Administration (WPA)

50) If everyone agrees that a certain economic outcome is desirable, the simplest way for government to achieve that outcome is to use A) a market-based approach.

B) a mixed economy.

C) an era of deregulation.

D) a command-and-control approach.

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51)

A command-and-control approach to government regulation works best when A) there is significant agreement on the goals and the best ways to achieve them.

B) there is significant disagreement on the goals of government regulation.

C) there is significant agreement on the goals, but not on the best ways to achieve them.

D) markets can and will produce socially desirable economic outcomes.

52)

Government spending on public education has A) decreased steadily since the 1920s.

B) increased steadily since the 1920s.

C) remained at roughly 1.2 percent of GDP since the 1920s.

D) remained at roughly 4 percent of GDP since the 1970s.

53) The EPA’s pollution exhaust standards for passenger vehicles are an example of what kind of approach to government regulation?

A) The command-and-control approach B) A market-based solution C) An educational campaign D) The behavioral economics approach

54) Which of the following best explains why public agencies are less likely to control costs than are private businesses?

A) The inefficiency of taxation B) The incentive problem C) Rent-seeking behavior D) Corruption

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55)

Which of the following is an example of a negative network externality?

A) Using a social media site like Facebook B) Planting pretty flowers in front of one’s house C) Playing terrible music very loudly in your dorm room D) Driving on a crowded highway during rush hour

56) In 2011, why did the Department of Justice challenge AT&T’s purchase of T-Mobile USA?

57)

What is a network externality?

58)

Why is it difficult to set rules for consumer privacy and the use of online data?

59)

What happened to government regulation in the aftermath of the oil shock of 1973?

60) What are the four justifications for government intervention in the economy? Describe two in detail, providing an example of each.

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61) The public sector includes state and local governments, as well as the federal government. ⊚ true ⊚ false

62) The private sector includes privately owned businesses and for-profit divisions of various governments. ⊚ true ⊚ false

63)

The New Deal was a government outgrowth of World War I. ⊚ true ⊚ false

64) World War II increased the amount of government spending and economic intervention in the United States. ⊚ true ⊚ false

65) Under President John F. Kennedy, the United States expanded its highway system, creating 50,000 miles of high-speed, limited-access highway. ⊚ true ⊚ false

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66) Under President Lyndon Johnson, the federal government actually decreased its involvement in the economy. ⊚ true ⊚ false

67) In 1971, President Richard Nixon announced a 90-day freeze on wage and price increases in order stabilize prices. ⊚ true ⊚ false

68) The era of deregulation began as a result of the government’s failed response to the oil price shock of 1973. ⊚ true ⊚ false

69)

An example of the command-and-control approach is public education. ⊚ true ⊚ false

70)

There are no discernible downsides to government action. ⊚ true ⊚ false

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Answer Key Test name: chapter 6 1) A 2) D 3) D 4) D 5) D 6) C 7) D 8) D 9) D 10) B 11) A 12) D 13) C 14) A 15) D 16) B 17) B 18) C 19) A 20) A 21) D 22) B 23) D 24) B 25) A 26) B Version 1

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27) C 28) B 29) C 30) B 31) C 32) C 33) C 34) D 35) A 36) B 37) C 38) C 39) A 40) A 41) C 42) D 43) C 44) B 45) A 46) A 47) B 48) C 49) D 50) D 51) A 52) D 53) A 54) B 55) D 61) TRUE Version 1

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62) FALSE 63) FALSE 64) TRUE 65) FALSE 66) FALSE 67) TRUE 68) TRUE 69) TRUE 70) FALSE Student name:__________ 1)

Nondefense government spending has been approximately constant as far back as the A) 1940s.

B) 1950s.

C) 1970s.

D) 1980s.

2)

If an American company, such as Intel, produces output in Ireland, this output A) counts in the U.S. GDP. B) counts in the Irish GDP. C) counts in both the United States and the Irish GDPs. D) is subtracted from the company's U.S. production for U.S. GDP calculations.

3)

Goods that are produced but not immediately sold

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A) do not count in the GDP. B) count in the GDP as a change in private inventories.

C) count in the GDP as intermediate input.

D) count in the GDP as private investment.

4)

Nonresidential investment does not include A) office chairs.

B) computers on desktops.

C) copy paper.

D) software.

5)

In GDP calculations, the work of stay-at-home parents is A) included as though it were paid childcare.

B) not counted.

C) counted as intermediate inputs.

D) subtracted from the income of working parents.

6)

Volunteers in the workforce have what effect on the GDP? A) None, because they are not counted.

B) Only hours actually volunteered are counted.

C) Hours are divided by 2.4.

D) Hours are counted as intermediate inputs.

7)

The main statistical agencies in Washington are

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A) the Federal Bureau of Investigation, the Central Intelligence Agency, the Bureau of Economic Analysis, and the National Labor Relations Board.

B) the Bureau of Economic Analysis, the Bureau of Labor Statistics, the Census Bureau, and the Federal Reserve Board.

C) the National Labor Relations Board, the Drug Enforcement Agency, and the Internal Revenue Service.

D) the U.S. Department of Agriculture, the Federal Trade Commission, the Food and DrugAdministration, and the Census Bureau.

8) In its annual time use study in 2017, the BLS found that the average adult spends __________ per day on unpaid work.

A) 1.5 hours B) 2.4 hours C) 0.8 hours D) 3.6 hours

9)

The underground economy includes A) self-employed workers.

B) babysitters paid in cash.

C) babysitters on a payroll.

D) landscapers.

10)

The BEA is the A) Bureau of Educational Administration.

B) Bureau of Economic Alliances.

C) Bureau of Economic Analysis.

D) Bureau of Educational Analysis.

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11)

GDP per capita means A) gross domestic product per business.

B) gross domestic product per employee.

C) gross domestic product per person.

D) gross domestic product per dollar in revenue.

12)

The GDP includes government consumption such as A) Social Security benefits.

B) Medicare and Medicaid benefits.

C) transfer payments.

D) office products.

13)

Simon Kuznets

A) was a contemporary of Albert Einstein's who is responsible for the theory of economic relativity.

B) is the Secretary of the Treasury who helped pull the country out of the Great Depression.

C) is an award-winning hip-hop artist who majored in economics in college.

D) was the first economist to construct an overall measurement of the U.S. economy.

14)

Net exports are A) exports divided by population.

B) exports minus marginal product.

C) exports minus imports.

D) exports minus debt.

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15)

GDP stands for A) gross domestic price.

B) general domestic product.

C) gross detailed product.

D) gross domestic product.

16) In the early 1940s, military planners needed to know the size of the economy so they could determine A) the size of the tax base in case of war.

B) how many tanks and planes the economy could produce.

C) the military budget for the next five years.

D) whether military spending was too large.

17)

If goods are produced domestically but sold overseas A) they are not counted in our GDP. B) they are still counted in our GDP. C) they are counted in our GDP and in the GDP of the country in which they were sold.

D) they are considered intermediate inputs and therefore not counted.

18)

One of the purchases a business can make that would count directly in the GDP is A) software.

B) copy paper.

C) pencils.

D) ingredients.

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19)

Which is not an example of an intermediate input?

A) A new chair for a restaurant dining room B) Paper towel used in an office kitchen C) A computer chip factory built in Arizona D) Electricity used in a school

20)

The use of GDP to measure the economy began A) in the 1930s.

B) just prior to the Great Depression.

C) after World War II. D) as part of the Great Society legislation.

21)

Which does not belong in GDP? A) Salaries for government employees B) New trays purchased by a company for use in the cafeteria C) Tractors purchased by a farmer D) Police salaries in Toledo, Ohio

22)

If gross domestic purchases are __________, then net exports are __________.

A) greater than gross domestic product; greater than net imports B) equal to zero; also equal to zero C) greater than gross domestic product; positive D) less than gross domestic product; positive

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23)

Which component of GDP captures goods that are produced but not sold in a given year?

A) Personal consumption B) Nonresidential investment C) Changes in private inventories D) Net exports

24)

If a foreign car manufacturer builds a plant in the United States, the new plant will A) increase U.S. GDP by the value of the cars produced.

B) have no effect on U.S. GDP because it is a foreign company.

C) decrease U.S. GDP by the value of the cars produced because of foreign ownership.

D) increase U.S. GDP by the net exports of the company.

25)

Since the 1960s, the pattern of nonresidential investment

A) has changed as U.S. companies invest less in industrial equipment.

B) has remained relatively stable as the global economy has stopped evolving.

C) now involves less spending on computers, which used to be relatively more expensive.

D) includes more investments in apartment buildings than in single-family homes.

26)

Gross domestic product does not include A) personal consumption.

B) intermediate inputs.

C) residential investment.

D) net exports.

27)

The biggest category of business investment spending today is

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A) trucks.

B) software.

C) computers.

D) residential structures.

28)

Government consumption includes all A) salaries paid to factory workers.

B) fuel for nuclear submarines.

C) cola served in a company cafeteria.

D) pencils bought by a private university.

29)

The Bureau of Economic Analysis is responsible for A) regulating accounting standards and managing the money supply.

B) estimating the output of the U.S. economy.

C) administering the U.S. Census and collecting employment statistics.

D) calculating the gross domestic product of the U.S.'s trade partners.

30)

In 2018, the country with the highest GDP per capita in the world was A) India.

B) China.

C) the United States.

D) Norway.

31)

Which of the following does not count as personal consumption?

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A) Gambling losses B) Spending on education C) Bequests to a hospital D) Tax payments

32)

When companies reduce their inventories A) the amount of the change gets added to the GDP. B) the amount of the change gets subtracted from the GDP. C) the amount of the change has no effect on the GDP. D) the amount of the change is subtracted from net exports.

33)

When a good is produced but not immediately sold, its value is A) added to change in private inventories.

B) added to nonresidential investment.

C) subtracted from personal consumption.

D) subtracted from net exports.

34)

The GDP per capita tells us

A) the amount of output each person would get if the economic pie were sliced evenly.

B) the amount of output each worker would get if the economic pie were sliced evenly.

C) the ratio of the maximum amount of output any person gets to the minimum amount of output each person gets.

D) the median amount of output each person gets, adjusted for inequality.

35)

The term "gross domestic purchases" refers to

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A) the amount spent by U.S. consumers, businesses, and government on final goods and services.

B) the amount spent only by U.S. consumers on final goods and services.

C) the amount spent only by businesses on final goods and services.

D) the amount spent only by government on final goods and services.

36)

Which of the following best describes an intermediate input?

A) A business-to-business sale where the product is used in the production process B) A business-to-consumer sale included in the GDP C) A wholesale transaction D) The production of a good that has not yet been sold or delivered

37)

Imports enter the calculation of GDP A) with a positive sign.

B) with a negative sign.

C) as an addition to changes in private inventories.

D) through the personal consumption category.

38)

From the point of view of the United States, exports are A) goods and services produced in foreign countries by U.S. companies.

B) goods and services produced in the United States and sold outside the United States.

C) goods and services produced in foreign countries by foreign companies.

D) goods and services produced in foreign countries and sold in the United States.

39)

Which of the following is not an element of the underground economy?

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A) Off-the-books babysitting B) Illegal drug deals C) Commissioned salespeople D) Cash-only, under-the-table businesses

40)

In 2018, the United States imported about __________ of goods and services.

A) $3.2 trillion B) $2.5 trillion C) $3.2 billion D) $20.5 trillion

41) Gross domestic product (GDP) is the __________ of the total output of the economy in a given year.

A) quantity B) physical volume C) dollar value D) physical weight

42)

GDP is defined as the dollar value of __________ in a given year.

A) the total output of the economy B) all of the inputs used in the economy C) all intermediate and final goods produced in the economy D) the total purchases made in the economy

43)

Which of the following is the correct formula for net exports?

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A) Net exports = Imports − Exports B) Net exports = Exports − Imports C) Net exports = Imports + Exports D) Net exports = (−Imports) + (−Exports)

44) Official GDP numbers do not include the activity of the __________ economy, which includes illegal activities and off-the-book transactions.

A) underground B) barter C) unofficial D) laissez-faire

45) According to most estimates, the size of the "underground" economy in the United States could be as large as A) the "above-ground" economy.

B) the economy of China.

C) 10 percent of GDP. D) the state of Rhode Island.

46)

The second-largest economy in the world belongs to A) China.

B) Germany.

C) Japan.

D) the United States.

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47) In 2018, Brazil had a population of roughly 211 million people and a GDP of approximately $1.9 trillion. This means that GDP per capita in Brazil was approximately A) $11,100.

B) $9,000.

C) $90.

D) $90,000.

48)

Which country below has a higher GDP per capita than the United States?

A) China B) Sweden C) Norway D) All three of these countries have a higher GDP per capita than the United States.

49) Which of the following correctly ranks personal consumption, government consumption and investment, and nonresidential investment in order from greatest to least for the United States in 2018?

A) Personal consumption, government consumption and investment, nonresidential investment B) Personal consumption, nonresidential investment, government consumption and investment C) Government consumption and investment, personal consumption, nonresidential investment D) Government consumption and investment, nonresidential investment, personal consumption

50)

Which of the categories of GDP were negative for the United States in 2018?

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A) None of these categories are correct.

B) Net exports C) Net imports D) Change in private inventories

51)

Which of the following categories of GDP can possibly be negative?

A) None of these categories are correct.

B) Net exports only C) Net exports and changes in private inventories only D) Changes in private inventories only

52)

What was the approximate value of U.S. GDP in 2018?

A) $13.95 billion B) $20.50 billion C) $13.95 trillion D) $20.50 trillion

53)

Government social benefits paid to individuals are

A) known as transfer payments and are counted as part government consumption and investment.

B) known as transfer payments and are typically used to fund personal consumption.

C) known as the output of government and are counted as part government consumption and investment.

D) known as the output of government and are typically used to fund personal consumption.

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54)

The network of suppliers needed to make a particular product is known as A) net exports.

B) the nonmarket economy.

C) the network externality.

D) the supply chain.

55) If Boeing produces a plane in the United States, using some parts that it imports from other countries, and then exports that plane to another country, how will this production be counted in U.S. GDP? A) The final value of the plane will be added to GDP. B) The value of the imported parts will be subtracted from GDP. C) The final value of the plane will be added to GDP, and the value of the imported parts will be subtracted from GDP. D) The final value of the plane and the value of the imported parts will both be subtracted from GDP.

56)

Why are intermediate inputs left out of GDP calculations?

A) Because GDP only measures the goods that households buy B) Because intermediate inputs are part of final goods and services C) Because the statistical agencies are unable to correctly measure intermediate inputs D) Because intermediate inputs do not have a dollar value

57) Category Personal consumpction

$ 10

Value billion

Nonresidential investment

$ 3

billion

Residential investment

$ 1

billion

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Government consumption and investment

$ 3.5 billion

Exports

$ 0.5 billion

Imports

$ 0.5 billion

Consider the data for a small economy located in the table above. Assuming there were no changes in private inventories, what is the GDP of this country?

A) $16.5 billion B) $17.5 billion C) $18.0 billion D) $18.5 billion

58) If all of the unpaid work in the U.S. economy were counted in GDP, which of the following would be closest to value of this unpaid work?

A) $20 billion B) $200 billion C) $2 trillion D) $20 trillion

59) Comparing GDP between countries can tell us which country __________, but not which country __________.

A) can produce more; has a higher average standard of living B) has a higher average standard of living; has the highest minimum standard of living C) has a higher average standard of living; has a better quality of life D) has a better quality of life; can produce more

60)

If you attend a private university, a new lecture hall on campus probably counts as

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A) residential investment, since the lecture hall is a building.

B) nonresidential investment, since the lecture hall is a long-lived structure used by a business.

C) government consumption and investment, since universities are funded by taxpayers.

D) personal consumption, since the education received in the lecture hall is a service consumed by individuals.

61)

What six items make up the gross domestic product figure?

62)

How are net exports calculated?

63)

What is included in government consumption and investment when calculating the GDP?

64) The GDP does not include the nonmarket economy. What is this, and why isn't it included?

65)

What is macroeconomics?

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66)

Macroeconomics is the independent study of individual parts of the economy. ⊚ true ⊚ false

67) year.

The gross domestic product is the dollar value of the total output of the economy in a ⊚ ⊚

true false

68)

Only final goods and services count in calculating the GDP. ⊚ true ⊚ false

69)

Nonresidential investment is part of the GDP calculation. ⊚ true ⊚ false

70)

The salaries paid to government employees are an example of a government input. ⊚ true ⊚ false

71) Government investment includes all purchases of long-lived assets such as tanks and planes.

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⊚ ⊚

true false

72)

Net exports are calculated as exports minus imports. ⊚ true ⊚ false

73)

The production by American companies in foreign countries counts in U.S. GDP. ⊚ true ⊚ false

74)

Personal consumption accounted for $13.95 billion in 2018 in the United States. ⊚ true ⊚ false

75) The output of a government is equal to government consumption plus government investment. ⊚ true ⊚ false

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Answer Key Test name: chapter 7 1) C 2) B 3) B 4) C 5) B 6) A 7) B 8) B 9) B 10) C 11) C 12) D 13) D 14) C 15) D 16) B 17) B 18) A 19) C 20) A 21) B 22) D 23) C 24) A 25) A 26) B Version 1

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27) B 28) B 29) B 30) D 31) D 32) B 33) A 34) A 35) A 36) A 37) B 38) B 39) C 40) A 41) C 42) A 43) B 44) A 45) C 46) A 47) B 48) C 49) A 50) B 51) C 52) D 53) B 54) D 55) C 56) B Version 1

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57) B 58) C 59) A 60) B 66) FALSE 67) TRUE 68) TRUE 69) TRUE 70) FALSE 71) TRUE 72) TRUE 73) FALSE 74) FALSE 75) TRUE Student name:__________ 1)

Inflation can be defined as A) a sustained upward movement in the average level of prices.

B) a sustained downward movement in the average level of prices.

C) a sustained upward movement in most or all of the prices in the economy.

D) any increase in any individual price in the economy.

2)

Inflation is A) one of the categories of gross domestic product.

B) one of the key measures of the health of an economy.

C) something that consumers worry about more than economists do.

D) the single most important economic problem in the United States today.

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3)

The average price level is equivalent to A) the price of energy.

B) the price of a market basket of goods.

C) the price of exports.

D) the price of imports.

4)

What is the CPI? A) The Consumer Protection Institute B) The consumer price index C) The consumer product index D) The consumption and production index

5)

In order to create an index for consumer prices, the BLS chose A) 100 to represent the average 1982–1984 price level.

B) 1 to represent the average 1982–1984 price level.

C) 100 to represent the average 1952–1954 price level.

D) 1 to represent the average 1952–1954 price level.

6)

Core inflation is defined as A) inflation that takes energy and food into account.

B) inflation that does not take energy and food into account.

C) inflation that takes health care and energy into account.

D) inflation that does not take health care and energy into account.

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7)

A relative price shift occurs when

A) any price in the economy changes.

B) the inflation rate of a good or service is significantly higher or lower than the overall inflation rate.

C) the inflation rate of a good or service matches the overall inflation rate.

D) the prices of two different goods rise by the same amount.

8)

Between 2000 and 2018, which of the following experienced a negative inflation rate?

A) Gasoline B) College tuition C) Medical care D) Wireless phone service

9)

Some goods have become less expensive due to A) globalization and technology.

B) government deregulation.

C) government regulation.

D) GDP growth.

10)

Money illusion occurs when we compare dollar amounts A) without adjusting for technology.

B) without adjusting for inflation.

C) between two years.

D) between the CPI and the GDP.

11)

A dollar-amount increase that has not been adjusted for inflation is called

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A) a real increase.

B) a nominal increase.

C) a net increase.

D) a deflationary increase.

12)

The formula for a real percentage change is A) the nominal percentage change minus the inflation rate.

B) the nominal percentage change divided by the inflation rate.

C) the nominal percentage change plus the inflation rate.

D) the nominal percentage change multiplied by the inflation rate.

13)

Expected inflation is A) the inflation rate that governments require from their central banks from year to year.

B) the inflation rate that consumers and businesses expect will hold for some time in the

future.

C) the inflation rate that is equal to the rate of GDP growth over the same period.

D) the actual inflation rate minus the actual growth rate of GDP.

14)

Hyperinflation is A) any increase in prices that lasts for more than 5 years.

B) a very rapid increase in prices from year to year.

C) inflation calculated without considering food and energy prices.

D) inflation calculated based on the CPI model.

15)

A wage-price spiral occurs when

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A) businesses boost prices and wagesfaster and faster to try to stay ahead of higherthan-expected inflation.

B) businesses reduce prices and wagesfaster and faster to try to stay ahead of higherthan-expected deflation.

C) businesses boost productionfaster and faster to try to stay ahead of higher-thanexpected inflation.

D) businesses reduce productionfaster and faster to try to stay ahead of higher-thanexpected inflation.

16) The Bureau of Labor Statistics has chosen the price level from __________ to be the base price level used in calculating the CPI. A) 1992 B) 1982–1984 C) 2010–2015 D) 1995

17)

Unexpectedly high inflation tends to hurt __________ most.

A) borrowers B) lenders C) policy makers D) businesses

18)

What is deflation?

A) An increase in the price level that reduces the GDP B) A decrease in the average price level C) A decrease in the rate of inflation D) A reduction in GDP caused by changes in the price level

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19)

Disinflation is A) a decrease in the average price level.

B) a decrease in the rate of inflation.

C) an increase in the average price level.

D) an increase in the rate of inflation.

20)

If unexpected inflation is good for borrowers, unexpected deflation is good for A) borrowers as well.

B) lenders.

C) businesses.

D) governments.

21)

Which is not a category of goods included in the BLS's consumer market basket?

A) Communication B) New vehicles C) Medical care D) Business office supplies

22)

What does the phrase "owners' equivalent rent" mean?

A) It is the price of five years' worth of housing services.

B) It is the price of a home.

C) It is the value of a year's worth of housing services.

D) It is the value of three years' worth of housing services.

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23)

Which goods did not decrease in price between 2000 and 2018?

A) Personal computers and peripherals B) Alcoholic beverages away from home C) Televisions D) Toys

24) If an auto manufacturer installs antilock brakes on a vehicle, and that alone causes the price to increase by $100, the BLS A) counts that increase as part of the inflation rate.

B) does not count that increase as part of the inflation rate.

C) subtracts that price increase from the overall inflation rate.

D) counts only half of the price increase as part of the inflation rate.

25) Suppose that a new iPod with 30 new features costs $100 more to produce and buy than does the previous version. The $100 price increase A) is added to the inflation rate.

B) is not added to the inflation rate because consumer electronics are not part of the consumer market basket.

C) is not added to the inflation rate because it represents an improvement in quality.

D) is divided by the additional benefits and then added to the inflation rate.

26)

A pure price change occurs A) when inflation alone increases the price of an item.

B) when technology and quality improve an item.

C) when inflation exceeds expected inflation rates.

D) with unanticipated inflation.

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27) As of 2014, the average household earned $53,657. In 1979, the average household earned $16,461. Although it appears as though incomes have more than tripled, other prices have risen too. This illustrates a concept known as A) deflation.

B) disinflation.

C) money illusion.

D) COLA.

28) Of the categories of spending listed below, which is the smallest component of the market basket?

A) Food at home B) Medical care C) Apparel D) New vehicles

29) The amount of inflation that households and businesses expect will continue into the future is known as A) anticipated inflation.

B) expected inflation.

C) nominal inflation.

D) long-run inflation.

30) As an example of hyperinflation, one U.S. dollar was equal to __________ German marks in 1923, compared to 8.9 marks in 1919.

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A) 0.001 B) 1 C) 1,000 D) 1 trillion

31)

Annual inflation equal to 1,000 percent means that prices are rising by A) 100 times in a year.

B) 10 times in a year.

C) 500 times in a year.

D) 1,000 times in a year.

32) In 1973, the oil embargo sparked a wage-price spiral due to higher energy costs. In 2004, with a similar spike in oil prices, there was not a corresponding wage-price spiral because A) of heavy government regulation.

B) of alternative energy sources.

C) the jump in prices did not last very long.

D) the economy avoids unanticipated inflation.

33)

What is the cost of transactions as it relates to the harm caused by inflation?

A) The cost associated with the time and effort of managing your spending B) The cost to households of the products whose prices are rising C) Increases in production costs when input prices rise D) The cost associated with buying and selling in a market

34)

COLA provisions automatically increase wages or benefits to match

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A) inflation.

B) disinflation.

C) deflation.

D) the cost of living.

35)

Which of the following countries has not experienced hyperinflation?

A) Norway B) Brazil C) Germany D) Venezuela

36)

In the United States, inflation peaked around A) 1980.

B) 1990.

C) 1929.

D) 1973.

37)

Money illusion occurs when A) falling relative prices make consumers feel richer.

B) the value of moneydisappears.

C) we disregard inflation adjustments for dollar values.

D) the rate of inflation decreases.

38)

Disinflation and deflation are

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A) two different terms that describe the same thing.

B) often confused with one another.

C) exact opposites.

D) terms used to describe changes to the GDP.

39)

Certain behavior associated with expected inflation can A) reduce inflation rates overall.

B) allow lenders to collect with more valuable dollars.

C) allow borrowers to pay with more valuable dollars.

D) actually increase the overall rate of inflation.

40)

Unexpected inflation can often A) reduce price levels below cost.

B) reduce wages below the inflation rate.

C) help borrowers by allowing them to pay back lenders with less valuable dollars.

D) help lenders collect payments in more valuable dollars.

41) The category of spending called "food away from home" makes up a smaller proportion of the market basket than which of the following categories?

A) Apparel B) Gasoline C) Education D) Food at home

42) Suppose a technological advancement makes automobiles 50 percent safer, and at the same time, the prices of automobiles go up by 25 percent. Is this a pure price change?

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A) No, because an improvement in quality has contributed to the price increase.

B) Yes, because an improvement in quality has contributed to the price increase.

C) No, because it is not possible to put an economic value on safety.

D) Yes, because any time a price changes, it is considered a pure price change.

43) Which of the following is an example of a company "offshoring" part of the production of a service?

A) Scissors for haircuts being produced in China B) Technicians overseas reading x-rays taken in the United States C) An American traveler getting a tattoo while in Germany D) Foreign students studying at American universities

44) Good

Price Increase Last Year

Amusement park admission

5.0%

Museum admission

4.2%

Zoo admission

3.1%

Refer to the table above, which gives hypothetical data on price changes for three goods. If the overall rate of inflation in the economy was 3.5 percent, which good(s) experienced a relative price increase?

A) Amusement park admission only B) Amusement park admission and museum admission C) Zoo admission only D) Museum admission and zoo admission

45) Good

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Price Increase Last Year

164

Amusement park admission

5.0%

Museum admission

4.2%

Zoo admission

3.1%

Refer to the table above, which gives hypothetical data on price changes for three goods. At which of the following overall rates of inflation would it be true that museum admission became relatively cheaper?

A) 4.5 percent.

B) 4.2 percent.

C) 3.5 percent.

D) −1.5 percent.

46) Good

Price Increase Last Year

Amusement park admission

5.0%

Museum admission

4.2%

Zoo admission

3.1%

Refer to the table above, which gives hypothetical data on price changes for three goods. Which good(s) became relatively more expensive for buyers?

A) Only amusement park admission became relatively more expensive.

B) None of the goods in the table became relatively more expensive.

C) It depends on the overall rate of inflation in the economy.

D) All three of the goods in the table became relatively more expensive.

47) Good

Price Increase Last Year

Amusement park admission

5.0%

Museum admission

4.2%

Zoo admission

3.1%

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Refer to the table above, which gives hypothetical data on price changes for three goods. If the overall rate of inflation in the economy was 3.5 percent, what happened to the real price of amusement park admission?

A) The real price of amusement park admission rose by 1.5 percent.

B) The real price of amusement park admission rose by 8.5 percent.

C) The real price of amusement park admission rose by 5.0 percent.

D) The real price of amusement park admission fell by 1.5 percent.

48) Good

Price Increase Last Year

Amusement park admission

5.0%

Museum admission

4.2%

Zoo admission

3.1%

Refer to the table above, which gives hypothetical data on price changes for three goods. If the overall rate of inflation in the economy was 4.5 percent, which of the following statements is true?

A) The real prices of all three of the goods listed in the table increased.

B) The real price of amusement park admission rose, and the real price of museum admission and zoo admission fell.

C) The real price of amusement park admission fell, and the real price of museum admission and zoo admission rose.

D) The real prices of all three of the goods listed in the table decreased.

49) Good

Price Increase Last Year

Amusement park admission

5.0%

Museum admission

4.2%

Zoo admission

3.1%

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Refer to the table above, which gives hypothetical data on price changes for three goods. If the overall rate of inflation in the economy was 3.5 percent, what happened to the real price of zoo admission?

A) The real price of zoo admission fell by 0.4 percent.

B) The real price of zoo admission rose by 0.4 percent.

C) The real price of zoo admission rose by 6.6 percent.

D) The real price of zoo admission fell by 6.6 percent.

50) Year

Antonio's Hourly Wage

Consumer Price Index

2015

$10.50

237.0

2018

$11.05

250.5

Refer to the table above, which gives Antonio's hourly wage and the value of the CPI for two years. Using 2018 as the base year, by how much did Antonio's wage change from 2015 to 2018?

A) It rose by 55 cents per hour.

B) It rose by 60 cents per hour.

C) It fell by 5 cents per hour.

D) It rose by 5 cents per hour.

51) Year

Antonio's Hourly Wage

Consumer Price Index

2015

$10.50

237.0

2018

$11.05

250.5

Refer to the table above, which gives Antonio's hourly wage and the value of the CPI for two years. What was Antonio's nominal wage in 2015?

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A) $10.50 B) $10.50 times (250.5 − 237.0) C) $10.50 times (237.0/250.5) D) $10.50 times (250.5/237.0)

52) Year

Antonio's Hourly Wage

Consumer Price Index

2015

$10.50

237.0

2018

$11.05

250.5

Refer to the table above, which gives Antonio's hourly wage and the value of the CPI for two years. What was Antonio's real wage in 2015, if 2015 is used as the base year?

A) $10.50 B) $11.05 C) $11.10 D) $10.45

53) Year

Antonio's Hourly Wage

Consumer Price Index

2015

$10.50

237.0

2018

$11.05

250.5

Refer to the table above, which gives Antonio's hourly wage and the value of the CPI for two years. From 2015 to 2018, Antonio received a total of 55 cents in pay raises, and the CPI also increased as shown in the table. What happened to Antonio's real wage from 2015 to 2018?

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A) It rose, because $11.05 is greater than $10.50.

B) It rose, because Antonio's nominal wage and the CPI were both higher in 2015 than in 2018.

C) It fell, because Antonio's nominal wage rose more slowly than did the CPI. D) It fell, because the change in the CPI was 13.5, which is greater than Antonio's wage.

54) Year

Antonio's Hourly Wage

Consumer Price Index

2015

$10.50

237.0

2018

$11.05

250.5

Refer to the table above, which gives Antonio's hourly wage and the value of the CPI for two years. From 2015 to 2018, Antonio received a total of 55 cents in pay raises, and the CPI also increased as shown in the table. What was Antonio's real wage in 2015 if 2018 is used as the base year?

A) $10.50 B) $11.05 C) $11.10 D) $10.45

55) Year

Antonio's Hourly Wage

Consumer Price Index

2015

$10.50

237.0

2018

$11.05

250.5

Refer to the table above, which gives Antonio's hourly wage and the value of the CPI for two years. From 2015 to 2018, Antonio received a total of 55 cents in pay raises, and the CPI also increased as shown in the table. What was Antonio's real wage in 2018 if 2015 is used as the base year?

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A) $10.50 B) $11.05 C) $11.10 D) $10.45

56) The CPI in November 2015 was equal to 237.3, and in 2016 it was equal to 241.4. This means that the inflation rate between November 2015 and November 2016 was equal to A) 1.7 percent.

B) 1.02 percent.

C) 4.1 percent.

D) 0.41 percent.

57) The CPI in November 2016 was equal to 241.4. This means that prices in November 2016 were A) 241.4 percent higher than in 1982–1984.

B) 141.4 percent higher than in 1982–1984.

C) 120.7 percent higher than in 1982–1984.

D) 2.414 percent higher than in 1982–1984.

58)

The CPI in November 2016 was equal to 241.4. This means that $1,000 in A) November 2016 had as much buying power as $2,414 in 1982–1984.

B) November 2016 had as much buying power as $241.40 in 1982–1984.

C) 1982–1984 had as much buying power as $2,414 in November 2016.

D) 1982–1984 had as much buying power as $241.40 in November 2016.

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59) Since 1990, the annual inflation rate for the United States has __________ and has __________.

A) remained under 4 percent; never been negative B) remained above 4 percent; been negative for just one year C) remained under 4 percent; been negative for just one year D) remained above 4 percent; never been negative

60) Between 2000 and 2018, the average rate of inflation for all goods was 2.1 percent.

Which goods experienced relative price decreases during that same period?

A) Any goods with negative inflation rates only B) Any goods with positive inflation rates higher than 2.1 percent only C) Any goods with negative inflation rates or positive inflation rates greater than 2.1 percent D) Any goods with negative inflation rates or positive inflation rates lower than 2.1 percent

61) The U.S. TV series Survivor has awarded a $1 million check to the show’s winner for more than 35 seasons, dating back to 2000. Which of the following is true about that top prize?

A) It has remained constant, since it is a real price of $1 million.

B) It has decreased in value, since there has been overall inflation in the United States since 2000.

C) It has increased in value, since there has been deflation in several years since 2000.

D) Nothing can be concluded about the top prize without knowing the specifics of the show’s rules.

62)

In the aftermath of the Great Recession

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A) the United States, Japan, and Europe are all experiencing deflation.

B) deflation concerns have subsided in the United States, Japan, and Europe.

C) policymakers in the United States, Japan, and Europe are working hard to avoid deflation.

D) the deflation of the early 2000s has been reversed.

63)

Since 2000, the relative price of rental housing has risen because A) the average price of rental housing has gone up.

B) the price of rental housing has risen faster than the overall price level.

C) the overall price level has been stable, but rental housing prices have risen.

D) rental housing prices have remained stable, but the overall price level has fallen.

64)

The increases in the relative prices of rental housing in recent years have A) greatly varied among metro areas.

B) been more or less the same in urban and rural areas.

C) generally been highest in the Midwest and the South.

D) gone unnoticed since housing is so cheap.

65)

Strong job growth in a certain metro area is likely to be correlated with A) an increase in the demand for rental housing, pushing down its relative price.

B) an increase in the supply of rental housing, pushing down its relative price.

C) an increase in the demand for rental housing, pushing up its relative price.

D) an increase in the supply of rental housing, pushing up its relative price.

66)

Why does core inflation not include energy or food prices?

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67)

Explain how globalization has caused some goods to be cheaper.

68)

What is a pure price change?

69)

What is one way to avoid money illusion?

70) Federal spending on elementary and secondary education rose from $39.7 billion to $40 billion in 2007. Inflation at the time was 2.5 percent. Explain what happened to real spending on education in 2007.

71) The average price level measures how much it costs to buy a market basket of common goods and services. ⊚ true ⊚ false

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72) The phrase "owners' equivalent rent of primary residence" refers to the cost of living in your own home for one year. ⊚ true ⊚ false

73) The BLS has chosen 90 to represent the average 1982–1984 price level, and it now measures all other years relative to this base year. ⊚ true ⊚ false

74)

The CPI measures the changes of a narrow category of products. ⊚ true ⊚ false

75)

The inflation rate is the annual percentage change in the average price level. ⊚ true ⊚ false

76)

Core inflation includes energy and food cost increases. ⊚ true ⊚ false

77)

The biggest declines in prices in the last few years have come from medical care. ⊚ true ⊚ false

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78)

Nominal increases take into account inflation adjustments over a period of time. ⊚ true ⊚ false

79)

Real dollars are also called inflation-adjusted dollars. ⊚ true ⊚ false

80) The inflation-adjusted percentage change is the nominal percentage change plus the inflation rate. ⊚ true ⊚ false

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Answer Key Test name: chapter 8 1) A 2) B 3) B 4) B 5) A 6) B 7) B 8) D 9) A 10) B 11) B 12) A 13) B 14) B 15) A 16) B 17) B 18) B 19) B 20) B 21) D 22) C 23) B 24) B 25) C 26) A Version 1

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27) C 28) C 29) B 30) D 31) B 32) C 33) A 34) A 35) A 36) A 37) C 38) B 39) D 40) C 41) D 42) A 43) B 44) B 45) A 46) C 47) A 48) B 49) A 50) C 51) A 52) A 53) C 54) C 55) D 56) A Version 1

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57) B 58) C 59) C 60) D 61) B 62) C 63) B 64) A 65) C 71) TRUE 72) TRUE 73) FALSE 74) FALSE 75) TRUE 76) FALSE 77) FALSE 78) FALSE 79) TRUE 80) FALSE Student name:__________ 1) The inputs used in the aggregate production function do not include which of the following?

A) Education and skill levels B) Knowledge C) Average price levels D) The number of workers in a country

2)

One essential force in the growth of human capital over the past several decades has been

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A) the growth of Social Security.

B) the community college system.

C) the growth of Medicare and Medicaid.

D) the reduction in the inflation rate.

3)

The real growth rate is calculated by A) the BEA adjusting the GDP for inflation.

B) the BEA using nominal rates to reflect the GDP. C) the BLS adjusting the GDP per capita for inflation.

D) the BLS calculating price level changes and population changes.

4)

Investment in physical capital means A) hiring more employees.

B) purchasing equipment and buildings.

C) purchasing supplies.

D) taking out loans.

5)

What is one negative effect of growth?

A) Obesity due to falling food prices B) Cleaner air due to technological advances C) More healthful foods due to improved farming techniques D) Increases in poverty as the result of corporate greed

6)

In 2007, Google spent more than $2 billion on property and equipment. This is called

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A) intermediate inputs.

B) aggregate production.

C) investment in physical capital.

D) aggregate investment.

7)

Raw materials include which of the following?

A) Software B) Laptop cases C) Oil D) Steel beams to build houses

8)

Food production over the past 50 years has increased, partially due to A) better seeds.

B) more farm workers.

C) lower inflation rates.

D) lower interest rates.

9) The United States has fewer workers than China, but has a bigger overall economy because the United States has A) more land resources.

B) a larger labor pool.

C) a higher growth rate.

D) on average more productive workers.

10)

Economic growth generally leads to

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A) higher rates of inflation.

B) higher rates of poverty.

C) intensified disinflation.

D) higher living standards.

11)

An increase in living standards is shown by which of the following?

A) An increase in the number of workers employed B) An increase in private consumption spending C) An increase in real GDP D) An increase in real GDP per capita

12)

The education and skills of workers are factors driving A) economic inflation.

B) productivity functions.

C) economic growth.

D) inflationary growth.

13)

In a growing economy, __________ enjoy a rising standard of living.

A) both rich and poor B) only the poor C) only the rich D) neither the rich nor the poor

14) Which of the following is not an example of the "more" and "better" that results from economic growth?

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A) A cleaner environment B) Going out to eat more often C) The invention of the smartphone D) Improved treatments for health problems

15)

GDP statistics do not reveal anything about A) the amount of economic growth.

B) the productivity of the economy.

C) global warming's impact on the economy.

D) the economy’s production of goods and services.

16)

GDP and real GDP are ways to measure A) inflation.

B) disinflation.

C) economic output.

D) market equilibrium.

17)

To measure the growth of the average standard of living over time, we A) look at the aggregate production function.

B) look at the production possibilities frontier.

C) look at the change in real GDP per capita.

D) measure and compare inflation rates.

18) On a PPF with two products, health care and housing, what would occur in a stagnant economy if the amount of health care output increased?

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A) The amount of housing would increase.

B) The amount of housing would decrease.

C) There would not be any more stagnation.

D) There would have to be deflation.

19)

A growing economy can result in A) fewer newborn deaths.

B) less access to communication technology.

C) a higher incidence of malnutrition.

D) less government corruption.

20)

Which does an expanding economy not do?

A) Free up resources for the public sector B) Boost living standards for the poor C) Create a lower real GDP D) Allow the middle class to enjoy more luxuries

21)

Without economic growth A) we would have a zero-sum economy.

B) we would have a non-zero-sum economy.

C) standards of living would rise only as the population increased.

D) the production possibility curve would shift outward.

22)

Which of the following is a potential downside of economic growth?

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A) People may become too happy.

B) Standards of living may rise too quickly for people to notice.

C) There may be more government corruption.

D) It can have a negative impact on the environment.

23)

Which of the following would cause an increase in human capital?

A) An increase in the number of college students B) An increase in the sale of Microsoft Windows C) A machine purchased to cook burgers automatically D) The purchase of an airplane

24)

Productivity growth is usually an indicator of A) the possibility of inflation.

B) future increases in the unemployment rate.

C) a decline in the health and prosperity of the economy.

D) an increase in the health and prosperity of the economy.

25)

Long-term growth is measured by A) looking at real GDP over at least 5 or 10 years.

B) looking at real GDP over at least one year.

C) looking at per capita GDP over at least one year.

D) looking at GDP compared to real GDP.

26) What would not be one of the reasons for a much lower real GDP in 1905 compared with 2018?

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A) Productive capability in 1905 was lower than in 2018.

B) Fewer goods and services were available in 1905 than in 2018.

C) On average, there were fewer poor people in 1905 than in 2018.

D) Automobiles were rare in 1905 but common in 2018.

27)

According to the aggregate production function, when inputs increase A) inflation slows.

B) unemployment rises.

C) the economy grows.

D) GDP declines.

28)

In the past 50 years, the economy of the United States has grown, causing A) a higher standard of living for most citizens.

B) a higher standard of living for the employed.

C) a stagnant standard of living after adjusting for inflation.

D) a lower standard of living after adjusting for inflation.

29)

Calculating real GDP growth requires

A) adjusting GDP for changes in every price.

B) adjusting GDP for changes in the average level of prices.

C) measuring the GDP with investment, government consumption and investment, and foreign trade.

D) estimating the GDP based on unadjusted price levels.

30)

The production possibility frontier represents

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A) the different possible combinations of output.

B) the shifting of priorities to meet demand.

C) the ability of the GDP to grow relative to other countries' GDPs. D) the potential impact of inflation on GDP.

31)

GDP that is not reported as real GDP is A) the actual GDP for that year, unadjusted for inflation.

B) the actual GDP for that year, adjusted for inflation.

C) the expected level of GDP for that year, adjusted for inflation.

D) the expected level of GDP for that year, unadjusted for inflation.

32)

A zero-sum economy would result from A) excessive inflation-adjusted growth.

B) a lack of real economic growth.

C) a lack of inflation.

D) nominal GDP growth equal to real growth.

33)

A country's standard of living is measured by its A) nominal GDP per capita.

B) real GDP per capita.

C) inflation rates.

D) unemployment rates.

34)

GDP growth on a year-to-year basis is called

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A) nominal growth.

B) real growth.

C) short-term growth.

D) long-term growth.

35)

Human capital can be described as A) education and skill levels.

B) wages employees receive.

C) the cost of labor.

D) the cost of collective bargaining.

36)

Economic growth is driven by several factors, including A) government investment in welfare.

B) a progressive tax on income.

C) education and skill levels of workers.

D) the health of the Social Security trust fund.

37) The golden age of prosperity for productivity in the United States was from World War II to 1973, when productivity rose at an average rate of _____ per year.

A) 2.8 percent B) 2.1 percent C) 5.0 percent D) 1.4 percent

38)

Around 1995, businesses really started

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A) further declines in productivity.

B) using computers to increase worker productivity.

C) a stagnant period of productivity.

D) the information age, which caused productivity slowdowns.

39) Which of the following is not one of the explanations for the low productivity growth in the U.S. economy since 2005?

A) Productivity growth is being improperly measured.

B) Inflation since 2005 has been too volatile for productivity growth.

C) The government is overregulating the economy.

D) Forces driving previous productivity growth have run out of steam.

40)

The era of rapid productivity growth known as the "Golden Age" came to an end in A) 2010.

B) 1995.

C) 1947.

D) 1973.

41)

Real GDP is usually reported by the Bureau of Economic Analysis in A) 2012 dollars.

B) units of output.

C) 1982–1984 dollars.

D) tons (for goods) and hours (for services).

42)

The economy is growing if and only if

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A) GDP is rising.

B) the average price level is rising.

C) real GDP is rising.

D) GDP per capita is rising.

43) The growth rate of GDP in 2005 was 6.5 percent, but the growth rate of real GDP was 3.1 percent. Based on these facts alone, we can conclude that A) the government increased its spending in 2005.

B) the average price level was rising in 2005.

C) the economy experienced disinflation in 2005.

D) GDP per capita rose in 2005.

44) Year 1999

Real GDP (in Billions of 2005 Dollars) $ 10,780

2000

$ 11,226

Population (in Millions of People) 279.63 282.4

Refer to the table above. What was the growth rate of real GDP between 1999 and 2000?

A) 4.1 percent B) 1.0 percent C) 3.0 percent D) 2.6 percent

45)

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Year 1999

Real GDP (in Billions of 2005 Dollars) $ 10,780

2000

$ 11,226

Population (in Millions of People) 279.63 282.4

Refer to the table above. What was the growth rate of the population between 1999 and 2000?

A) 4.1 percent B) 1.0 percent C) 2.5 percent D) 3.1 percent

46) Year 1999

Real GDP (in Billions of 2005 Dollars) $ 10,780

2000

$ 11,226

Population (in Millions of People) 279.63 282.4

Refer to the table above. What was real GDP per capita in 1999?

A) $40,146 B) $38,173 C) $38,551 D) $39,752

47) Year

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Real GDP (in Billions of 2005 Dollars)

Population (in Millions of People)

190

1999

$ 10,780

279.63

2000

$ 11,226

282.4

Refer to the table above. What was real GDP per capita in 2000?

A) $40,146 B) $38,173 C) $38,551 D) $39,752

48) Year 1999

Real GDP (in Billions of 2005 Dollars) $ 10,780

2000

$ 11,226

Population (in Millions of People) 279.63 282.4

Refer to Table 9.1. What was the growth rate of real GDP per capita from 1999 to 2000?

A) 3.12 percent B) 5.17 percent C) 0.99 percent D) 4.14 percent

49)

In 2018, the U.S. labor force was approximately

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A) 154.3 million.

B) 162.1 million.

C) 320.1 million.

D) 7.7 million.

50)

As of 2018, ________ of U.S. adults aged 25–29 had at least a bachelor's degree.

A) 0.5 percent B) 12 percent C) 37 percent D) 70 percent

51)

Most economists favor less interference in the marketplace by government because

A) they ignore the positive impact of government because they focus only on GDP. B) the government is too corrupt.

C) they believe that corporations and individuals know better which investments are most likely to pay off.

D) they don't want the government to spoil the investments they've made in the stock market.

52) Which of the following is not an example of a way that the government interferes in the economy?

A) The government requires everyone to get an elementary and high school education.

B) Local governments impose building codes on newly constructed office buildings or factories.

C) The government sets laws and rules for how mortgages are issued.

D) The government tells Apple what kind of phones to make.

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53) Which two things happened more or less simultaneously to bring an end to the era of low productivity growth that lasted from 1973 to 1995?

A) The information revolution and the creation of the Environmental Protection Agency B) The entry of the baby boom generation into the workforce and a great expansion of globalization C) The information revolution and a great expansion of globalization D) The entry of the baby boom generation into the workforce and the creation of the Environmental Protection Agency

54)

How did a great expansion of globalization in the late 1990s increase productivity?

A) Businesses learned how to use foreign suppliers to cut costs.

B) Businesses learned how to use computers to produce more output with fewer workers.

C) Businesses began sending workers overseas for more training.

D) Businesses were able to sell in larger markets as tariffs and import quotas were reduced.

55) What is the correct chronological order of the four eras of productivity growth discussed in the textbook?

A) Information revolution and globalization, Unexplained productivity slowdown, Golden Age, Productivity slowdown B) Golden Age, Productivity slowdown, Information revolution and globalization, Unexplained productivity slowdown C) Unexplained productivity slowdown, Information revolution and globalization, Productivity slowdown, Golden Age D) Information revolution and globalization, Productivity slowdown, Golden Age, Unexplained productivity slowdown

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56)

Economic growth can be depicted as A) an outward shift of the PPF. B) an inward shift of the PPF. C) the PPF becoming steeper.

D) the PPF becoming flatter.

57) for

The impact of the Great Recession is clear when one observes negative real GDP growth

A) all of the years from 2007 to 2010.

B) 2008 and 2009.

C) 2008 only.

D) 2009 only.

58) What might be the short-run impact of a completely open immigration policy that allowed labor to move freely across the U.S. border?

A) An increase in real GDP growth caused by an increase in the labor force B) A decrease in real GDP growth caused by an increase in the labor force C) An increase in real GDP growth caused by an increase in demand for public goods D) A decrease in real GDP growth caused by an increase in demand for public goods

59)

Questions of exactly where to draw the line on government interference in the economy A) can only be answered through a democratic process.

B) are best answered by noneconomists.

C) can be answered easily using the tools of economics.

D) are the subject of intense political and economic dispute.

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60) By early 2019, economists had drawn what conclusion about the very low productivity growth that lasted from 2005 to 2018?

A) It was merely a temporary pause in otherwise strong productivity growth.

B) Productivity slowed because of government overregulation.

C) Productivity slowed because of a decrease in investment.

D) Productivity growth averaged only 1.3 percent during that time.

61)

What is the economic definition of productivity?

62)

What could low productivity growth in a country suggest?

63) What is the purpose of the productivity number reported by the Bureau of Labor Statistics, and what doesn't it include?

64) What inputs are included in the aggregate production function, and what is the economic impact of those inputs?

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65)

Besides a growing workforce, how can a country boost its aggregate production?

66) An economy experiences growth if it produces more goods and services in a year than it did in the year prior. ⊚ true ⊚ false

67) The production possibility frontier represents all of the combinations of different goods and services that the economy is capable of producing at a given time. ⊚ true ⊚ false

68)

If there is moderate growth, we have a zero-sum economy. ⊚ true ⊚ false

69)

A growing economy is non-zero-sum. ⊚ true ⊚ false

70)

Knowledge is human capital plus business know-how. ⊚ true ⊚ false

71)

The skill level of workers is called human productivity.

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⊚ ⊚

true false

72)

Real GDP per capita is real GDP divided by the number of workers in a country. ⊚ true ⊚ false

73)

Growth on a year-to-year basis is called long-term growth. ⊚ true ⊚ false

74) The aggregate production function tells us the output, or GDP, of the economy, given its inputs. ⊚ true ⊚ false

75)

Output rises as workers become more educated and skilled. ⊚ true ⊚ false

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Answer Key Test name: chapter 9 1) C 2) B 3) A 4) B 5) A 6) C 7) C 8) A 9) D 10) D 11) D 12) C 13) A 14) A 15) C 16) C 17) C 18) B 19) A 20) C 21) A 22) D 23) A 24) D 25) A 26) C Version 1

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27) C 28) A 29) B 30) A 31) A 32) B 33) B 34) C 35) A 36) C 37) A 38) B 39) B 40) D 41) A 42) C 43) B 44) A 45) B 46) C 47) D 48) A 49) B 50) C 51) C 52) D 53) C 54) A 55) B 56) A Version 1

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57) B 58) A 59) D 60) D 66) TRUE 67) TRUE 68) FALSE 69) TRUE 70) FALSE 71) FALSE 72) FALSE 73) FALSE 74) TRUE 75) TRUE Student name:__________ 1)

The natural rate of unemployment is A) four percent.

B) dependent on the business cycle.

C) determined by the Bureau of Labor Statistics.

D) the level where inflation is more or less stable.

2)

_________ are organized groups of workers that bargain collectively with employers.

A) Unions B) Student councils C) Aggregated labor groups D) Wage stickers

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3)

What does the phrase "wages are sticky" mean?

A) Wages never change.

B) It is difficult to change wages in the short term.

C) Wages are always changing.

D) Wages stick to unemployment rates.

4)

Cyclical unemployment happens because A) businesses make strategic errors.

B) of government intervention.

C) inflation rates vary.

D) of the ups and downs of the business cycle.

5)

Structural unemployment exists when A) the construction industry lays workers off.

B) there is a mismatch between worker skills and employer needs.

C) the government decides who is unemployed.

D) there are too few workers to fill available jobs.

6)

Frictional unemployment occurs when A) employees file grievances and are fired.

B) workers take time off to care for parents or children.

C) workers move from one job into another.

D) workers go back to school.

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7)

The unemployment rate is calculated as A) the rate of inflation minus the rate of employment.

B) total productivity divided by frictional unemployment.

C) the number of unemployed divided by the labor force.

D) structural unemployment divided by GDP.

8)

The unemployment rate includes A) people not working because they are in school.

B) people who have given up looking for work.

C) people who are not working in order to stay at home with children.

D) people who are not employed but are actively seeking work.

9)

The underemployed are those people who are A) working at a job below their skill level while looking for a better job.

B) working full-time but want to work only part-time.

C) not looking for work actively enough to be considered unemployed.

D) unemployed due to the ups and downs of the business cycle.

10) A(n) _________ is defined as a significant decline in economic activity spread across the economy, lasting more than a few months.

A) recession B) depression C) economic deficit D) regressive economy

11)

The _________ is the beginning of a recession.

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A) peak B) trough C) expansion D) valley

12)

The date a recession is most severe is called the A) peak.

B) expansion.

C) trough.

D) equilibrium.

13) The _________ is the period of time from the trough, through recovery, and all the way back to a peak.

A) peak B) trough C) expansion D) start

14)

The pattern of recession, recovery, and expansion is known as the A) economic cycle.

B) inflationary cycle.

C) recession cycle.

D) business cycle.

15)

In a recession, demand for cars falls, and the demand curve in the market for cars

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A) shifts to the right.

B) remains unchanged.

C) shifts to the left.

D) slows down.

16) If the long-term labor force growth rate is 1.2 percent and the long-term productivity growth rate is 2.4 percent, then the A) potential growth rate is 3.6 percent.

B) short-term growth rate is 1.2 percent.

C) spending multiplier is 2.

D) real GDP per capita growth rate is 0.5 percent.

17)

Which of the following is most likely to be a recession-resistant industry?

A) Consumer electronics B) Health care C) Automobiles D) Boats

18)

Negative supply shifts may lead to A) excess deflation.

B) economic growth.

C) recessions.

D) excess supply.

19)

Negative demand shifts can

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A) be defined as an increase in demand without an increase in supply.

B) lead to a positive supply shift.

C) cause a recession.

D) be caused by falling aggregate production.

20)

_________ policies of the government can cause recessions.

A) Inflation-fighting B) Welfare C) Defense spending D) In-kind transfer

21) A problem in which of the following markets is most likely to generate an economic downturn?

A) Agricultural markets B) Financial markets C) Aggregate input markets D) Intermediate input markets

22)

The rate at which potential GDP rises is called the A) GDP peak rate.

B) natural growth rate.

C) real growth rate.

D) potential growth rate.

23)

Which of the following is the formula for the potential growth rate?

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A) The long-term labor force growth rate plus the long-term productivity growth rate B) The short-term growth rate plus the long-term aggregate productivity growth rate C) The short-term growth rate plus the long-term productivity growth rate D) The short-term aggregate growth rate minus the long-term productivity growth rate

24)

The difference between actual and potential GDP is called A) a gap shortage.

B) an output gap.

C) the output resistance.

D) the output differential.

25) If the NAIRU was 4.8 percent in 2016 and the actual unemployment rate was 5.3 percent, what percentage of the labor force could have been put to work without exerting upward pressure on inflation?

A) 0.5 percent B) 10.1 percent C) 4.8 percent D) 5.3 percent

26)

When unemployment is below the natural rate A) inflation tends to slow.

B) the inflation rate tends to increase.

C) frictional unemployment tends to increase.

D) structural unemployment tends to decrease.

27)

When unemployment is above the natural rate

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A) inflation tends to rise.

B) nominal wages tend to decrease.

C) wage-price spirals occur.

D) the inflation rate tends to fall.

28)

The NAIRU is a key indicator of A) how unemployment trends occur.

B) how much the economy can slow down without a recession.

C) how much faster the economy can grow without increasing inflation.

D) how much structural unemployment the economy can sustain.

29)

The potential growth rate is sometimes also called the _________ of the economy.

A) breaking point B) speed limit C) stop point D) peak

30)

When the economy is operating at potential GDP, the rate of inflation is A) rising.

B) neither rising nor falling.

C) falling.

D) zero.

31) Potential GDP is the maximum amount of economic output an economy can sustain at any moment without

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A) causing frictional unemployment.

B) raising unemployment levels.

C) decreasing the inflation rate.

D) increasing the inflation rate.

32)

If real GDP is too high relative to potential GDP, which of the following happens?

A) Inflation rises.

B) A recession begins.

C) Deflation occurs.

D) Unemployment rises.

33)

If real GDP is too low relative to potential GDP, which of the following is true?

A) Inflation is higher than normal.

B) A recession has just begun.

C) Deflation will occur.

D) Unemployment is higher than normal.

34)

What is one potential effect of very high real GDP and very low unemployment?

A) A recession B) Inflation C) Stagnation D) Falling interest rates

35)

Which of the following is a reason that wages are sometimes "sticky"?

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A) Technological changes B) Labor market friction C) Structural unemployment D) Union wage agreements

36)

Which of the following is an example of cyclical unemployment?

A) A fast-food worker quits that job to find a better-paying job.

B) An autoworker is laid off when auto sales fall due to a recession.

C) A student goes to school instead of working.

D) A worker stays at home to care for children.

37)

Which person provides an example of structural unemployment?

A) A worker who stays at home to take care of children.

B) A worker skilled at running an obsolete machine.

C) A student who goes to school instead of working.

D) A fast-food worker who quits that job to find a better-paying job.

38)

Which of the following is an example of frictional unemployment?

A) A student goes to school instead of working.

B) A worker leaves one job and is temporarily unemployed before starting a new one.

C) A worker can't find a job because she is skilled at running an obsolete machine.

D) A worker stays at home to take care of children.

39)

Who would not be counted among the unemployed?

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A) A fast-food worker laid off due to lack of work B) A factory worker fired due to incompetence C) A full-time student pursuing a degree instead of working D) A stay-at-home parent who reentered the workforce and was subsequently laid off

40)

When real GDP goes below potential GDP, it means that A) economic activity has increased.

B) inflation is imminent.

C) economic activity has slowed.

D) deflation is imminent.

41)

When real GDP is lower than potential GDP, the output gap is A) zero.

B) infinity.

C) negative.

D) positive.

42)

How are potential GDP and real GDP alike?

A) They are two different terms for the same thing.

B) They are both adjusted for inflation.

C) They are both influenced by changes in the price level.

D) They both increase when the output gap is positive.

43)

When there is a negative output gap, the unemployment rate

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A) rises.

B) remains steady.

C) is also negative.

D) falls.

44) If there is a mismatch between the skills of unemployed workers and the needs of employers, economists say that there is A) frictional unemployment.

B) cyclical unemployment.

C) per capita unemployment.

D) structural unemployment.

45) The periods of temporary unemployment that correspond to short gaps between jobs create A) frictional unemployment.

B) cyclical unemployment.

C) per capita unemployment.

D) superficial unemployment.

46)

If the average price level is rising, then we can guess that A) the unemployment rate must be below the NAIRU. B) real GDP is above potential GDP. C) the natural rate of unemployment is below the actual rate of unemployment.

D) All of these answer choices could be true.

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47) Which of the following statements best represents the recent relationship between the NAIRU and the actual unemployment rate in recent years (2018–2019)?

A) The actual unemployment rate has been far below the NAIRU, and this has caused high inflation.

B) The actual unemployment rate has exceeded the NAIRU and this has caused severe recessions.

C) The actual unemployment rate has been below the NAIRU; however, the expected increase in inflation has not taken place.

D) The actual unemployment has been exactly equal to the NAIRU.

48) As the economy slows in a recession, the _________ schedules of most businesses shift to the _________.

A) supply; left B) supply; right C) demand; left D) demand; right

49) The effects of a recession on auto companies are that _________ cars are demanded and prices generally _________.

A) fewer; fall B) fewer; rise C) more; fall D) more; rise

50) Which of the following would be considered an inflation-fighting policy and could potentially cause a recession?

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A) The Federal Reserve raises interest rates to intentionally slow down the economy.

B) Businesses lay off workers as a way to keep prices from rising too fast.

C) The federal government orders businesses to reduce prices, which raises interest rates.

D) Households stop buying goods and services in response to higher prices.

51)

Since the 1970s, the most common causes of recessions have been A) negative supply shifts and negative demand shifts.

B) negative supply shifts and inflation-fighting policies.

C) problems in financial markets and inflation-fighting.

D) problems in financial markets and negative demand shifts.

52) Short-term labor force growth rate

1.2 percent

Long-term labor force growth rate

1.0 percent

Short-term productivity growth rate

2.3 percent

Long-term productivity growth rate

2.7 percent

Consider the information for an imaginary economy provided in the table. What is this economy’s potential growth rate?

A) 3.3 percent B) 3.5 percent C) 3.7 percent D) 3.9 percent

53) The big jump in the unemployment rate that occurred in 2009 can best be explained as an increase in

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A) cyclical unemployment.

B) frictional unemployment.

C) natural unemployment.

D) structural unemployment.

54) As a result of changes in cyclical unemployment, the unemployment rate _________ from 2009 to 2014.

A) remained below 6 percent B) remained above 6 percent C) rose every year D) fell every year

55)

Which of the following is equivalent to the natural rate of unemployment?

A) The underemployment rate B) The rate of cyclical unemployment C) The nonaccelerating inflation rate of unemployment D) An unemployment rate of zero percent

56)

Which of the following statements could not be true for an economy?

A) "The actual rate of unemployment is below the NAIRU." B) "Actual GDP is higher than potential GDP." C) "The natural rate of unemployment is higher than the actual rate of unemployment."

D) "The NAIRU is lower than the natural rate of unemployment."

57)

The Great Recession started in _________ and ended in _________.

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A) December 2007; June 2009 B) December 2007; March 2010 C) September 2008; June 2009 D) September 2008; March 2010

58)

The business cycle peak associated with the Great Recession was in A) November 2001 when the prior expansion started.

B) December 2007 when the Great Recession started.

C) June 2009, when the Great Recession ended.

D) September 2008, when the Great Recession became very severe.

59)

The Great Recession was primarily caused by A) negative demand shifts.

B) negative supply shifts.

C) problems in financial markets.

D) inflation fighting.

60) After the housing market bust in the mid-2000s, _________, leading to the economic slowdown that became known as the Great Recession.

A) the Federal Reserve began to aggressively fight inflation B) many banks lent more money than they should have C) many households borrowed more than they could afford to pay back D) it became harder for households and business to borrow

61)

How is it possible for output to be greater than potential GDP?

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62)

What is the definition of the output gap? What contributes to an output gap?

63)

What is the definition and purpose of potential GDP?

64) What will happen in an economy if the actual GDP is too high relative to the potential GDP?

65)

What is the definition of the natural rate of unemployment?

66) Potential GDP is the output of the economy along a smooth path of growth, without strains on production or unused resources. ⊚ true ⊚ false

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67) The National Bureau of Economic Research decides the official start and end dates for a recession. ⊚ true ⊚ false

68)

The expansion is the period of time after the peak in business cycles. ⊚ true ⊚ false

69)

The pattern of recession, recovery, and expansion is called the business cycle. ⊚ true ⊚ false

70)

Generally, more homes are built in a recession. ⊚ true ⊚ false

71)

During a recession, business profits decline. ⊚ true ⊚ false

72)

During a recession, consumers have less money, causing a demand shift to the right. ⊚ true ⊚ false

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73)

Recessions are always caused by negative demand shifts. ⊚ true ⊚ false

74) An important cause of recessions is an unexpected negative supply shift, such as higher oil prices. ⊚ true ⊚ false

75)

The NAIRU is short for the nonaccelerating inflation rate of unemployment. ⊚ true ⊚ false

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Answer Key Test name: chapter 10 1) D 2) A 3) B 4) D 5) B 6) C 7) C 8) D 9) A 10) A 11) A 12) C 13) C 14) D 15) C 16) A 17) B 18) C 19) C 20) A 21) B 22) D 23) A 24) B 25) A 26) B Version 1

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27) D 28) C 29) B 30) B 31) D 32) A 33) D 34) B 35) D 36) B 37) B 38) B 39) C 40) C 41) C 42) B 43) A 44) D 45) A 46) D 47) C 48) C 49) A 50) A 51) B 52) C 53) A 54) B 55) C 56) D Version 1

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57) A 58) B 59) C 60) D 66) TRUE 67) TRUE 68) FALSE 69) TRUE 70) FALSE 71) TRUE 72) FALSE 73) FALSE 74) TRUE 75) TRUE Student name:__________ 1)

The Keynesian recommendation for a policy response to a recession consists of A) increased government spending with tax cuts.

B) decreased government spending with tax cuts.

C) increased government spending with tax increases.

D) decreased government spending with tax increases.

2) The overall boost to economic activity that results from a government spending increase is called the A) butterfly effect.

B) economic effect.

C) multiplier effect.

D) aggregate demand effect.

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3)

The portion of each additional dollar of income that households spend is called A) after-tax income.

B) the marginal propensity to consume.

C) the spending multiplier.

D) the marginal spending rate.

4)

The transfer of domestic economic stimulus to foreign markets is known as A) economic overage.

B) net export leakage.

C) overseas leakage.

D) fiscal offset.

5)

In the short term, an increase in government spending may A) reduce taxes and wages.

B) raise prices and wages.

C) raise taxes but reduce wages.

D) raise wages and reduce inflation.

6) During a recession, government spending to push up output and reduce unemployment is called A) inflationary.

B) stimulative.

C) deflationary.

D) a fiscal devaluation.

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7)

The single biggest federal tax is the A) excise tax.

B) federal income tax.

C) estate tax.

D) corporate income tax.

8)

The amount of income people have left after taxes is called A) boot.

B) net profit.

C) excise income.

D) disposable income.

9)

If tax cuts are stimulative, tax increases are A) contractionary.

B) reactionary.

C) inflationary.

D) deflationary.

10)

The overall increase in GDP that results from a $1 cut in taxes is called the A) government spending effect.

B) tax multiplier.

C) fiscal multiplier.

D) base multiplier.

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11)

The tax you pay on your last dollar of income is called the A) marginal propensity to pay tax.

B) average tax rate.

C) marginal rate of payment.

D) marginal tax rate.

12)

The excess of the federal government's spending over its revenues is called the A) surplus deficit.

B) budget deficit.

C) surplus effect.

D) budget surplus.

13) the

The total of all past government borrowing, minus government budget surpluses, is called

A) national cost.

B) public debt.

C) net debt load.

D) fiscal cost.

14)

When government revenues exceed spending, that is called a A) negative surplus.

B) budget surplus.

C) budget deficit.

D) balanced budget.

15)

The federal government's budget deficit __________ between 2008 and 2009.

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A) decreased from $1,413 billion to $459 billion B) remained stable at $459 billion C) increased from $459 billion to $1,413 billion D) increased by $1,413 billion

16) During a recession, the budget deficit generally increases because tax revenues weaken while expenditures rise. This increase is known as the A) automatic stabilizer.

B) net stimulus increase.

C) automatic increase.

D) fiscal stabilizer.

17)

When the government competes with the private sector for loans, this is called A) private competition.

B) crowding out.

C) crowdfunding.

D) fiscal bullying.

18)

In the short term, a decrease in taxes will have what effect on GDP and unemployment?

A) It will reduce unemployment and reduce GDP. B) It will reduce unemployment and raise GDP. C) It will raise unemployment and raise GDP. D) It will raise unemployment and reduce GDP.

19)

Supply-side economics argues that changes in ________ affect incentives to work.

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A) marginal tax rates B) marginal income C) marginal profit D) marginal cost

20) in

A result of budget deficits is that governments have to borrow more, sometimes resulting

A) increasing the rate of inflation.

B) decreasing interest rates.

C) increased foreign borrowing.

D) increasing interest rates.

21)

In the private sector, all transactions are voluntary, so A) there are always winners and losers.

B) often too few transactions will take place.

C) presumably all parties benefit.

D) individuals are required to participate.

22) The government's decisions about spending and taxation that affect employment, output, and inflation are called A) fiscal policy.

B) multiplier policy.

C) short-term policy.

D) Keynesian policy.

23)

In 2018, federal, state, and local governments spent almost

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A) $7 trillion.

B) $4 billion.

C) $3 trillion.

D) $600 billion.

24)

Government spending is funded by a system of A) checks and balances.

B) policies and laws.

C) states and cities.

D) taxation and borrowing.

25) The short-term impact of increased government spending on demand schedules for goods and labor is A) a shift to the left.

B) a decrease in inflation.

C) a shift to the right.

D) an increase in inflation.

26) ________ originally proposed the use of government spending to stimulate the economy in the 1930s during the Great Depression.

A) John Maynard Keynes B) Franklin Delano Roosevelt C) Friedrich von Hayek D) Stanley Kuznets

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27) was

In 1955, the marginal tax rate for a married couple with a taxable income over $400,000

A) 35 percent.

B) 30 percent.

C) 85 percent.

D) 91 percent.

28) Some supply-side economic theory states that cutting taxes can stimulate enough work and investment to A) actually increase tax revenues.

B) actually decrease tax revenues even further.

C) add to inflationary concerns.

D) create a supply curve equilibrium.

29)

An increasing budget deficit stimulates the economy A) in the long run only.

B) by decreasing spending.

C) in the short run only.

D) by increasing taxes.

30)

The effect of crowding out over the long run is A) bad because businesses have less access to loans.

B) good because it ensures strong businesses.

C) bad because it is deflationary in nature.

D) good because it tends to reduce taxes.

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31)

When higher taxes discourage whatever activity is being taxed, that is called A) tax discouragement.

B) tax abatement.

C) a multiplier effect.

D) a negative incentive effect.

32)

Tax cuts tend to boost A) disposable income.

B) tax revenues.

C) inflation.

D) interest rates.

33)

Like private borrowers, governments A) can raise taxes to pay off their debts.

B) do not, in the long run, have to pay back their debts.

C) regulate the industries through which they borrow.

D) have to pay interest on their debts.

34)

The time it takes to recognize a recession and implement a spending stimulus is called a A) retroactivity.

B) fiscal drag.

C) multiplier.

D) lag.

35)

An attempt to use government spending to boost the economy may bring

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A) inflation.

B) deflation.

C) anarchy.

D) fiscal instability.

36)

As overseas leakage becomes greater, the multiplier effect A) grows.

B) shrinks.

C) becomes more moderate.

D) is replaced with the incentive effect.

37) Domestic fiscal stimulus is more likely to lead to ________ when production is outsourced.

A) decreased imports B) increased imports C) decreased inflation D) increased inflation

38)

The _____ is the overall economic effect of government spending increases.

A) incentive effect B) spending effect C) multiplier effect D) fiscal effect

39)

The higher the marginal propensity to consume

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A) the bigger the multiplier effect will be.

B) the smaller the spending effect will be.

C) the bigger the incentive effect will be.

D) the smaller the incentive effect will be.

40)

The wealthy have a ________ marginal propensity to consume.

A) lower B) higher C) more elastic D) less elastic

41) The multiplier effect of government spending can be stated as a ________ multiplier or a ________ multiplier.

A) fiscal; money B) spending; job C) federal; local D) government; private sector

42) If the spending multiplier is 1.2, then a $100 billion increase in government spending will increase GDP by A) $12 billion.

B) $120 billion.

C) $83.3 billion.

D) $220 billion.

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43) If the spending multiplier is 1.2, then a $100 billion increase in government spending will increase private sector spending by A) $100 billion.

B) $120 billion.

C) $83.3 billion.

D) $20 billion.

44) Some economists argue that the spending multiplier is actually less than 1. If the spending multiplier is 0.8, then a $200 billion increase in government spending will increase GDP by A) $200 billion.

B) $160 billion.

C) $40 billion.

D) $250 billion.

45) Some economists argue that the spending multiplier is actually less than 1. If the spending multiplier is 0.8, then a $200 billion increase in government spending will cause private-sector spending to A) rise by $160 billion.

B) rise by $40 billion.

C) fall by $40 billion.

D) fall by $160 billion.

46)

The two primary factors that determine the size of the multiplier are the A) marginal propensity to consume and the amount of overseas leakage.

B) amount of imports and the amount of exports.

C) amount of spending and the number of jobs.

D) unemployment rate and the inflation rate.

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47) An increase in government spending is more likely to have a positive impact on jobs and output when A) the unemployment rate is below the natural rate.

B) real GDP is above potential GDP. C) the business cycle is near the peak.

D) the economy is in a recession.

48)

An increase in government spending is more likely to lead to higher inflation when A) the unemployment rate is above the natural rate.

B) real GDP is above potential GDP. C) the business cycle is near the trough.

D) the economy is in a recession.

49)

Which recent president raised taxes when the income tax share of GDP was very low?

A) Ronald Reagan B) Bill Clinton C) George W. Bush D) Barack Obama

50)

Supply-side economic theory focuses on the A) average tax burden.

B) federal income tax share of GDP. C) marginal tax rate.

D) size of the tax multiplier.

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51) The government is like a private borrower in that ________, but the government is not like a private borrower in that ________.

A) the government pays interest on debts; the government can simply increase its income to pay back debts B) the government can simply increase its income to pay back debts; the government pays interest on debts C) the government does not pay interest on debts; the government can simply increase its income to pay back debts D) the government can simply increase its income to pay back debts; the government does not pay interest on debts

52) The government and a private business are alike in terms of ________ but different in terms of ________.

A) the economic pressure they feel to be efficient; the economic impact of their spending B) the economic impact of their spending; the economic pressure they feel to be efficient C) the economic pressure they feel to be efficient; the nature of their relationships with their customers D) the nature of their relationships with their customers; the economic pressure they feel to be efficient

53)

An increase in government spending is likely to lead to decreasing inflation A) if the economy is doing well.

B) if the economy is not doing well.

C) regardless of the state of the economy.

D) under no circumstances.

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54)

An increase in government spending is likely to lead to increasing inflation A) if the economy is doing well.

B) if the economy is not doing well.

C) regardless of the state of the economy.

D) under no circumstances.

55) As of 2018, the federal budget deficit was about ________ of GDP, and ________ of the deficit came from interest payments on federal debt.

A) 3.9 percent; almost all B) 50 percent; almost all C) 3.9 percent; about half D) 50 percent; almost none

56)

What is the multiplier effect?

57)

What is the definition and purpose of the payroll tax?

58)

What is the largest tax in the United States?

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59)

What concept is central to supply-side economics?

60)

What does the government have to do when there is a budget deficit?

61)

Provide an example of automatic stabilizers in times of expansion.

62) President Obama signed legislation that pumped $787 million worth of federal spending and tax cuts into the economy. ⊚ true ⊚ false

63)

The government funds its spending through taxation and borrowing. ⊚ true ⊚ false

64)

The amount of government debt is called the public cost. ⊚ true ⊚ false

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65) An increase in government spending in the short term lowers unemployment and increases GDP. ⊚ true ⊚ false

66)

Fiscal stimulus involves raising taxes and reducing spending to stimulate the economy. ⊚ true ⊚ false

67)

The multiplier effect can be expressed as both a job multiplier and a spending multiplier. ⊚ true ⊚ false

68) The marginal propensity to consume is the portion of income that a household saves after taxes. ⊚ true ⊚ false

69)

Overseas leakage occurs when net imports exceed net exports. ⊚ true ⊚ false

70)

An increase in government spending can raise wages and prices in the short term. ⊚ true ⊚ false

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71)

An excise tax is levied on individual income. ⊚ true ⊚ false

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Answer Key Test name: chapter 11 1) A 2) C 3) B 4) C 5) B 6) B 7) B 8) D 9) A 10) B 11) D 12) B 13) B 14) B 15) C 16) A 17) B 18) B 19) A 20) D 21) C 22) A 23) A 24) D 25) C 26) A Version 1

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27) D 28) A 29) C 30) A 31) D 32) A 33) D 34) D 35) A 36) B 37) B 38) C 39) A 40) A 41) B 42) B 43) D 44) B 45) C 46) A 47) D 48) B 49) B 50) C 51) A 52) B 53) D 54) A 55) C 62) TRUE Version 1

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63) TRUE 64) FALSE 65) TRUE 66) FALSE 67) TRUE 68) FALSE 69) FALSE 70) TRUE 71) FALSE Student name:__________ 1) The Fed's control over interest rates, quantitative easing, and direct lending to financial institutions are some of the tools of A) fiscal policy.

B) monetary policy.

C) discount policy.

D) margin control.

2)

The Fed's margin requirements control

A) how much money people can borrow when they buy stock.

B) the amount of reserves banks must keep in cash or in their accounts with the Federal Reserve.

C) the federal funds rate.

D) the interest rate banks are allowed to pay on demand deposit accounts.

3)

One of the advantages of monetary policy over fiscal policy is that

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A) monetary policy must be approved by Congress, which prevents bad monetary policy from taking effect.

B) monetary policy does not produce inflation, whereas fiscal policy does.

C) the Fed can react more quickly than the legislature can.

D) monetary policy allows the Fed to limit government spending so that government budget deficits are reduced.

4)

When financial institutions borrow from the Federal Reserve, this is called A) borrowing on margin.

B) fiscal policy.

C) open market operations.

D) using the discount window.

5)

The chairperson of the Federal Reserve Board as of 2019 is A) Alan Greenspan.

B) Jerome Powell.

C) Ben Bernanke.

D) Janet Yellen.

6)

The Fed's response to the financial crisis of 2007 and 2008 was to A) encourage discount window borrowing.

B) reduce taxes on financial institutions.

C) raise the federal funds rate.

D) raise the reserve requirement.

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7) Which of the following would be the result of increasing the money available for banks to lend?

A) An increase in the reserve requirement B) An increase in the discount rate C) A decrease in the federal funds rate D) A decrease in the Fed's holdings of U.S. Treasury securities

8) Which one of the following is among the Federal Reserve's tools to control short-term interest rates?

A) Open market operations B) Raising or lowering taxes on financial institution C) Limits on credit card interest rates D) Controlling the demand for money

9)

Which of the following is not one of the three purposes served by money?

A) Serving as a medium of exchange B) Serving as a store of value C) Providing a means for regulators to track economic activity D) Providing a standard of value

10)

Members of the Board of Governors of the Federal Reserve are

A) appointed by the outgoing chairperson of the Board of Governors and confirmed by Congress.

B) appointed by the President of the United States.

C) elected by the stockholders of the eight largest banks in the United States.

D) appointed by the Treasury Secretary.

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11)

Money serves as a medium of exchange. This means that you can A) accept money as payment for the goods and services you sell.

B) hold on to money to use at a later time.

C) compare values across several items by looking at the prices in terms of money.

D) increase the economic growth rate in the long run by printing more money.

12)

Which of the following is not one of the main goals of monetary policy?

A) Controlling inflation B) Smoothing out the business cycle C) Ensuring financial stability D) Balancing the federal budget

13) When Fed Chairperson Paul Volcker raised interest rates shortly after he became chairperson in 1979, the effect was A) a pair of severe recessions in 1980 and 1981–1982.

B) a rapid increase in the inflation rate.

C) a decade of economic decline for the United States.

D) an immediate and sharp decline in the value of the dollar.

14)

The Federal Reserve's response to the 2001 recession was to A) cut the federal funds rate over a three-year period.

B) reduce the reserve requirement.

C) raise the margin requirement and lower the reserve requirement.

D) reduce the money supply by 7 percent in order to reduce overinflated stock prices.

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15)

The target federal funds rate is set by the A) Chairperson of the Federal Reserve Board.

B) President of the United States.

C) Secretary of the Treasury.

D) Federal Open Market Committee.

16) If the Federal Reserve raises the federal funds rate, which one of the following will not tend to happen as a result?

A) Economic activity will decrease.

B) Car loan and home mortgage rates will rise.

C) Businesses will find it easier to obtain funds to expand.

D) The rate of inflation will decrease.

17) If the Federal Reserve raises the federal funds rate, which one of the following will tend to happen as a result?

A) The rate of inflation will increase.

B) The demand curve for products bought with a credit card will shift to the left.

C) The supply curve for new cars will shift to the left.

D) Home mortgage rates will decrease.

18)

Which of the following statements about monetary policy is true?

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A) Unlike fiscal policy, there is no delay between the Fed's enacting a policy and the policy's effects.

B) The Fed's policies can be implemented more quickly and with less political influence than can fiscal policy.

C) Monetary policy has an equal impact on short-term and long-term interest rates.

D) The Fed controls most interest rates directly by telling banks and other financial institutions what interest rate they must charge for common loans.

19) Which of the following would shift the supply curve for loans to the right, reducing shortterm interest rates?

A) An increase in the amount of money the Fed makes available to banks B) An increase in margin requirements C) A reduction in discount lending by the Fed to banks D) An increase in the desire of consumers to borrow money

20)

Which of the following would shift the demand curve for cars to the right?

A) An increase in the federal funds rate B) An increase in discount lending by the Fed to banks C) An increase in home mortgage interest rates D) An increase in the unemployment rate over the NAIRU

21) If the Federal Reserve increases the federal funds rate dramatically, which of the following would we expect to happen?

A) The price of houses would increase.

B) The amount of credit card borrowing would increase.

C) The price of cars would decrease.

D) People with adjustable-rate mortgages would be better off.

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22) If the inflation rate is rising, which one of the following would the Fed need to do to reduce the inflation rate?

A) Reduce margin requirements.

B) Reduce reserve requirements.

C) Encourage more discount borrowing.

D) Increase the federal funds rate.

23) The Federal Reserve Act establishing the Federal Reserve System was passed by Congress in A) 1788.

B) 1863.

C) 1913.

D) 1934.

24)

Which of the following is one of the main goals of monetary policy?

A) Rescuing bankrupt private businesses B) Transferring wealth from lenders to borrowers C) Producing deflation D) Smoothing out the business cycle

25) If the economy has been experiencing high inflation, as it was in the late 1970s, sharply reducing that inflation rate through monetary policy (as Paul Volcker did) may A) increase short-run economic growth, triggering an economic expansion.

B) produce a recession in the short run.

C) increase demand for expensive items like cars and houses.

D) reduce the unemployment rate in the short run.

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26)

If the Federal Reserve reduces the federal funds rate A) the quantity of funds borrowed and lent will decrease.

B) other interest rates, such as home mortgage rates, will rise to compensate.

C) inflation is more likely to occur.

D) long-term interest rates will react more than short-term rates.

27) People who have bought a house using an adjustable-rate mortgage are most likely to be hurt by A) an increase in the inflation rate.

B) an increase in the amount of the Fed's discount lending.

C) a decrease in the reserve requirement.

D) an increase in the federal funds rate.

28)

To produce financial stability, the Federal Reserve would want to

A) increase the money supply during an economic boom and reduce the money supply during a recession.

B) raise the interest rate during a recession to prevent excessive borrowing and increase income for struggling banks.

C) sell bonds during a recession and buy bonds during an economic boom.

D) raise the money supply and cut interest rates during a recession to stimulate spending.

29) Money can be used to buy goods and services and is accepted in turn as payment. This is the __________ use of money.

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A) medium of exchange B) store of value C) standard of value D) inflationary

30) Money enables us to make comparisons of value among goods and services. This is the __________ use of money.

A) medium of exchange B) store of value C) standard of value D) inflation fighting

31)

An element of trust is built into money because

A) the government maintains a monopoly over the money supply, and people tend to trust monopolies.

B) people must trust that it will still have value when they want to spend it in the future.

C) people must trust that the government can always print more of it if necessary.

D) people must trust the Federal Reserve to prevent banks from failing.

32)

In the United States and in virtually every other country, the printing of money is

A) strictly a government monopoly.

B) open to the free market so that different monies can compete for acceptance with one another.

C) limited by the supplies of gold and silver the central bank holds in reserve.

D) a privilege that is allowed only to banks that are members of the Federal Reserve System.

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33)

If a major crash of the financial system began, the Federal Reserve would

A) provide money to banks in order to reassure investors and prevent banks from going bankrupt.

B) immediately reduce the money supply to stop people from withdrawing cash from their banks.

C) raise interest rates in order to provide banks with a more secure stream of income.

D) prop up stock prices by buying stocks in the 500 largest corporations.

34)

Which of the following is a tool of the Federal Reserve System?

A) Buying or selling stocks of publicly traded corporations in order to stabilize the stock

market B) Buying or selling bonds in the open market in order to stimulate the economy during recessions and prevent inflation C) Reducing the burden of household debt by capping credit card and other loan interest rates at reasonable levels D) Encouraging employment by lending money at a discounted rate to firms that are in danger of having to make layoffs

35)

Having government-issued money makes it easier for policymakers to A) completely prevent inflation.

B) keep wages high in certain key industries.

C) guide and control the economy.

D) keep oil prices stable.

36) One potential problem with having private currencies (such as "Bank of Sam" dollars and "Bank of Sally" dollars) is that it would be difficult for individuals to

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A) compare Sam dollars to Sally dollars.

B) trade Sam dollars for Sally dollars.

C) discourage both Sam and Sally from inflating their currencies.

D) keep both Sam dollars and Sally dollars in their wallets.

37)

The Federal Reserve was founded by Congress in 1913 in response to A) the Great Depression.

B) the first World War. C) a financial panic in 1907.

D) a request by President Franklin D. Roosevelt.

38)

When Paul Volcker became Federal Reserve chairperson in 1979

A) the rate of inflation was relatively low, and he managed to raise it to 12 percent.

B) the rate of inflation was 12 percent and he managed to reduce it, but doing so caused a recession.

C) the rate of inflation was already low and stable, but his policies made it lower and more stable.

D) the rate of inflation was 12 percent and he was not able to bring it down during his time as chairperson.

39)

Alan Greenspan argued that a low, stable inflation rate was the best way to achieve A) low unemployment.

B) low interest rates.

C) strong economic growth.

D) low, stable oil prices.

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40)

Monetary stimulus requires about __________ for its full effect to be felt.

A) 3 to 6 months B) 6 to 12 months C) 12 to 18 months D) 18 to 24 months

41)

Cutting the fed funds rate A) puts downward pressure on inflation.

B) puts upward pressure on prices.

C) can cause interest rates to increase.

D) can cause deflation to occur.

42) rates

Reducing the fed funds rate can increase GDP in the short term because at lower interest

A) individuals and businesses will want to borrow and spend more.

B) households will attempt to save more.

C) banks will earn greater profits on loans.

D) taxes are lower, which increases disposable income.

43) In the aftermath of the terrorist attacks of September 11, 2001, __________ banks failed because of the disruption to business on Wall Street.

A) no B) only 2 C) 50 percent of all D) 1 in 10

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44)

The discount rate is generally set __________ the fed funds rate.

A) 1/4 to 1/2 percentage point lower than B) equal to C) 3/4 to 1 percentage point higher than D) 1 to 2 percentage points higher than

45)

In response to the financial crisis of 2007–2009, the Federal Reserve A) cut the fed funds rate from 5.25 percent to 2.0 percent.

B) cut the discount rate from 5.25 percent to 2.0 percent.

C) raised the fed funds rate from 2.0 percent to 5.25 percent.

D) raised the discount rate from 2.0 percent to 5.25 percent.

46)

Cutting the interest rate paid on reserves should make banks A) less willing to use their funds for lending.

B) more willing to use their funds for lending.

C) less willing to meet the margin requirement.

D) more willing to meet the margin requirement.

47) Alan Greenspan, who followed Paul Volcker in 1987 as Fed chairperson, was a proponent of A) discretionary intervention.

B) a rules-based approach to monetary policy.

C) inflation targeting.

D) fiscal policy.

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48) When parents save money to pay for their children’s future college education, they are using money as a __________ of value.

A) store B) medium C) standard D) stock

49)

The Federal Reserve is A) one single bank.

B) a system of 12regional banks located all around the country.

C) a system of 12 regional banks all located in Washington, DC. D) a system of banks that includes all private banks.

50) The "right" rate of inflation for the economy—the rate at which no one really pays attention to it—is a rate between A) zero and 2 percent.

B) −2 and 2 percent.

C) 2 and 5 percent.

D) −5 and zero percent.

51)

Quantitative easing (QE) differs from the normal use of open market operations in that it A) targets short-term interest rates.

B) targets long-term interest rates.

C) involves the buying of securities.

D) involves the selling of securities.

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52) Which of the following is not one of the concerns that economists have about the Fed’s use of quantitative easing (QE)?

A) That too much money is being added to the economy B) That it will eventually lead to inflation C) That interest rates will rise sharply when QE is reversed D) That long-term interest rates may become negative

53) In order to practice quantitative easing (QE) to bring down long-term interest rates, the Fed should A) buy short-term securities.

B) buy long-term securities.

C) sell short-term securities.

D) sell long-term securities.

54)

One important current monetary policy question is A) how soon to raise the fed funds rate back to a normal level.

B) whether to raise the fed funds rate back to a normal level.

C) how long the fed funds rate has been near zero.

D) whether quantitative easing can raise the funds rate back to a normal level.

55) Why is it important that the central bank be independent or insulated from changes in political power?

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56) Show, using a supply-and-demand diagram, what would happen to the short-term interest rate (that is, the federal funds rate) if the Federal Reserve increases the amount of money available to banks to lend.

57) What is the role of the "discount window" in preventing financial crises? How was it used during the financial crisis of 2007–2009?

58)

What advantages does monetary policy have over fiscal policy?

59)

Describe the difficult situation faced by Paul Volcker in the early 1980s.

60)

The Federal Reserve has the power to issue money but does not influence interest rates. ⊚ true ⊚ false

61) The Federal Reserve is under the ultimate direction of the Congress of the United States because Congress can cut the budget of the Federal Reserve if the Federal Reserve Board of Governors does not follow the instructions of Congress.

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⊚ ⊚

true false

62) One of the goals of monetary policy is to make sure that the inflation rate and the overall rate of growth in the economy are the same. ⊚ true ⊚ false

63) When the Federal Reserve acts as a lender of last resort, it is making sure that banks have the money they need to continue to operate. ⊚ true ⊚ false

64) The Federal Reserve's most-used policy tool is open market operations, with which it can control short-term interest rates. ⊚ true ⊚ false

65) When the Federal Reserve makes more money available for banks to lend, the demand curve for loans shifts to the right. ⊚ true ⊚ false

66) Generally, if the inflation rate is too high, the Federal Reserve will want to raise the federal funds rate. ⊚ true ⊚ false

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67)

Lowering the federal funds rate will tend to reduce the overall price level in the economy. ⊚ true ⊚ false

68) The discount window allows the Fed to lend money to financial institutions that are running short of funds. ⊚ true ⊚ false

69)

The chairperson of the Federal Reserveas of 2019 is Ben Bernanke. ⊚ true ⊚ false

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Answer Key Test name: chapter 12 1) B 2) A 3) C 4) D 5) B 6) A 7) C 8) A 9) C 10) B 11) A 12) D 13) A 14) A 15) D 16) C 17) B 18) B 19) A 20) B 21) C 22) D 23) C 24) D 25) B 26) C Version 1

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27) D 28) D 29) A 30) C 31) B 32) A 33) A 34) B 35) C 36) A 37) C 38) B 39) C 40) C 41) B 42) A 43) A 44) C 45) A 46) B 47) A 48) A 49) B 50) A 51) B 52) D 53) B 54) A 60) FALSE 61) FALSE Version 1

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62) FALSE 63) TRUE 64) TRUE 65) FALSE 66) TRUE 67) FALSE 68) TRUE 69) FALSE Student name:__________ 1)

The possibility of not getting paid back on a loan is known as

A) the risk of default.

B) arbitrage.

C) financial intermediation.

D) deposit risk.

2)

The time value of money is

A) the benefit of borrowing money.

B) the opportunity cost of not having your money.

C) also known as the credit score.

D) also known as price appreciation.

3)

Financial intermediaries that provide start-up capital for risky new businesses are called

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A) stock markets.

B) investment banks.

C) stockbrokers.

D) venture capital firms.

4)

The total return on a share of stock is

A) the total of dividends plus the change in the stock price over a year.

B) the original price of the stock, divided by the change in the stock price.

C) the change in the stock price, plus the dividend, divided by the original price.

D) the total of dividends over a year, divided by the change in the stock price.

5)

When companies first sell shares of stock to the public, this is called

A) an initial public offering.

B) venture capital funding.

C) financial intermediation.

D) primary lending.

6)

Which of the following describes the risk-return principle?

A) In most financial markets, the greater the risk, the lower the rate of return.

B) In a financial market, the only way to get consistently higher average returns over the long run is to take more risks.

C) In a stock market, the higher the price of the stock, the greater the risk incurred by the investor.

D) An investment or loan has less risk if it is likely to lose value at the same time your other investments or loans do.

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7) The danger that the overall price level will rise faster than anticipated, so that a lender is being paid back in dollars that are worth less than expected, is called

A) credit risk.

B) event risk.

C) inflation risk.

D) default risk.

8)

The U.S. government funds the federal budget deficit by

A) selling securities such as Treasury bonds and Treasury bills.

B) selling stock in government-owned corporations.

C) selling shares in gold owned by the Federal Reserve via special drawing rights.

D) borrowing from large private banks at favorable terms and low interest rates.

9)

Public companies are companies that

A) are owned or managed by the federal government.

B) have not yet had an initial public offering.

C) act as financial intermediaries.

D) have sold shares of stock to the general public.

10) Which of the following is a loan that entitles the lender to get regular interest payments over time, and then to get back the principal at the end of the term of the loan?

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A) A share of stock B) A bond C) A mutual fund D) A revolving credit account

11)

Event risk is the possibility that

A) a borrower will face some circumstance that will prevent the borrower from paying the loan back.

B) a major catastrophic occurrence, such as a hurricane, flood, or terrorist attack, will lower the return on the investment.

C) the overall price level will rise faster than expected, so that the lender is repaid in dollars that are worth less than the lender expected.

D) the lender will go bankrupt before the loan is fully repaid.

12) Individual investors wishing to buy shares of stock in a company will typically purchase them from

A) venture capital firms.

B) an initial public offering.

C) stockbrokers.

D) the company.

13) For one person to be willing to lend money to another person, the interest rate must be high enough to compensate the lender for

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A) the risk of deflation and bearing the risk of default.

B) the time value of money and bearing the risk of default.

C) the opportunity cost of risk and the principal.

D) the certainty of default and the certainty of inflation.

14) Suppose you come up with a wonderful new invention, and after borrowing as much as you can from a bank, you believe that additional capital is needed to make the invention marketable. Your small new company would be most likely to find additional capital from

A) issuing bonds.

B) borrowing from a different bank.

C) an initial public offering.

D) a venture capital firm.

15)

Which of the following is not a type of consumer loan?

A) A student loan B) Credit card purchases for household items C) A mortgage used to purchase an owner-occupied house D) A loan taken out by a young entrepreneur to purchase equipment for a landscaping business

16)

Which of the following will happen if the supply of loans increases?

A) The interest rate will fall, and the quantity of money borrowed will increase.

B) The interest rate will fall, and the quantity of money borrowed will decline.

C) The interest rate will rise, and the quantity of money borrowed will increase.

D) The interest rate will rise, and the quantity of money borrowed will decline.

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17)

Which of the following would one tend to see in a growing economy?

A) The demand curve for loans shifting to the right B) The supply curve for loans shifting to the left C) The interest rate falling D) The quantity of loans falling

18) Which of the following would you expect to see for borrowers with a high risk of default, compared to borrowers with a low risk of default?

A) A surplus of loans B) A supply curve that is further to the right C) A demand curve that is further to the left D) A higher interest rate

19)

Funds that banks lend to borrowers come from

A) the Federal Reserve.

B) depositors.

C) the U.S. Treasury.

D) the bank's stockholders.

20)

In addition to interest on loans, another major source of funds for banks is

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A) the fees charged to depositors.

B) interest-free loans from the Federal Reserve to banks.

C) subsidies from the U.S. Treasury.

D) inflation.

21)

Which of the following statements about venture capital firms is false?

A) Venture capital firms get most of their capital from pension funds, large university endowments, and other institutions that can take substantial risks with a small portion of their funds.

B) Most start-up companies that acquire venture capital eventually turn out to be successes.

C) Venture capital firms invest in high-risk, high-potential firms.

D) Companies that acquire their funds from venture capital firms may initially have trouble acquiring capital from other channels.

22)

Which of the following statements about stock-issuing firms is false?

A) Firms that issue stock for the first time do so through an initial public offering, handled by an investment bank.

B) Firms that pay dividends cannot lose money for their investors because the stockholders can at least count on the dividend payment every year.

C) Firms that issue new stock a second time are making a secondary public offering.

D) Firms that issue stock are participating in the equity credit channel.

23)

A share of ownership in a company is called

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A) a bond.

B) dividends.

C) stock.

D) a mortgage.

24)

Which of the following statements about the stock market is true?

A) Government regulation ensures that the stock market will go up each year, even if there are occasional declines in stock values.

B) People who want to buy shares of stock in an established company will generally contact a representative of a venture capital firm.

C) Some investors diversify by investing in a group of many different stocks, such as those in the S&P 500 Index.

D) Diversifying by buying shares of stock in many different companies can eliminate the risk taken by the stock investor.

25) Measures of the prices of groups of stocks, such as the Dow Jones Industrial Average and the S&P 500, are called

A) mutual funds.

B) secondary markets.

C) index funds.

D) stock indexes.

26)

A bond is best defined as a

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A) revolving loan that allows the borrower to borrow as needed from a line of credit at a bank.

B) share of ownership in a company.

C) loan that commits the borrower to make regular interest payments over time, and then repay the principal at the end of the loan period.

D) nontransferable loan backed by real estate.

27)

A share of stock is best defined as a

A) nontransferable loan backed by real estate.

B) transferable loan backed by the assets of the company.

C) share of ownership in a company.

D) fixed-income security.

28) When corporations and governments need to raise money outside of their revenue, they mainly borrow through

A) the stock market.

B) the bond market.

C) loans from banks.

D) the equity credit channel.

29)

Which of the following is the best definition of a stock index?

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A) A measure of the prices of a group of stocks, such as the Dow Jones Industrial Average or the S&P 500 B) A mutual fund made up of a group of stocks and sold through a firm such as Vanguard or Fidelity C) A category of stocks whose value is indexed to the inflation rate to safeguard the investor against inflation risk D) A control the Federal Reserve places on the stock market via margin requirements, whereby the Fed indexes margin requirements to inflation

30) The supply curve for loans to high-risk borrowers is __________ the supply curve for loans to low-risk borrowers.

A) below B) flatter than C) to the right of D) to the left of

31) Suppose the interest rate falls and the quantity of money borrowed (and lent) increases.

Which of the following could have caused this to occur?

A) A decrease in the supply of loans B) A decrease in the demand for loans C) An increase in the supply of loans D) An increase in the demand for loans

32) Which of the following companies would be most likely to use the bond market to raise capital?

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A) A sole proprietorship grossing $100,000 a year, in which the owner is a full-time consultant and has no employees B) A large, growing firm trying to expand its business C) A small technology firm with high potential but a great deal of risk D) A partnership of five attorneys that wishes to borrow money to buy a larger office building

33)

Which of the following best describes inflation risk?

A) The danger that a borrower will fail to repay a loan on time or default on the loan B) The danger that a major destructive event will reduce the rate of return on an investment C) The danger that the Federal Reserve will reduce the supply of money in the economy D) The danger that the lender will be paid back in dollars that are worth less than expected

34) In a well-functioning financial market, the only way to get consistently higher returns over the long run is to take more risks. This is known as the

A) risk-return principle.

B) diversification principle.

C) fixed-income principle.

D) price appreciation principle.

35)

A secondary public offering occurs when a

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A) stockbroker resells stock to a customer in the secondary market.

B) bankrupt firm's assets are sold to bondholders at auction.

C) venture capital firm takes a successful acquisition and goes public with it, selling its stock on the open stock market.

D) firm that has already issued stock decides to issue new stock again.

36)

Which of the following is not true about banks?

A) Banks are tightly regulated by state and federal governments.

B) Banks are required to keep a certain amount of cash reserves.

C) Banks are an example of a financial intermediary.

D) Banks are sellers, not buyers, in the market for money.

37)

How are banks and venture capital firms different?

A) Banks are financial intermediaries.

B) Venture capital firms provide funds to businesses.

C) Banks receive funds from the suppliers of capital.

D) Venture capital firms expect quite a few of their investments to fail.

38)

Banks generally do not provide

A) mortgages to individuals.

B) consumer loans.

C) venture capital funding.

D) loans to well-established businesses.

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39) Suppose the price of one share of a particular stock rose from $10.15 to $12.05 over the course of a year, and the stock paid a dividend of $1.00 per share during the same year. What was the total return on the share of stock?

A) 28.6 percent B) 18.7 percent C) 8.9 percent D) 15.8 percent

40) Suppose the price of one share of a particular stock rose from $9.00 to $9.15 over the course of a year, and the stock paid a dividend of $0.60 per share during the same year. What was the total return on the share of stock?

A) 1.7 percent B) 6.7 percent C) 8.3 percent D) 25.0 percent

41) Suppose the price of one share of a particular stock fell from $26.25 to $24.75 over the course of a year, and the stock paid a dividend of $0.90 per share during the same year. What was the total return on the share of stock?

A) −5.7 percent B) 9.1 percent C) 2.4 percent D) −2.3 percent

42)

The principal on a bond is generally paid back

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A) right away, before any interest has been paid.

B) at the end of the term of the bond, after the interest has been paid.

C) in small increments over the term of the bond, at the same time that any interest has been paid.

D) never, because bonds offer only interest payments, not principal repayment.

43)

Treasury securities with terms as short as one month are known as

A) Treasury bonds.

B) Treasury loans.

C) Treasury bills.

D) Treasury dollars.

44)

The Federal Reserve

A) did not pay close enough attention to derivatives in the period leading up to the financial crisis.

B) should not have promoted the use of complicated financial derivatives the way it did during the financial crisis.

C) could have prevented the financial crisis through the use of complicated financial derivatives.

D) is not legally authorized to monitor or regulate complicated financial derivatives.

45)

When buyers believe that rising prices will continue to rise, this can lead directly to

A) bankruptcy.

B) deflation.

C) a bubble.

D) a burst.

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46) With respect to financial markets, how were the late 1990s like the early part of the 2000s?

A) In both periods, there were bubbles in important markets.

B) During both periods, the housing market experienced wild ups and downs.

C) A stock market bubble burst during both periods.

D) These two periods are not alike in any way relative to financial markets.

47)

The financial crisis of 2007–2009 was primarily the result of

A) the bursting of the stock market bubble.

B) the bursting of the housing market bubble.

C) excessive tax rates.

D) inflation fighting by the Federal Reserve.

48)

The price of a loan is the

A) interest rate.

B) principal.

C) term.

D) exchange rate.

49) In a loan, the lender lends the borrower __________, for which the borrower pays the lender __________.

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A) the default; the principal B) the principal; interest C) interest; the term D) the term; the default

50)

How do the suppliers of capital and the users of capital connect?

A) Through the Fed discount window B) Through private one-on-one transactions C) Through the use of a financial intermediary D) Through government agencies

51)

A pension fund with money to invest is an example of a

A) venture capital firm.

B) user of capital.

C) financial intermediary.

D) supplier of capital.

52)

The fact that there are so many diverse ways for businesses to raise money is

A) one of the strengths of the U.S. economy.

B) an impediment to well-functioning monetary policy.

C) one of the causes of the financial crisis of 2007–2009.

D) the reason Congress established the Federal Reserve in 1913.

53)

The U.S. Federal government is probably the __________ in the world.

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A) safest lender B) safest borrower C) riskiest lender D) riskiest borrower

54) In the wake of the financial crisis of 2007–2009, the federal government had to __________ in order to keep the economy afloat.

A) perform trillions of dollars in open market bond purchases B) perform trillions of dollars in open market bond sales C) borrow trillions of dollars D) lend trillions of dollars

55) One of the government’s responses to the Financial Crisis of 2007–2009 was the DoddFrank Act, a law that

A) made special provisions for dealing with very large banks in times of crisis.

B) eliminated the risk of another financial crisis in the future.

C) ignored the insurance industry.

D) authorized trillions of dollars in borrowing for the federal government.

56)

Why is the interest rate on U.S. Treasury securities lower than on other types of bonds?

57) Show, using a supply and demand diagram, why we would expect a stronger economy to result in higher interest rates.

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58) Where do banks get their money, and what do they do with the money once they have it?

How do banks make a profit?

59) Paul has started a small software company and has used his personal savings and personal loans from banks and relatives so far. However, a substantial amount of money is still needed to fund expansion if Paul's company is to have a chance to grow and succeed. Briefly describe four different sources of capital, and explain which one you think Paul will use.

60) Suppose the ABC Corporation had a stock price of $56.80 on December 31, 2018. On December 31, 2019, it has a stock price of $60.15. Over the year, it paid $2.00 in dividends per share. Calculate the total return of a share of ABC Corporation stock in 2018, showing your work.

61)

Explain why portfolio diversification may not necessarily reduce risk for an investor.

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62)

The length of a loan is called the term. ⊚ ⊚

true false

63) Borrowing generally slows an economy down because borrowers must pay interest as well as returning the principal of the loan. ⊚ ⊚

64)

If the demand for loans increases, the interest rate will fall. ⊚ ⊚

65)

true false

true false

In the United States, bank deposits up to a certain amount are insured by the FDIC. ⊚ ⊚

true false

66) Publicly traded companies are required by law to pay out their profits to shareholders in payments called dividends. ⊚ ⊚

67)

true false

A share of stock indicates that the company owes money to the person owning the share.

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⊚ ⊚

true false

68) Splitting money across different investments, or diversification, reduces risk but also reduces the rate of return, according to the risk-return principle. ⊚ ⊚

69)

true false

The S&P 500 is a list of the 500 most successful stock market investors. ⊚ ⊚

true false

70) Bonds are considered fixed-income securities because they pay a fixed amount of interest per quarter or per year for the term of the loan. ⊚ ⊚

71) left.

true false

A stronger economy will typically result in a shift of the demand curve for loans to the

⊚ ⊚

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Answer Key Test name: chapter 13 1) A 2) B 3) D 4) C 5) A 6) B 7) C 8) A 9) D 10) B 11) B 12) C 13) B 14) D 15) D 16) A 17) A 18) D 19) B 20) A 21) B 22) B 23) C 24) C 25) D 26) C Version 1

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27) C 28) B 29) A 30) D 31) C 32) B 33) D 34) A 35) D 36) D 37) D 38) C 39) A 40) C 41) D 42) B 43) C 44) A 45) C 46) A 47) B 48) A 49) B 50) C 51) D 52) A 53) B 54) C 55) A 62) TRUE Version 1

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63) FALSE 64) FALSE 65) TRUE 66) FALSE 67) FALSE 68) FALSE 69) FALSE 70) TRUE 71) FALSE Student name:__________ 1)

Which of the following is not among the natural barriers to trade?

A) Distance B) Tariffs and quotas C) Differences in cultures and values D) The difficulty of delivering services remotely

2) Contributors to an expanded global trade in recent years have included all of the following except A) greater ease of communication with the Internet and other technology.

B) lower costs of shipping with the use of shipping containers and larger ships.

C) a reduction in tariffs, quotas, and other legal barriers to trade.

D) a decline in the differences in comparative advantages across nations.

3) Suppose the United States puts a numerical limit on the number of imported cars from Japan and South Korea. This would be known as a(n)

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A) tariff.

B) quota.

C) exchange rate.

D) natural barrier to trade.

4)

Which of the following statements about the World Trade Organization (WTO) is false?

A) The WTO is a development of the General Agreement on Tariffs and Trade (GATT).

B) The WTO is the main world organization governing rules of international trade.

C) The WTO has worked to increase tariff rates in an effort to protect infant industries in developing countries.

D) The WTO makes an effort to ensure that trade flows smoothly and predictably.

5)

Which of the following will not occur when a tariff is imposed on an imported product?

A) The price paid by domestic consumers will rise.

B) The level of imports will fall.

C) The price received by importers will fall.

D) The demand curve for imports will shift to the left.

6)

When a tariff is removed from an imported product, which of the following will occur?

A) The demand curve for the imported product will shift to the right.

B) The supply curve for the imported product will shift to the left.

C) The price paid by consumers will fall.

D) The level of imports will fall.

7)

Which of the following statements about quotas is true?

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A) Quotas make consumers better off by ensuring that domestically manufactured products are of as high quality as possible.

B) Quotas increase the quantity supplied by encouraging more domestic production.

C) Quotas increase the price above the market equilibrium.

D) Quotas provide some revenue to the government imposing them, while tariffs merely increase the well-being of foreign consumers.

8) In 1981, Japanese auto manufacturers signed a "voluntary restraint agreement" that limited the number of cars they would export to the United States. The effect of this was to A) increase the price that dealers obtained for Japanese cars in the United States.

B) lower the quantity of domestic cars available to American buyers.

C) drive down the price of Japanese cars compared to U.S.-made cars.

D) benefit Japanese auto manufacturers by reducing the number of cars they had to ship to the United States, allowing them to sell more in their domestic market.

9) If the United States were to stop importing flowers from other nations and instead insisted that it grow all of its own flowers, the effect of this would be to A) improve consumer well-being.

B) reduce flower prices because they would not have to be transported as far.

C) improve the well-being of foreign flower producers.

D) draw resources necessary to grow flowers away from the rest of the economy.

10) The last American niobium mine closed in 1959, and all U.S. niobium is now imported from other countries. This is

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A) bad for the U.S. economy because the United States must give money to other countries in order to obtain niobium.

B) bad for the U.S. economy because the niobium miners lost their jobs and had to retrain and/or find work in other sectors.

C) good for the U.S. economy because the resources used to mine niobium are freed to do something for which the United States has a comparative advantage.

D) good for the U.S. economy because it is always better to import raw materials from other countries and export finished goods.

11) Software companies have high fixed costs and low marginal costs. This means that if a software company sells its product in the global market A) it will gain a large benefit from its fixed investment and generate higher profits.

B) it will lose money because the additional expense of selling in the global market will add a large amount to fixed costs and add very little to revenues.

C) the company will earn more money in the short run but lose money in the long run as entry into other markets encourages more competition.

D) the country in which the software company is located will suffer losses because the price of the software will rise with the additional worldwide demand.

12) Suppose it takes workers in Baldistan 20 hours to produce a metal folding table, and it takes workers in Plochia 18 hours to produce an identical table. Workers in Baldistan take 40 hours to produce a set of ceramic plates, and it takes workers in Plochia 22 hours to make identical plates. Which of the following is true?

A) Plochia is better off making both tables and plates and not trading with Baldistan.

B) Baldistan and Plochia can gain from trading with one another.

C) Plochia has a comparative advantage in making tables.

D) Baldistan has an absolute advantage in making tables.

13)

A nation has a comparative advantage in producing a good if

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A) it has a higher standard of living than its trading partners.

B) more people in the country are employed in the production of the good than in other countries.

C) it also has an absolute advantage in producing the good.

D) it has either a greater productivity advantage or a smaller productivity disadvantage.

14) Which of the following events would not cause India to decrease their exports of call center services to the United States?

A) An increase in the other employment opportunities available to English-speaking college graduates in India B) An increase in the value of the dollar against the rupee C) An increase in the number of Chinese who speak English well D) The development of automated software that handles a large fraction of customer questions and sales orders

15)

The theory of comparative advantage implies which of the following?

A) A country with an absolute advantage in a good will necessarily have a comparative advantage in that good.

B) The gains to trade are exactly offset by the losses from trade.

C) Workers in an industry in which the United States does not have a comparative advantage will be hurt if the United States reduces barriers to trade.

D) There are gains to trade for a country as long as that country has a comparative advantage in producing the goods that it imports and exports.

16)

From 2000 to 2018, 4.6 million U.S. manufacturing workers lost their jobs. As a result,

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A) the U.S. economy is worse off because those people have lost their incomes and the government has lost the tax revenue from their incomes.

B) other sectors of the economy expanded and absorbed many of those individuals who had lost their jobs.

C) the overall unemployment rate in the United States increased.

D) the U.S. economy shrank, and the well-being of the average American declined.

17)

All other things being equal, globalization

A) benefits manufacturing firms and hurts service firms.

B) benefits countries that have relatively low wages and harms countries that have relatively high wages.

C) benefits countries that have wealthy, highly educated workforces, and hurts countries that have poor, badly educated workforces.

D) benefits people whose skills are relatively scarce on world markets and hurts those whose skills are relatively common.

18)

Using tariffs, quotas, or other barriers to trade to protect domestic jobs is called A) offshoring.

B) globalization.

C) protectionism.

D) dumping.

19) Some small, new industries are not as efficient as their more mature foreign competitors.

The argument for protecting these industries from foreign competition is known as the A) national security argument.

B) infant industry argument.

C) unfair competition argument.

D) antidumping argument.

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20)

Protectionism is best defined as

A) using tariffs, quotas, or other barriers to trade to protect domestic jobs.

B) reducing barriers to trade in order to protect firms that export to other nations.

C) using low-cost loans from the government to encourage industries to offshore their operations to other nations.

D) protecting workers from layoffs by subsidizing industries in danger of reducing their workforces.

21) Suppose Australia subsidizes its wine exports. Which one of the following groups will benefit from this policy?

A) American wine consumers B) Australian wine consumers C) American wine producers D) Australian taxpayers

22)

Which of the following is not among the common arguments for protection?

A) Major war could cut off imports from other countries and leave a country dependent on its own industries, so a nation should protect industries important to conducting a war.

B) A new or small industry in a country could be crushed by more mature foreign competitors, so the industry should be protected until it is on an equal footing with the foreign competition.

C) Trade can be disruptive to sectors of society facing foreign competition for the first time, as with small towns built around a single industry.

D) More international trade will tend to reduce the value of the domestic currency, hurting savers.

23)

Which of the following best defines the exchange rate?

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A) The difference between the inflation rate in one country and the inflation rate in another country B) The rate at which the goods of one country can be exchanged for the goods of another C) The rate at which one currency can be exchanged for another D) The ratio of the number of units of one currency in circulation to the number of units of another currency in circulation

24)

Which of the following statements about exchange rates is correct?

A) The exchange rate, in most cases, is floating—meaning it is determined by the supply and demand for currency and can change dramatically.

B) In some cases the exchange rate is pegged—meaning that it is linked to the amount of gold or silver that the country's central bank has in its vaults.

C) When a country experiences inflation, its currency tends to appreciate.

D) When a country experiences a trade deficit, its currency tends to appreciate to compensate.

25)

Protecting a country's "infant" industries

A) leads to long-run growth in most cases because the industries are given a chance to be competitive.

B) encourages short-run competition with the protected industry so that the industry will be forced to become efficient more rapidly.

C) seems to hurt the economy in practice because consumers of that industry's products are denied access to low-cost or higher-quality imports.

D) will hurt the protected industry in the short run but generate growth for that industry in the long run.

26)

If a country's currency is "pegged" to another currency, this means

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A) the currency's value is determined by the supply and demand for that currency in a free currency market.

B) the World Trade Organization sets the exchange rate and enforces it with trade sanctions.

C) workers in that country use the other nation's currency in daily transactions.

D) the government of that country is managing the exchange rate so that it stays the same.

27) Suppose a change to the global economy makes it so the United States dollar can buy more Mexican pesos than before. We would then say that the U.S. dollar is __________ and the Mexican peso is __________.

A) depreciating; appreciating B) appreciating; depreciating C) pegged; floating D) floating; pegged

28) Over the last several years, the Chinese government has allowed the yuan to rise in value relative to the dollar. This means that Chinese-made goods A) are now more expensive compared to U.S.-made goods.

B) will be harder to compete within U.S. markets.

C) will be less affordable for Chinese consumers.

D) are now less expensive for U.S. consumers.

29)

Which of the following statements is true?

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A) Imports from Britain become more expensive for U.S. customers when the dollar appreciates.

B) American exports become cheaper for the British when the dollar appreciates.

C) Imports from Britain become less expensive for U.S. customers when the dollar depreciates.

D) American exports become more expensive for the British when the dollar appreciates.

30) Which of the following could make Chinese-made goods more expensive for American consumers?

A) An increase in the value of the dollar B) An increase in the value of the yuan C) An increase in the inflation rate in the United States D) A decrease in the size of the U.S. trade deficit

31)

Which of the following statements about comparative advantage is false?

A) There is always a trade between two countries that can make both better off as long as both have comparative advantage in producing something.

B) A country's comparative advantage cannot be determined by looking only at its own economy.

C) International trade will benefit an entire economy, but some particular groups of people may be hurt by expanding trade.

D) Expanding international trade hurts a nation's economy if it causes the nation's currency to depreciate.

32)

Which of the following events would benefit American consumers?

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A) South Korea begins to subsidize its auto exports.

B) The U.S. dollar experiences depreciation against the euro.

C) The U.S. government strengthens trade barriers against foreign imports.

D) The Chinese economy starts to grow more slowly than the U.S. economy.

33)

Protectionist policies include all of the following except A) tariffs.

B) currency appreciation.

C) quotas.

D) regulatory barriers.

34) Suppose workers in Freecia can produce either two bushels of riceor one memory chip in one hour of work. Workers in Warmia can produce either five bushels of rice or two memory chips in one hour of work. Which of the following must be true?

A) Warmia has a comparative advantage in producing memory chips.

B) Warmia has an absolute advantage in producing memory chips.

C) Freecia has a comparative advantage in producing memory chips.

D) Freecia has an absolute advantage in producing memory chips.

35) The United States currently imports a lot of steel from abroad. If the United States were to produce all of its own steel rather than importing large quantities of steel from other nations, the effect would be A) to make steel consumers, such as auto manufacturers, better off.

B) to reduce steel prices because steel would not have to be transported as far.

C) to slow the economy by drawing resources for producing steel away from other production.

D) to improve the well-being of foreign steel producers.

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36)

Which of the following statements about trade deficits is false?

A) The U.S. trade deficit widened sharply in the 1990s.

B) Budget deficits tend to produce trade deficits.

C) The U.S. has run a trade deficit for more than 40 years.

D) A trade deficit makes it less likely that foreigners will make investments in a country.

37) Selling exports to foreign purchasers, borrowing money from foreign investors, selling assets to foreign investors, and allowing foreign companies to build factories in the United States are all ways to A) pay for imports.

B) shift the aggregate demand curve to the right.

C) achieve a trade balance.

D) increase a trade deficit.

38)

Which of the following would increase the trade deficit?

A) Foreign countries subsidizing their exports B) The U.S. government reducing the budget deficit C) An increasing preference of American consumers for domestic products D) A tax on imports

39) Which of the following is not one of the common explanations given for the U.S. trade deficit?

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A) Other countries subsidize their exports.

B) The United States is a wealthy, stable country, making it attractive for loans from other countries.

C) The U.S. government has a large budget deficit.

D) U.S. income tax rates are high compared to those in other countries.

40) If the United States borrows a large amount of money from other countries to pay for a trade deficit A) this will hurt the U.S. economy unless the United States is able to pay off the debt by increasing manufacturing exports.

B) this will necessarily slow the U.S. growth rate, compared to a situation in which the United States has a trade surplus.

C) this is not necessarily a problem if the economy is growing fast enough to have future income to pay back the accumulated debt.

D) American firms will have to repay the debt with shares of stock or real estate, which will put American firms at a disadvantage compared to foreign firms.

41)

Which of the following is an example of direct foreign investment?

A) A foreign citizen buys a share of stock in Ford.

B) The German-owned BMW company builds an assembly plant near Greenville, SC. C) A foreign citizen lends money to General Motors by buying a GM bond.

D) A foreign citizen travels to the United States as a tourist, spending money in the United States on various goods and services.

42)

Which country received the most U.S. exports in 2018?

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A) Japan B) China C) Mexico D) Canada

43)

From which country did the United States import the most in 2018?

A) Japan B) China C) Mexico D) Canada

44)

The United States imports all of its niobium because

A) niobium production in the United States is expensive compared to production in other countries.

B) niobium mining is so unsafe that it was outlawed in the United States in 1959.

C) the United States does not have any natural niobium deposits.

D) niobium is no longer a very useful metal.

45) Which of the following countries had the highest hourly manufacturing compensation costs in 2016?

A) The United States B) China C) Japan D) Germany

46)

An infant industry is one that

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A) is vulnerable to being crushed by better-funded and more mature foreign competitors.

B) is less than two years old.

C) relies on growing human populations for new customers.

D) does not need so-called protection by government.

47) If the value of one U.S. dollar goes from 0.75 euros to 0.80 euros in the course of a week, the euro has A) depreciated from $1.33 to $1.25.

B) appreciated from $1.25 to $1.33.

C) depreciated from $0.80 to $0.75.

D) appreciated from $0.75 to $0.80.

48) Which of the following might you believe if you say that "it's their fault" that the United States runs a trade deficit?

A) Other countries have used nontariff barriers to keep out U.S. exports.

B) U.S. manufacturers are incompetent and unable to compete with foreign producers.

C) American consumers borrow too much to buy imported goods like cars and electronics.

D) The United States is a successful rich economy that can afford a lot of imports.

49) Which of the following might you believe if you say that "it's no one's fault" that the United States runs a trade deficit?

A) Other countries have used nontariff barriers to keep out U.S. exports.

B) U.S. manufacturers are incompetent and unable to compete with foreign producers.

C) American consumers borrow too much to buy imported goods like cars and electronics.

D) The United States is a successful rich economy that can afford a lot of imports.

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50) The goal of the two large trade treaties that the U.S. was negotiating in 2016 with Pacific Rim countries and with Mexico was to A) encourage more global trade.

B) slow the growth of global trade.

C) protect domestic workers.

D) reduce domestic employment.

51) The price of furniture in the United States began to fall in the late 1990s while other prices in the economy rose primarily because A) furniture imports to the United States began to rise dramatically.

B) the United States had placed high tariffs on imported furniture.

C) there were technological advances in the production of furniture.

D) employment in the U.S. furniture industry rose significantly.

52)

Which of the following is not one of the gains from trade discussed in Chapter 14?

A) Access to natural resources B) Increases in domestic employment C) Access to global markets D) Lower prices of goods and services

53) Suppose Country A is better than Country B at producing all goods. Which of the following statements is true?

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A) Country A’s superior productivity will lead to higher domestic prices, so trade between the two countries could only benefit Country A. B) Trade between Country A and Country B is likely only to benefit Country B since it does not have the productivity advantage that Country A does.

C) As long as the opportunity cost of producing the goods differs between the countries, there will still be opportunities for mutually beneficial trade.

D) Country A will have a lower opportunity cost than Country B for the production of all goods.

54) Suppose 1 U.S. dollar exchanges for 1 euro, and the price of a car imported from Germany is 50,000 euros. If next week the euro depreciates to 0.90 U.S. dollars for each euro, what will happen to the dollar price of the car for American consumers?

A) It will rise from $50,000 to $55,556.

B) It will fall from $55,556 to $50,000.

C) It will rise from $45,000 to $50,000.

D) It will fall from $50,000 to $45,000.

55) Which of the following might you believe if you say that "it's our fault" that the United States runs a trade deficit?

A) Other countries have used nontariff barriers to keep out U.S. exports.

B) The U.S. government does not run large enough budget deficits.

C) American consumers borrow too much to buy imported goods like cars and electronics.

D) The United States is a successful rich economy that can afford a lot of imports.

56)

How does expanding worldwide trade produce gains for all the nations that participate?

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57) Who loses from expanding international trade? Does this mean that globalization is a bad idea overall?

58)

What has produced the rapid expansion in international trade in the last several decades?

59) What is the difference between absolute advantage and comparative advantage? Which one is most important for determining what a country will specialize in producing?

60) Briefly describe at least three of the arguments for protectionism mentioned in your textbook.

61) This chapter discusses the notion that gains from trade can exist but may likely displace workers in less efficient industries. Discuss one option mentioned in the text for these displaced workers and evaluate the pros and cons of this option.

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62) Over the last two decades, trade worldwide has fallen (as a share of global output) because many countries have discovered that trade produces too many job losses. ⊚ true ⊚ false

63) The General Agreement on Tariffs and Trade (GATT), which later became the World Trade Organization (WTO), has increased tariffs in industrialized countries that can afford tariffs, while decreasing tariffs in less developed countries that cannot afford them. ⊚ true ⊚ false

64)

A tariff is a tax levied on imports by a country. ⊚ true ⊚ false

65)

If imports are greater than exports, we say that the country is running a trade deficit. ⊚ true ⊚ false

66) If the U.S. dollar depreciates against the euro, it will be more expensive for European countries to purchase U.S.-made products. ⊚ true ⊚ false

67) If American consumers began buying less expensive golf clubs from China rather than buying American-made golf clubs, the U.S. economy would be worse off as a whole.

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⊚ ⊚

true false

68) Approximately five million people working in the manufacturing sector in the United States have lost their jobs between 2000 and 2018, but as of 2016 affiliates of foreign multinationals employed more than 7 million workers in the United States. ⊚ true ⊚ false

69) The expansion of global trade has especially benefited individuals whose skills are relatively common in the worldwide economy. ⊚ true ⊚ false

70) Because the gains from trade are so large, no one really loses from the expansion of global trade in the short run or the long run. ⊚ true ⊚ false

71) The "infant industry" argument for protectionism says that new or small industries in a country are vulnerable and therefore should be protected with trade barriers until they have had an opportunity to grow large enough to compete effectively with their foreign rivals. ⊚ true ⊚ false

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Answer Key Test name: chapter 14 1) B 2) D 3) B 4) C 5) D 6) C 7) C 8) A 9) D 10) C 11) A 12) B 13) D 14) B 15) C 16) B 17) D 18) C 19) B 20) A 21) A 22) D 23) C 24) A 25) C 26) D Version 1

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27) B 28) A 29) D 30) B 31) D 32) A 33) B 34) C 35) C 36) D 37) A 38) A 39) D 40) C 41) B 42) D 43) B 44) A 45) D 46) A 47) A 48) A 49) D 50) A 51) A 52) B 53) C 54) D 55) C 62) FALSE Version 1

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63) FALSE 64) TRUE 65) TRUE 66) FALSE 67) FALSE 68) TRUE 69) FALSE 70) FALSE 71) TRUE Student name:__________ 1)

Which of the following is not typically true of an innovation cluster?

A) A major university is usually present.

B) The cluster has a pool of skilled labor that can move from one company to another.

C) Financial sources, like venture capital firms, tend to locate in the same area.

D) Innovations decline as the cluster gets larger because the available talent is used up.

2) Brand new, technologically innovative companies often receive capital from companies that specialize in high-risk start-up firms and sometimes get involved in the strategic decisions of the firm. These investment companies are known as

A) venture capitalists.

B) mutual funds.

C) brokerage houses.

D) investment banks.

3)

Which of the following would tend to increase the quantity of innovative activities?

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A) an increase in the rate of immigration of scientists and engineers B) dispersing innovative activity away from clusters, where ideas often stagnate C) a change in government policy that makes patents more difficult to obtain D) a decline in the rate of return on investment in research and development

4)

The supply curve for innovative activities slopes

A) downward because as the price of innovative activities rises, people will want to consume fewer innovative services.

B) downward because as the price of innovation rises, people who would otherwise become scientists begin to go into other occupations like law or business.

C) upward because as the price of innovation rises, more people and capital will be attracted into innovative activities.

D) upward because as the price of innovation rises, people who would otherwise become scientists begin to go into other occupations like law or business.

5)

Currently the main sources for basic research are

A) large corporations.

B) government and universities.

C) charitable organizations.

D) small businesses.

6) Economic activities primarily directed toward creating or developing new ideas and new technology are called

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A) technological diffusion.

B) innovative activities.

C) the information revolution.

D) technological competition.

7) Why are the private returns to innovation likely to be smaller than the social returns to innovation?

A) Innovations are not likely to be profitable unless a large number of businesses produce the new technology.

B) Innovators are often so tempted by greed that they keep their innovations secret.

C) New ideas spread from one person or business to other parts of the economy.

D) A business cannot make a profit off of an innovation until other businesses learn about it and copy it.

8) Locations like Silicon Valley, California; Cambridge, Massachusetts; and Bangalore, India have generated a large number of technological innovations, partly due to the concentration of people and capital that are specialized in innovative activities. These regions are known as

A) innovation clusters.

B) information nodes.

C) technology cells.

D) human capital districts.

9)

Which of the following best represents Moore's law?

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A) New technologies, such as personal computers, will have little impact on the economy because while they increase some workers' productivity, they cause other workers to lose their jobs.

B) Only about 1 in 10 technology firms financed by venture capital will succeed, 3 in 10 will break even, and 6 in 10 will fail.

C) Microprocessor technology advances rapidly enough that microprocessors double their performance every 18–24 months.

D) Technology advances rapidly enough to extend human life expectancies by one year every six years.

10) Microprocessors have become faster and faster since their invention in 1971, with their performance approximately doubling every 18–24 months. This trend of improvement has become known as

A) Gates's law.

B) the Intel effect.

C) information clustering.

D) Moore's law.

11)

Allowing people to profit from their innovations has which of the following effects?

A) Technological improvement will be slowed because people focus only on commercially viable projects.

B) The rate of technological advancement will expand because people are encouraged to innovate in the hope of financial gain.

C) Resources will be diverted from other parts of the economy so that the economy as a whole suffers.

D) Society will benefit, but only to the extent that the profits from those innovations are taxed for the common good.

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12)

Which of the following would not be an example of a technological change?

A) The government passes a law expanding the funding available to NASA and other scientific agencies.

B) A pharmaceutical company develops a new drug that effectively fights malaria.

C) A team of nuclear scientists develop a new way of generating nuclear power that is safer but more expensive to implement.

D) Google develops a new way to perform Internet searches that makes searches produce more relevant results.

13) Suppose home builders figure out how to produce houses faster by prefabricating more of the house in a factory, then transporting the components to the construction site. This saves labor time and prevents materials from being wasted. Which type of innovation is this?

A) The creation of new goods and services B) A quality-of-life innovation C) A productivity-enhancing innovation D) Basic research

14) Suppose scientists figure out how to prevent strokes and heart attacks by using microscopic robots that enter the bloodstream and fix problems before they become serious. This could fit into two categories of innovation. They are

A) a quality-of-life innovation and a productivity-enhancing innovation.

B) the creation of new goods and services and a productivity-enhancing innovation.

C) the creation of new goods and services and a quality-of-life innovation.

D) a productivity-enhancing innovation and basic research.

15) Suppose a new way of producing fireworks is developed using different chemicals that do not release as many hazardous heavy metals into the environment. Which type of innovation is this?

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A) A quality-of-life innovation B) The creation of a new good or service C) A productivity-enhancing innovation D) Basic research

16)

Which of the following occurs if there is a quality-of-life innovation?

A) Positive externalities are reduced, or negative externalities are increased.

B) Positive externalities are increased, or negative externalities are reduced.

C) New goods or services are created, allowing people to do things that they could not do before.

D) More of the same products can be produced at lower cost.

17) Scientists sent the Cassini spacecraft past Saturn, where it discovered rings around Saturn's moon Rhea. This is an example of

A) technological diffusion.

B) product development.

C) applied research.

D) basic research.

18) The process by which new ideas spread from the original company to other businesses in the economy is called

A) technological diffusion.

B) innovative revolution.

C) Moore's process.

D) patent dispersion.

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19)

A productivity-enhancing innovation has the effect of

A) shifting a supply curve to the right.

B) shifting a supply curve to the left.

C) shifting a demand curve to the right.

D) shifting a demand curve to the left.

20) Which of the following countries is the largest spender on research and development in the world (in total dollars or dollar equivalents)?

A) China B) The United States C) Japan D) The United Kingdom

21) Scientific investigations that have no immediately obvious commercial applications are called

A) basic research.

B) nonessential research.

C) applied research.

D) diffused research.

22) The immigration of skilled scientists and engineers from other nations will have which of the following effects?

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A) The demand curve for innovative activities will be pushed to the left, decreasing the amount of innovation.

B) The supply curve for innovative activities will be pushed to the left, increasing the amount of innovation.

C) The demand curve for innovative activities will be pushed to the right, increasing the amount of innovation.

D) The supply curve for innovative activities will be pushed to the right, increasing the amount of innovation.

23)

Which of the following would raise the wages of scientists and engineers?

A) A decline in the rate of return on research and development B) A decline in the level of legal protection of property rights over new inventions C) An increase in the demand for innovative activities D) The immigration of skilled scientists and engineers from other nations

24)

Which of the following is the function of a patent?

A) A patent encourages more rapid technological diffusion by requiring the inventor to license the invention to anyone at no charge for three years.

B) A patent allows the inventor to prevent others from making or selling an invention for a period of years to encourage innovation.

C) A patent produces revenue for the federal government by giving the government a percentage of the licensing fees from new inventions.

D) A patent prevents the inventor from licensing the invention to anyone for a period of 20 years to encourage the inventor to more thoroughly develop the idea.

25) The government allows inventors to apply for a temporary government monopoly on their invention. The government will prevent others from making or selling the invention for a period of years to encourage innovation. What is this temporary monopoly called?

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A) A trademark B) A patent C) An investment tax credit D) Moore's law

26) Which of the following would tend to narrow the gap between the private return to innovation and the social return to innovation?

A) More spending on R&D B) Competitive markets C) A patent system D) An increase in scientific productivity

27)

Which of the following would be an example of basic research?

A) Studies of the atmosphere on Neptune B) Research into gene therapy to treat Alzheimer's disease C) Studies of circuit miniaturization for applications in computers D) A pharmaceutical company's research into a chemical compound that could reduce the growth rate of cancer cells

28)

Which of the following would be an example of applied research?

A) Studies of the earth's climate 5,000 to 6,000 years ago B) Research into the use of new combustion techniques that could increase gas mileage in vehicle engines C) Research into the effects of zero-gravity environments on plant life D) Research into string theory in advanced subatomic physics

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29)

Which of the following would tend to encourage more innovation in the United States?

A) Stricter enforcement of the patent laws B) Limits on the immigration of scientists and engineers C) Restrictions on the risk that venture capital firms can take D) Protection of manufacturing industries through tariffs and trade barriers

30)

Which of the following is not an example of research and development?

A) Government funding to a biochemistry professor for the study of new pharmaceutical therapies B) Government funding to elementary and middle schools C) Government funding of new public transportation technologies D) General Motors funding a study of new internal combustion technology

31)

Research into string theory in advanced subatomic physics would be an example of

A) basic research.

B) applied research.

C) development.

D) technological externalities.

32) Which of the following would tend to encourage a faster rate of long-run economic growth?

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A) An increase in the supply of innovative activities B) A decrease in the demand for innovative activities C) A decrease in basic research D) A decrease in the immigration of engineers and scientists

33)

Which of the following best fits the definition of basic research?

A) Research into a process that converts radioactive fly ash from coal-burning power plants into bricks B) Research into mosquito physiology to find vulnerabilities to be exploited by future pesticides C) A study of parallel universes D) Research into ultra-capacitors that store electrical energy for use in hybrid vehicles

34)

Which of the following would not encourage economic growth in the United States?

A) The development of artificial intelligence, allowing computers to fill jobs formerly occupied by human beings B) A limit on the number of foreign citizens who are permitted to study in high-level research institutions in the United States C) The development of a better Internet search engine D) An improvement in shipbuilding technology that allows large cargo ships to be built at lower cost, reducing the cost of trading with other countries

35) It took several decades for advances in computer technology to have a significant impact on the economy. This illustrates the fact that

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A) technologies need to mature before they reach the point where they can have an impact.

B) technologies cannot have an impact until government regulation catches up.

C) people are initially irrationally suspicious of new technology and refuse to accept it until some time has passed.

D) new technology is not really needed; it tends to be a way for retailers to boost sales by selling people things they do not really need.

36) Which of the following technological breakthroughs failed to deliver many economic benefits?

A) Antibiotics B) Automobiles C) Manned space travel D) Computers

37)

Computers became powerful enough to make a real difference in the economy in the

A) 1970s.

B) 1980s.

C) 1990s.

D) 2000s.

38)

Technological advances that reduce pollution fall into which category of innovation?

A) Productivity-enhancing innovation B) Creation of new goods and services C) Quality-of-life innovation D) Pollution reduction does not fit into any of the categories of innovation.

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39) A quality-of-life innovation generates __________ externalities or reduces __________ externalities.

A) positive; negative B) revenue; cost C) marginal; average D) network; out-of-network

40)

Television would have been considered a "new good" type of innovation because

A) consumers already regularly listened to the radio for entertainment.

B) it had no equivalent in the past.

C) it gave companies a new source of advertising revenues.

D) it enhanced the quality of life for most people in the economy.

41)

In which of the following countries was R&D spending the highest in 2017?

A) The United States B) China C) Japan D) Germany

42)

What does "R&D" stand for?

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A) Research and design B) Research and development C) Revenue and demand D) Real and domestic

43) From 1993 to 2018, the average return on venture capital investments has been around __________ per year, compared to about 10 percent for the stock market.

A) 42 percent B) 30 percent C) 16 percent D) 12 percent

44) One important innovation cluster mentioned in the textbook is __________, which is the world center for biotech.

A) Silicon Valley, CA B) Bangalore, India C) Palo Alto, CA D) Cambridge, MA

45)

AT&T, the employer of the three scientists credited with inventing the transistor

A) reaped very few economic benefits from the invention.

B) suffered economic losses because of the invention.

C) earned a modest 10 percent return from the invention.

D) earned an unprecedented 2,000 percent return from the invention.

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46)

If a market is close to perfect competition, profits may be

A) so low that companies do not have enough extra money to spend on long-run research.

B) so high that companies have no incentive to spend money on long-run research.

C) so low that companies have no incentive to spend money on long-run research.

D) so high that companies are not willing to risk any extra money on long-run research.

47) There are often wide differences between the productivity levels of different factories making the same products because

A) patent protections limit the benefits of innovation to the firm responsible for the innovation.

B) some companies are more willing to take the risk of adopting a new technology.

C) the intensity of competition varies from industry to industry.

D) some factories are located in innovation clusters and others are not.

48)

Technological change __________ sustained increases in standards of living.

A) is necessary for B) is helpful, but not necessary, for C) always leads directly D) is an obstacle to

49) In the early __________, computers became powerful enough to have a real economic impact.

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A) 1970s B) 1980s C) 1990s D) 2000s

50)

The period from 1950 to 1975 was a period of

A) only a few big technological breakthroughs.

B) very low levels of innovation and low productivity.

C) rapidly increasing technological advancements.

D) information revolutions.

51) The moving assembly line reduced the amount of time it took to build a Model T from over 12 hours to less than 2 hours. This is an example of

A) the creation of new services.

B) the creation of new goods.

C) productivity-enhancing innovation.

D) a quality-of-life innovation.

52)

Most corporate executives are reluctant to pursue R&D spending because

A) the average private return is too low.

B) the social return is too low.

C) there are too many regulations.

D) the risk of failure is so high.

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53) The intensity of competition in a market can be __________ to inspire a business to undertake innovative activities.

A) too great B) too low C) too great or too low D) not low enough or not great enough

54) Which of the following forces is not a force that sometimes discourages innovative activities?

A) Ordinary people who don’t like change B) Companies that compete with innovative companies C) Workers who fear losing their jobs D) Executives concerned about low rates of return

55)

Xerox and AT&T are examples of companies that

A) earn most of their revenues from licensing the patents they own.

B) reaped little benefit from the major innovations they created.

C) earned too little profit to have money to invest in R&D. D) face so little competition that they see no need to innovate.

56) There are three different channels by which technological change can affect the economy.

List these and provide a brief definition of each.

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57) What is the difference between basic research and applied research? Provide one example of each.

58) Show, using a demand and supply diagram, what will happen to the wages of scientists and engineers if there is an increase in immigration of scientists and engineers from other countries.

59) Economic studies show that the rate of return on research and development investment is very high, possibly yielding 25%–50% a year. Why, then, are banks reluctant to lend to start-up firms investing in a new idea, and where do these firms get their capital?

60)

What is a patent, and how does it encourage innovation?

61)

Is slow technological diffusion always bad for the economy? Explain your answer.

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62) A productivity-enhancing innovation has the effect of shifting the supply curve to the right. ⊚ true ⊚ false

63) China is the largest spender on research and development in the world (in total dollars or dollar equivalents). ⊚ ⊚

true false

64) Scientific investigations that have no immediately obvious commercial applications are called nonessential research. ⊚ ⊚

true false

65) The supply curve for innovative activities tells us the quantity of innovative activities supplied, given their price. ⊚ ⊚

true false

66) Immigration of skilled scientists and engineers from other nations will push the supply curve for innovation to the right, increasing the amount of innovation.

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⊚ ⊚

true false

67) The immigration of skilled scientists and engineers from other nations raises the wages of scientists and engineers. ⊚ ⊚

true false

68) A region containing a group of innovative companies and the resources they need to succeed, such as Silicon Valley, is called an innovation cluster. ⊚ ⊚

true false

69) A patent allows the inventor to prevent others from making or selling an invention for a period of time to encourage innovation. ⊚ ⊚

true false

70) Technological improvements are generally harmful to society because new machines replace human beings, causing increased unemployment. ⊚ ⊚

true false

71) Governments that discourage profit seeking will tend to encourage more innovation because the best innovators are motivated by inner creativity and not money.

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⊚ ⊚

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325

Answer Key Test name: chapter 15 1) D 2) A 3) A 4) C 5) B 6) B 7) C 8) A 9) C 10) D 11) B 12) A 13) C 14) C 15) A 16) B 17) D 18) A 19) A 20) B 21) A 22) D 23) C 24) B 25) B 26) C Version 1

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27) A 28) B 29) A 30) B 31) A 32) A 33) C 34) B 35) A 36) C 37) C 38) C 39) A 40) B 41) A 42) B 43) B 44) D 45) A 46) A 47) B 48) A 49) C 50) A 51) C 52) D 53) C 54) B 55) B 62) TRUE Version 1

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63) FALSE 64) FALSE 65) TRUE 66) TRUE 67) FALSE 68) TRUE 69) TRUE 70) FALSE 71) FALSE Student name:__________ 1)

The labor force is best defined as the part of the

A) population that is working or capable of working.

B) adult population that is working.

C) adult population that is either working or actively looking for a job.

D) population that is working, looking for a job, or capable of working.

2)

If the labor force increases in size, which of the following would occur, all else equal?

A) The equilibrium wage would fall.

B) The quantity of workers employed would fall.

C) The labor demand curve would shift to the right.

D) The labor supply curve would shift to the left.

3) If the labor force increases in size, all else equal, which of the following would not occur?

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A) The labor supply curve would shift to the right.

B) The equilibrium wage would fall.

C) The number of workers employed would rise.

D) The labor demand curve would shift to the right.

4) Which of the following best describes the marginal product of labor for an additional employee in a landscaping firm?

A) The number of additional acres the firm can mow in a week because of that additional employee B) The extra money the firm brings in because of that employee C) The additional profits the firm earns because of that employee D) The additional wages the firm must pay in labor costs because of that employee

5) Which of the following best describes the marginal revenue of an additional salesperson at a car dealership?

A) The additional profits the firm earns because of that additional salesperson B) The number of additional cars the firm sells because of that additional salesperson C) The increase in revenue to the dealership because of that additional salesperson D) The increase in wages, benefits, and other costs because of that additional salesperson

6)

Which of the following best describes the marginal cost of labor?

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A) The additional cost to the firm of the taxes, fringe benefits, and office space that one more worker will require B) The additional cost to the firm of hiring one more unit of labor C) The additional cost to the firm of producing the additional product that will be sold because of hiring one more unit of labor D) The cost paid by the consumer, through a higher price, when a firm must raise prices to cover the cost of hiring an additional employee

7)

As the wage rate rises, firms will respond by

A) hiring more workers because a higher wage rate will make workers work harder.

B) hiring fewer workers because the labor demand curve slopes downward.

C) selling more output to cover the additional costs of the labor force.

D) selling the same amount of output, but passing on the higher labor costs to the customer.

8) What happens to the marginal product of additional cooks in a restaurant kitchen as more cooks are hired?

A) The marginal product will stay constant.

B) The marginal product will rise because each additional cook contributes to the production process.

C) We cannot know because the marginal product depends entirely on the skills of the individual cooks.

D) The marginal product will eventually fall because the cooks will get in each other's way, reducing productivity.

9)

A firm will hire workers until the

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A) marginal revenue from hiring an additional worker is maximized.

B) marginal revenue from hiring an additional worker is zero.

C) average revenue from hiring an additional worker is zero.

D) marginal revenue from hiring an additional worker falls below the marginal cost.

10)

Which of the following would be an effect of increased technology on the labor market?

A) People with fewer skills may face more difficulty getting a job.

B) The unemployment rate would tend to increase.

C) People with high levels of technical skill may see reduced compensation.

D) The advantage to gaining a college education would be reduced.

11)

The labor pool effect of globalization has which of the following effects?

A) The overall number of workers employed falls.

B) The labor force participation rate declines.

C) The supply of labor for many kinds of work increases, pushing the equilibrium wage down.

D) The demand for labor for many kinds of work increases, pushing the equilibrium wage up.

12)

The market expansion effect of globalization has which of the following effects?

A) The overall number of workers employed falls.

B) The labor force participation rate declines.

C) The supply of labor for many kinds of work increases, pushing the equilibrium wage down.

D) The demand for labor for many kinds of work increases, pushing the equilibrium wage up.

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13) Which of the following could increase the quantity of workers employed in the labor market?

A) A leftward shift in the labor supply curve B) A leftward shift in the labor demand curve C) An increase in the minimum wage D) An increase in the demand for labor

14)

As U.S. companies gain better access to growing overseas markets,

A) the demand for labor will increase, increasing the equilibrium wage.

B) the supply of labor will decrease, increasing the equilibrium wage.

C) the most highly-educated American workers have suffered from the competition.

D) their profits fall because they incur the higher costs of shipping overseas.

15)

Which of the following best describes the "education premium"?

A) The added benefits for society as a whole from a person getting a higher level of education B) The added pay for getting a higher level of education C) The added cost of getting a higher level of education D) The increase in average wages, in inflation-adjusted dollars, over time

16)

Which of the following statements about education and wage rates is true?

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A) People with four-year college degrees tend to earn considerably more than those with advanced degrees.

B) Inflation-adjusted earnings for people with four-year college degrees have fallen over the last 30 years.

C) People who are high school graduates with no college education have seen substantial increases in inflation-adjusted earnings in the last 30 years.

D) While people with high school degrees have had almost no increase in real wages in 30 years, those with advanced degrees have had significant increases in pay.

17)

Which of the following statements about education and the unemployment rate is true?

A) People with more education tend to have higher unemployment rates.

B) The unemployment rate tends to be higher for people with less education.

C) Unemployment rates are virtually the same for groups with different education levels.

D) As the unemployment rate rises, the number of people getting college degrees falls..

18)

Which of the following is not among the economic costs of a college education?

A) The cost of tuition B) The cost of room and board C) The earnings forgone by spending time in school instead of working for pay D) The cost of books and fees

19) Students who go to college when they are younger face a lower opportunity cost of education because

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A) wages are lower for younger people, so they are giving up less in earnings when they spend time in school.

B) younger people are willing to live at a lower standard of living with less expensive housing and other goods.

C) younger people always find it easier to learn, so going to college does not take as much effort as it does for someone who is older.

D) younger people can borrow money for college, and older people cannot.

20) Which of the following individuals would be likely to face the lowest opportunity cost of a college education?

A) A high school basketball star who is offered a multimillion-dollar contract with the NBA as well as a full scholarship at the university of their choice B) A high school graduate who has few skills, does not qualify for a full scholarship, and would be able to work as a server at their family's restaurant if she did not go to college C) The 40-year-old owner of a successful construction company who wants to finish college as an example to their children D) A well-paid staff member at a college who can take classes tuition-free

21)

Which of the following statements about an effective minimum wage is true?

A) A minimum wage shifts the demand curve for labor to the right.

B) A minimum wage shifts the supply curve for labor to the right.

C) A minimum wage tends to create unemployment among unskilled workers.

D) Increasing the minimum wage makes it easier for unskilled workers to find jobs.

22) If the equilibrium wage in the market for unskilled labor is $6.00 per hour and the government sets a minimum wage at $7.50 per hour, which of the following will occur?

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A) Some unskilled workers will lose their jobs.

B) The number of unskilled workers who have jobs will increase.

C) There will be a shortage of workers in the market for unskilled labor.

D) The labor demand curve will shift to the left.

23) If the equilibrium wage in the market for unskilled labor is $8.00 per hour and the government sets a minimum wage at $8.00 per hour, which of the following will occur?

A) Some unskilled workers will lose their jobs.

B) The wages paid to unskilled workers will rise.

C) The number of workers employed in the market will increase.

D) The minimum wage will have no effect because it is set at the equilibrium wage.

24) If the government passes legislation shortening the workweek from 40 hours to 35 hours, with overtime pay required for more than 35 hours, which of the following would occur?

A) Employers would face lower labor costs because they would save five hours a week of wages.

B) Employers would face higher labor costs because they would have to pay overtime or train more workers to get the same quantity of work done.

C) The demand for labor hours would increase.

D) The supply of labor would decrease.

25)

Which of the following is true about states that have passed "right-to-work" laws?

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A) It is illegal in those states for employers to lay off workers who have been employed for longer than five years or who are within five years of retirement age.

B) Employees in those states are always guaranteed a job and will therefore be provided a job by the state government if they remain unemployed after 12–16 weeks (depending on the state).

C) Employees in those states cannot be compelled to join a union.

D) It is illegal in those states for employers to turn down an application for a job if the applicant is qualified.

26)

Employees who are members of a union can expect

A) a wage that is higher than the equilibrium wage in the labor market.

B) less job security.

C) poorer working conditions as employers try to compensate for higher wages.

D) lower wages than nonunion workers in the same industry.

27) An additional worker will add to the profit of a business, and therefore be more likely to be hired, if the

A) average cost of labor is positive.

B) marginal revenue is less than the price of the output of the business.

C) wage is less than the marginal revenue.

D) marginal cost of labor is greater than the marginal revenue.

28)

Which of the following statements about the long-term labor supply is false?

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A) The growth rate of the working-age population has been declining since 1980.

B) Technology changes, such as the introduction of air conditioning in the mid-20th century, can have an impact on regional labor supply.

C) Immigration provides an insignificant proportion of the overall growth of the workforce.

D) Programs funded by payroll taxes, such as Social Security and Medicare, face problems from a slowdown in the growth of the working-age population.

29)

Which of the following statements about unionization is true?

A) Labor unions can increase wages but have virtually no impact on benefits.

B) Work stoppages due to strikes have become less common, and shorter, in the last 50 years.

C) Union membership has risen in the last 50 years as a result of globalization.

D) The public sector is not heavily unionized compared to the private sector.

30)

Unions will be more successful where

A) it is easy for competitors to enter the industry.

B) globalization is less extensive.

C) the state government has passed a "right-to-work" law.

D) it is easy for the company to hire replacement workers.

31)

Which of the following is typically a result of government licensing requirements?

A) Competition in the licensed occupation is reduced.

B) Wages in the licensed occupation fall.

C) People in the industry begin to work longer hours and receive lower benefits.

D) The number of people working in the industry increases.

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32) If an extra worker allows a childcare center to care for an extra nine children per week, the weekly price of childcare per child is $200, and the other workers are all paid wages and benefits totaling $500 per week, then the marginal revenue of that additional worker is

A) $4,500 per week.

B) $2,700 per week.

C) $1,800 per week.

D) $1,300 per week.

33)

The labor demand curve tells us

A) the marginal revenue created by an additional worker.

B) how many workers the firm will want to hire, given the wage.

C) the marginal profit generated by an additional worker.

D) the marginal product created by an additional worker times the wage.

34) Happy Tots Child Care Units of Labor per Week

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Output per Week

Marginal Product per Week

1

4

4

2

9

5

3

13

4

4

16

3

5

18

2

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Table 16.1 Refer to Table 16.1. Suppose the cost of childcare workers (units of labor) is the only cost the firm faces. How many units of labor would the firm need to hire to maximize profit?

Price of a unit of output: $150 per week.

Cost to Happy Tots of hiring one more unit of labor: $400 per week.

A) Two B) Three C) Four D) Five

35) Happy Tots Child Care Units of Labor per Week

Output per Week

Marginal Product per Week

1

4

4

2

9

5

3

13

4

4

16

3

5

18

2

Table 16.1 Refer to Table 16.1. What is the marginal revenue of the third unit of labor?

Price of a unit of output: $150 per week.

Cost to Happy Tots of hiring one more unit of labor: $400 per week.

A) $300 B) $450 C) $600 D) $1,200

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36) If the adult population in the United States was 225 million people and 150 million of those people were in the labor force, the labor force participation rate would be

A) 67 percent.

B) 150 percent.

C) 33 percent.

D) 40 percent.

37) Number of Employees

Total Output

1

6

2

11

3

15

4

18

5

20

Table 16.2 Table 16.2 gives the number of oil changes that can be performed at a local oil change business based on the number of employees hired. If the price of an oil change is $20, what is the marginal revenue of the third employee?

A) $80 B) $360 C) $5 D) $40

38) Number of Employees

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Total Output

1

6

2

11

340

3

15

4

18

5

20

Table 16.2 Table 16.2 gives the number of oil changes that can be performed at a local oil change business based on the number of employees hired. If the price of an oil change is $20, and workers get paid $150 per day, how many workers should the business hire?

A) Zero B) One C) Two D) Three

39) Number of Employees

Total Output

1

6

2

11

3

15

4

18

5

20

Table 16.2 Table 16.2 gives the number of oil changes that can be performed at a local oil change business based on the number of employees hired. If the price of an oil change is $20, and workers get paid $90 per day, how many workers should the business hire?

A) One B) Two C) Three D) Four

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Number of Employees

Total Output

1

6

2

11

3

15

4

18

5

20

Table 16.2 Table 16.2 gives the number of oil changes that can be performed at a local oil change business based on the number of employees hired. If the price of an oil change is $20, and workers get paid $90 per day, which of the following is equal to 3?

A) The marginal revenue of the third employee B) The optimal number of employees to hire C) The marginal product of the fourth employee D) The marginal cost of the first oil change

41) If technology is a complement to labor, then advances in technology will __________ the number of workers hired.

A) increase B) not affect C) act as a substitute for D) decrease

42) If the labor pool effect of globalization is stronger than the market expansion effect, then globalization will lead to a(n) __________ in wages and a(n) __________ in the number of workers hired.

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A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease

43) If the labor pool effect of globalization is weaker than the market expansion effect, then globalization will lead to a(n) __________ in wages and a(n) __________ in the number of workers hired.

A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease

44) If the labor pool effect of globalization is equal in strength to the market expansion effect, then globalization will lead to __________ in wages and __________ in the number of workers hired.

A) no change; a decrease B) a decrease; no change C) no change; an increase D) an increase; no change

45)

In 2018, the unemployment rate among workers with a bachelor's degree or higher was

A) 8.0 percent.

B) 5.4 percent.

C) 2.1 percent.

D) 3.8 percent.

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46)

In what year did the federal government pass rules to set a 40-hour workweek?

A) 1886 B) 1938 C) 1979 D) The federal government has never done this.

47)

Between 2005 and 2015, the increase in the foreign-born labor force was

A) about equal to the increase in the native-born labor force.

B) larger than the increase in the native-born labor force.

C) about half as large as the increase in the native-born labor force.

D) the only source of labor-force growth.

48) In 2018, the unemployment rate among workers with less than a high school diploma was __________ the unemployment rate among workers with a bachelor’s degree or higher.

A) more than two times higher than B) less than 3 percent higher than C) the same as D) one-third of

49)

Which of the following does not help explain why pay should rise with age?

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A) Experience improves performance.

B) Reasoning abilities, mental speed, and memory improve as people age.

C) Workers tend to build firm-specific knowledge over time.

D) Many jobs require a learning curve that is often years long.

50) Which of the following is likely the best explanation for the state of California’s requirement that brake lamp adjusters must be licensed?

A) Brake lamp adjusting is a hard job requiring years of education.

B) Improperly adjusted brake lamps pose a serious threat to public safety.

C) The licensing requirement reduces competition and increases wages.

D) Almost all states require licensing of brake lamp adjusters.

51) Looking forward into the future, the rate of growth of the working-age population is expected to

A) increase dramatically.

B) remain steady.

C) slow down considerably.

D) become negative.

52) Which of the following is least likely to occur as a result of a slowdown in the growth rate of the U.S. working-age population?

A) Businesses will struggle to find enough skilled workers among American workers.

B) Workers in the United States will feel increased pressure to pursue a college education.

C) The government will find that it is harder to pay for Social Security benefits.

D) Payroll tax revenues will increase as the number of retirees falls.

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53)

Immigration shifts the national demand curve for labor to the

A) right, because immigrants are consumers as well as workers.

B) left, because immigrants are consumers as well as workers.

C) right, because immigrants compete with native workers for jobs.

D) left, because immigrants compete with native workers for jobs.

54) Immigration has the potential to shift the national supply curve for labor to the __________ and the national demand curve for labor to the __________.

A) left; left B) right; right C) left; right D) right; left

55)

The long-term supply of labor

A) generally does not vary much from region to region.

B) depends on location, as some regions are more attractive to workers.

C) does not depend on location as flows of workers between regions cancel each other out.

D) can vary from region to region but does not change within a region.

56) Complete the table below if the price of a unit of output is $40 and the cost of hiring one more unit of labor is $300 per week.

Phil's Lawn Care Units of Labor

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Output per Week

Marginal Product

Marginal Revenue

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1

25

2

40

3

50

4

56

5

60

57) Fill in the marginal revenue column in the table below and tell how many units of labor Claire will hire (assuming she has to hire whole units of labor, not fractions). Assume that the price of a unit of output is $80 and that the cost of hiring one more unit of labor is $300 per week.

Claire's Pool Service Units of Labor

Output per Week

Marginal Product

1

20

20

2

30

10

3

38

8

4

42

4

5

44

2

Marginal Revenue

58) Suppose the government changes the tax code so that it is much simpler: there are fewer rules, fewer deductions, and fewer calculations to perform. Describe, using a supply and demand diagram, what would happen in the market for tax accountants.

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59) What effects will globalization have on labor demand? What will happen to the wages of U.S. workers as more foreign trade occurs?

60) Why do college-educated workers get paid more than those without a college education?

Provide at least two reasons, using economic reasoning.

61) Your friend, Travis, argues that globalization is bad for a nation’s workers because it increases competition in labor markets and pushes their wages down. If you wanted to critique his argument, what would you say?

62) The labor force is the part of the adult population that is either working or actively looking for a job. ⊚ true ⊚ false

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63) Older, more experienced workers tend to make more than younger workers, but as a worker nears retirement, pay increases level off and may even fall a little. ⊚ ⊚

true false

64) For full-time workers with a bachelor's or advanced degree, average pay peaks when workers are 55-64 years old. ⊚ true ⊚ false

65)

The minimum wage makes it possible for more low-skilled workers to find jobs. ⊚ ⊚

true false

66) Reducing the minimum wage would make it more difficult for low-skilled workers to find jobs. ⊚ ⊚

true false

67) If the equilibrium wage in the market for unskilled labor is $8.00 per hour, and the government sets a minimum wage at $7.50 per hour, unskilled workers will receive a pay cut of about 50 cents per hour. ⊚ ⊚

true false

68) In a "right-to-work" state, employees cannot be required to join a union as a condition of employment.

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⊚ ⊚

true false

69) Employees who are members of a labor union can expect to receive lower wages than nonunion workers in the same industry, but can also expect greater job security. ⊚ ⊚

true false

70) Unions will be more effective at raising wages when it is difficult for nonunion competitors to enter the industry. ⊚ ⊚

71)

true false

Globalization has had a positive effect on private sector labor union membership rates. ⊚ ⊚

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Answer Key Test name: chapter 16 1) C 2) A 3) D 4) A 5) C 6) B 7) B 8) D 9) D 10) A 11) C 12) D 13) D 14) A 15) B 16) D 17) B 18) B 19) A 20) B 21) C 22) A 23) D 24) B 25) C 26) A Version 1

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27) C 28) C 29) B 30) B 31) A 32) C 33) B 34) C 35) C 36) A 37) A 38) A 39) B 40) C 41) A 42) B 43) C 44) C 45) C 46) B 47) B 48) A 49) B 50) C 51) C 52) D 53) A 54) B 55) B 62) TRUE Version 1

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63) TRUE 64) TRUE 65) FALSE 66) FALSE 67) FALSE 68) TRUE 69) FALSE 70) TRUE 71) FALSE Student name:__________ 1)

Which of the following is not a reason for increasing income inequality?

A) A shift to "superstar" markets, in which firms with larger markets seek the very best talent to work for their companies B) Rapid technological improvements, which favor educated workers more than lowerskilled workers C) Growth of foreign trade, which helps higher-skilled workers whose talents are in higher demand worldwide D) A decline in the nominal dollar value of the minimum wage over several decades

2) In a "superstar economy," companies try to find only the very best talent. What effect has this had on labor markets?

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A) There is a widening gap in income between people who are competent and people who are the very best.

B) Unemployment tends to increase because one top employee may replace two or three less competent employees.

C) The income gap has narrowed as the "superstars" come up with ideas to produce in ways that boost the pay of lower-income workers.

D) Per capita income has dropped because the "superstars" tend to save, rather than spend, their large salaries.

3)

Which of the following statements about the minimum wage is true?

A) The minimum wage has not had any impact on income inequality.

B) Adjusting for inflation, the real minimum wage has fallen in the last 40 years.

C) Due to minimum wage increases, income inequality is now lower than it was in the mid-20th century.

D) The minimum wage tends to create inflation, which benefits the wealthy more than the poor.

4)

The 80/20 ratio is found by dividing the

A) number of households making less than 80 percent of the poverty line by the number of households making more than 20 times the poverty line.

B) income at the 80th percentile by the income at the 20th percentile.

C) average income of those below the 80th percentile by the average income of those in the top 20 percent.

D) average income of the top 80 percent of income earners by the average income of the top 20 percent of income earners.

5)

Which of the following statements about the poverty line is true?

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A) The poverty line is adjusted upward for inflation every year.

B) The percentage of people living below the poverty line has approximately doubled in the last 40 years.

C) The percentage of people living below the poverty line has been cut in half in the last 40 years.

D) The percentage of people over 65 living below the poverty line has approximately doubled in the last 40 years.

6) The combined impact of the labor pool effect of globalization for low-skilled workers and the market expansion effect of globalization for high-skilled workers is

A) falling income inequality, since one effect helps those with low incomes and the other effect hurts those with high incomes.

B) stable income inequality, since one effect helps those with low incomes and the other effect helps those with high incomes.

C) rising income inequality, since one effect helps those with high incomes and the other effect hurts those with low incomes.

D) stable income inequality, since one effect hurts those with low incomes and the other effect hurts those with high incomes.

7) An economy where there is a wide gap between the compensation of the top workers in certain fields and that of the merely competent workers is called a(n)

A) inequality economy.

B) superstar economy.

C) hyperinflation economy.

D) competitive economy.

8) Supporters of supply-side economics would be most likely to argue __________ government intervention to reduce inequality by focusing on its effects on __________.

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A) against; economic growth B) against; fairness C) in favor of; politics D) in favor of; economic growth

9) Which of the following is among the arguments against using government intervention to reduce income inequality?

A) Governments cannot have much of an impact on income inequality, so there is little use in making the attempt.

B) A wide gap between the rich and the poor tends to promote active participation in the democratic process.

C) Allowing big rewards to go to the most successful performers helps motivate creativity, innovation, and hard work.

D) Large income differences eventually lead to political strife and will undermine support for a market economy.

10) Which of the following is among the arguments in favor of using government intervention to reduce income inequality?

A) Taking money away from individuals who have earned it is unfair and immoral.

B) Government intervention is more effective in promoting creativity and hard work than the hope of higher earnings.

C) Large income differences eventually lead to political strife and will undermine support for a market economy.

D) The income distribution statistics understate inequality because they fail to take economic mobility into account.

11) People who oppose government intervention to reduce income inequality have sometimes argued that allowing large income gaps can be beneficial because

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A) people with large incomes will feel guiltier about their financial advantages and be motivated to give more to the poor.

B) large income gaps increase the incentive to support a market-based economy.

C) the poor will have a shorter life expectancy, leaving more wealth for the successful few.

D) it increases the incentive to work harder to be successful, thereby increasing economic growth.

12) Government intervention to reduce income inequality might reduce growth rates because of rent-seeking behavior. This means that

A) landlords might raise rental rates on housing in order to pay the higher taxes that go with government wealth redistribution programs.

B) groups who are not among the neediest might put pressure on government officials to obtain transfers of wealth.

C) people who are not homeowners, but reside in rental housing, may become unmotivated and work less, reducing payments to landlords and slowing real estate markets.

D) as a larger fraction of the population falls below the poverty line they are pushed out of home ownership and into rental housing, reducing the savings rate.

13) People tend to earn higher incomes as they mature and gain experience in the workforce.

Because of this income mobility

A) statistics on income may understate inequality.

B) redistribution of income may encourage innovation and economic growth.

C) statistics on income may overstate inequality.

D) the overall poverty rate may rise as the population ages.

14)

The effective tax rate is the

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A) share of income a household pays in taxes.

B) percentage of an additional dollar that a household would pay in taxes.

C) share of income a household pays in taxes, minus any transfer payments.

D) highest income tax rate minus the lowest income tax rate.

15)

An income tax is progressive if

A) lower-income households pay a larger share of their income in taxes than higherincome households.

B) most of the tax revenue is used to benefit lower-income households.

C) higher-income households pay a larger share of their income in taxes than lowerincome households.

D) most of the tax revenue is used to benefit higher-income households.

16)

An income tax is regressive if

A) lower-income households pay a larger share of their income in taxes than higherincome households.

B) most of the tax revenue is used to benefit lower-income households.

C) higher-income households pay a larger share of their income in taxes than lowerincome households.

D) most of the tax revenue is used to benefit higher-income households.

17)

A sales tax is usually considered to be a

A) progressive tax.

B) regressive tax.

C) proportional tax.

D) flat tax.

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18) Suppose an income tax is imposed that takes $1,000 from someone with an income of $20,000, $4,000 from someone with an income of $30,000, and $12,000 from someone with an income of $80,000. This tax would be classified as

A) regressive.

B) proportional.

C) progressive.

D) a flat tax.

19) The federal income tax in the United States fits the description of which of the following tax structures?

A) Regressive B) Proportional C) Progressive D) It depends on the income of the individual being taxed.

20) The Social Security and Medicare taxes in the United States, which are payroll taxes, fit the description of which of the following tax structures?

A) Regressive B) Proportional C) Progressive D) It depends on the income of the individual being taxed.

21)

Compared to 1981, the poor now pay a

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A) larger fraction of their income in taxes than the top 10 percent of income earners.

B) larger fraction of their income in taxes than the middle 50 percent of income earners.

C) smaller fraction of their income in federal taxes.

D) larger fraction of their income in federal taxes.

22) The possible increase in rent-seeking behavior is a __________ argument __________ government intervention to reduce inequality.

A) fairness-based; against B) political; against C) growth-based; in favor of D) data-based; against

23) If white workers earn more than black or Hispanic workers primarily because of differences in education, then this means there is no discrimination against blacks or Hispanics.

This statement is

A) true, because black and Hispanic workers are paid less because they have less education, not because of discrimination.

B) true, because antidiscrimination laws went into effect a long time ago.

C) false, because it could be that black and Hispanic workers face discrimination or other obstacles to receiving a quality college education.

D) false, because employers are discriminating by choosing not to hire uneducated workers, regardless of their race.

24)

Under the current federal income tax laws, a person who has a high income is likely to

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A) pay a larger percentage of income in taxes than the average taxpayer.

B) pay a smaller percentage of income in taxes than the average taxpayer.

C) receive a substantial benefit from the earned income tax credit.

D) spend a larger fraction of total income than a low-income taxpayer.

25) Suppose an income tax is imposed that takes $2,000 from someone with an income of $20,000, $2,500 from someone with an income of $30,000, and $4,000 from someone with an income of $80,000. This tax would be classified as

A) proportional.

B) regressive.

C) progressive.

D) a flat tax.

26)

Discrimination in the workplace results when

A) people who are less productive are paid less than those who are more productive.

B) employers pay people a higher wage if they are better educated.

C) pay and treatment on a job depend on a person’s race, gender, or some other characteristic.

D) employers refuse to hire someone who is an illegal immigrant.

27) In the United States, some groups have higher incomes than others. Which of these would be considered discrimination?

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A) English professors, who are more likely to be female than engineering professors, are paid less than engineering professors.

B) A male employee is paid more than an equally qualified female employee because the male employee is a manager and the female employee is not.

C) College-educated employees are consistently paid more than employees without a college education.

D) White candidates for a job opening are consistently preferred over equally qualified black candidates for the same position.

28) In the United States, people who earn more than $250,000 a year represent 3 percent of all households and earn

A) 15 percent of total income.

B) 3 percent of total income.

C) less than 1 percent of total income.

D) 47 percent of total income.

29)

The top quintile of income earners would be those whose income is

A) in the highest 5 percent of earners.

B) in the lowest 20 percent of earners.

C) in the highest 20 percent of earners.

D) higher than the lowest 20 percent of earners.

30)

The bottom quintile of income earners would be those whose income is

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A) in the lowest 5 percent of earners.

B) in the lowest 20 percent of earners.

C) in the highest 20 percent of earners.

D) lower than the highest 20 percent of earners.

31)

Among the reasons for high CEO pay are all of the following except

A) the people who are capable of doing the work required of a top corporate officer are relatively scarce.

B) paying CEOs with stock in the company will motivate the CEO to do what is in the best interests of the shareholders, and these stock packages might be very large to motivate more.

C) shareholders might benefit from the prestige of investing in a company with a CEO who enjoys a high standard of living.

D) a corporate board might make the CEO job higher-paying in order to entice lowerlevel corporate officers to put forth maximum effort as they try to achieve the top position.

32) Differences in pay between men and women in the United States could be at least partially explained by all of the following except

A) occupational choices in which women choose work with greater flexibility but lower pay.

B) gender discrimination.

C) interruptions in women's careers are more common than those in men's.

D) large differences in education levels between men and women.

33)

Which of the following statements is true?

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A) Income distributions have not changed much in the United States in the past 35 years.

B) Progressive income tax structures are one method of making incomes more equal.

C) The poverty line has not been adjusted at all in the past 35 years.

D) Worldwide, no countries are catching up to the United States with respect to GDP per capita.

34)

Which of the following statements is false?

A) Worldwide, no countries are catching up to the United States with respect to GDP per capita.

B) Income distributions have become less equal in the United States in the past 30 years.

C) Higher taxes tend to reduce the incentive to work productively and innovate.

D) The poverty rate measures the percentage of people living in households with incomes below the poverty line.

35) Which of the following numbers, if it were equal to the 80/20 ratio for a particular country, would indicate the most inequality?

A) 0 B) 0.5 C) 1 D) 2

36)

What is the lowest value the 80/20 ratio can take?

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A) −1 B) 0 C) 1 D) 100

37)

Which of the following is a theoretically possible value for the 80/20 ratio?

A) −1 B) 0 C) 0.5 D) 1,000

38) If a household earning $50,000 annually pays $10,000 in taxes while a household earning $100,000 annually pays $25,000 in taxes, then the tax system is

A) regressive.

B) progressive.

C) neither regressive nor progressive.

D) both regressive and progressive.

39) If a household earning $50,000 annually pays $10,000 in taxes while a household earning $100,000 annually pays $20,000 in taxes, then the tax system is

A) regressive.

B) progressive.

C) neither regressive nor progressive.

D) redistributive.

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40) If a household earning $50,000 annually pays $10,000 in taxes while a household earning $100,000 annually pays $15,000 in taxes, then the tax system is

A) regressive.

B) progressive.

C) reducing income inequality.

D) discriminatory.

41)

In 2014, the 80/20 ratio for the United States was approximately equal to

A) 1, indicating no income inequality.

B) 2, indicating substantial income inequality.

C) 4, indicating no income inequality.

D) 5, indicating substantial income inequality.

42)

Arguments that income inequality statistics are incomplete or misleading are made by

A) both those in favor of and those against government intervention to reduce inequality.

B) only those in favor of government intervention to reduce inequality.

C) only those against government intervention to reduce inequality.

D) neither those in favor of nor those against government intervention to reduce inequality.

43)

Appeals to fairness can be made by

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A) both those in favor of and those against government intervention to reduce inequality.

B) only those in favor of government intervention to reduce inequality.

C) only those against government intervention to reduce inequality.

D) neither those in favor of nor those against government intervention to reduce inequality.

44) The Equal Employment Opportunity Commission (EEOC) enforces laws forbidding employment discrimination based on all of the following except

A) age.

B) national origin.

C) sexual orientation.

D) education level.

45) In addition to discrimination, there may be other reasons earnings may differ by gender or race. These other reasons include each of the following except

A) differences in education.

B) differences in benefits and noncash compensation.

C) differences in experience.

D) differences in occupational choices.

46)

List three arguments against government intervention to reduce inequality.

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47)

Why might people object to a regressive tax structure?

48) Why might education differences better explain the differences in income between whites and Hispanics than between men and women?

49) Give a brief explanation of the "superstar economy" as a factor in the widening of income inequality.

50)

How has global trade affected income inequality? Explain briefly.

51)

What is meant by income mobility and how might it affect income inequality measures?

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52) The tournament effect is sometimes used to describe the effects of CEOs making significant salaries. Describe what this means and whether the effect argues for or against income inequality.

53) The percentage of U.S. citizens living below the poverty line is higher today than it was for most of the 1970s. ⊚ true ⊚ false

54) A quintile, sometimes used to measure wealth inequality, represents one-fourth of households. ⊚ ⊚

true false

55) Dividing the number of households making over $80,000 by the number of households making less than $20,000 will produce the 80/20 ratio. ⊚ ⊚

56)

The 80/20 ratio of income has been rising over the last three decades. ⊚ ⊚

57)

true false

true false

An increase in the returns to a college education has increased inequality of income.

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⊚ ⊚

true false

58) Increasing foreign trade has reduced income inequality because the market expansion effect increases the work opportunities and wages of low-skilled workers. ⊚ ⊚

59)

Adjusting for inflation, the real minimum wage has fallen over the last 40 years. ⊚ ⊚

60)

true false

true false

Progressive income tax structures tend to make after-tax incomes less equal. ⊚ ⊚

true false

61) The percentage of U.S. citizens living in poverty is actually higher today than it was for most of the 1970s. ⊚ ⊚

62)

true false

In the last two decades, women have completely closed the gender earnings gap. ⊚ ⊚

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Answer Key Test name: chapter 17 1) D 2) A 3) B 4) B 5) A 6) C 7) B 8) A 9) C 10) C 11) D 12) B 13) C 14) A 15) C 16) A 17) B 18) C 19) C 20) A 21) C 22) B 23) C 24) A 25) B 26) C Version 1

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27) D 28) A 29) C 30) B 31) C 32) D 33) B 34) A 35) D 36) C 37) D 38) B 39) C 40) A 41) D 42) A 43) A 44) D 45) B 53) TRUE 54) FALSE 55) FALSE 56) TRUE 57) TRUE 58) FALSE 59) TRUE 60) FALSE 61) TRUE 62) FALSE

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Student name:__________ 1) An employer retirement plan that provides a predetermined monthly amount of income when you retire is called a

A) defined contribution plan.

B) 401(k) plan.

C) defined benefit plan.

D) Social Security plan.

2)

How is a 401(k) plan taxed?

A) A 401(k) plan is taxed when workers withdraw money from the account to pay for retirement expenses.

B) 401(k) contributions are taxed when workers make their contributions and grow taxfree until retirement.

C) Contributions to a 401(k) plan are taxed at the time the contribution is made and again when the money is withdrawn from the account after retirement.

D) A 401(k) plan is not taxed at all.

3) Economists talk about a four-legged stool of retirement income, which includes all of the following sources of income except

A) individual savings.

B) funding provided by charitable organizations.

C) employer retirement plans.

D) Social Security benefits.

4) The life cycle theory of retirement breaks up an individual's working life into which three periods?

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A) Youth, middle age, and old age.

B) Training, working, and retiring.

C) Education, work, and enjoyment.

D) Not working, working, and not working.

5)

Which of the following statements about Social Security is true?

A) The Social Security program offers retirees retirement benefits for up to 20 years after retirement.

B) Social Security is funded with income tax revenues.

C) Social Security requires workers to contribute to an account that is held in their name at the Treasury and invested in government and highly rated private sector bonds.

D) Social Security transfers income from current workers to current retirees.

6)

Which of the following statements about Social Security is false?

A) Workers with low incomes will get back a higher percentage of their lifetime average income than higher-income workers.

B) Social Security benefits rise along with inflation.

C) Employers do not make any contribution to Social Security for employees unless the employer is the government, a government agency, or a government contractor.

D) Social Security is the single largest source of income for American adults aged 65 and over.

7)

What is expected to happen to old-age dependency ratios in the United States?

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A) As the population ages, the old-age dependency ratio is expected to rise.

B) The old-age dependency ratio is expected to fall as workers become more productive.

C) The old-age dependency ratio is expected to stay about the same as technology and the aging of the population counterbalance one another.

D) Since we do not know when people will retire and how long they will live, it is impossible to estimate.

8) Which of the following is not among the proposals for reducing the Social Security financing gap?

A) Raising Social Security payroll taxes B) Reducing benefits C) Mandating larger payments from company pension plans D) Privatizing the system

9)

Which of the following best describes the adverse selection problem in health care?

A) People don't know how much they will need to pay for health care in old age, adding to the risks of old age.

B) The poor are exposed to medical disasters because they cannot afford to pay for insurance.

C) The people who are selected for jobs with health insurance benefits are often the people who least need the health insurance.

D) Healthier people are less likely to buy health insurance because they are less likely to need it.

10) People who are the most at risk for health problems are the most likely to sign up for health insurance. Health insurance premiums rise to cover the increased costs of these people, whereupon those less at risk drop their health insurance coverage, worsening the problem. This problem is called the

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A) adverse selection problem.

B) incentive problem.

C) health care uncertainty problem.

D) moral hazard problem.

11)

The retirement poverty problem is that

A) many retired people live in poverty.

B) without Social Security payments, almost all seniors would be in poverty.

C) many workers are too poor to save for retirement.

D) retirement makes people feel poorer because they are not engaged in productive work.

12)

Which of the following statements about health insurance is true?

A) For employer-provided health insurance plans, the employee generally pays the bulk of the costs, while the employer covers 10 or 20 percent of the overall insurance expenses.

B) Low-income workers are less likely than high-income workers to be covered by an employer health plan.

C) Medicaid is a government program set up to cover the medical expenses of older citizens.

D) Medicare is a government program set up to cover the medical expenses of lowincome families and individuals with disabilities.

13) The "individual mandate" included in President Obama's Affordable Care Act was designed to address which problem?

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A) The moral hazard problem B) The incentive problem C) The health care poverty problem D) The adverse selection problem

14)

Which of the following statements about medical care costs is true?

A) In the last decade, medical care costs have risen more slowly than the overall rate of inflation.

B) Medical care costs per person have risen faster than income per person.

C) Third-party payers have been able to force large reductions in medical expenses.

D) In the United States, workers are taxed on company-funded medical care expenses.

15)

All the following have contributed to rising medical care costs except

A) rapid technological progress.

B) the aging of the population.

C) third parties paying for most medical expenses.

D) increasing occurrences of expensive communicable disease.

16)

Which of the following statements about medical care spending is true?

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A) Medical expenses among the elderly have been rising faster than medical expenses among the young.

B) Medical expenses among the elderly tend to be higher than medical expenses among the middle-aged.

C) Medical care is an inferior good because people spend less on medical care as their income rises.

D) Most medical care expenses are paid out-of-pocket rather than by insurance companies or the government.

17)

Third-party payers for medical care include all the following except

A) Medicare.

B) Medicaid.

C) employer-provided medical insurance.

D) payments from the patient's savings.

18) Suppose the court system begins to make it easier for plaintiffs to win large payments from doctors and other medical professionals who are accused of malpractice. What result would you expect?

A) Doctors would order more diagnostic tests and treatment procedures even when the costs of those procedures exceed the benefits to the patient.

B) The cost of medical care would fall because doctors would avoid expensive tests and treatments.

C) Claims on medical insurance plans would probably fall.

D) More people would seek training to become medical professionals because they would be able to make more money ordering tests and treatment procedures.

19) A single-payer system, in which the government pays for all medical expenses for everyone, would eliminate all the following problems except the

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A) poverty problem.

B) uncertainty problem.

C) third-party payer problem.

D) adverse selection problem.

20) The Affordable Care Act, signed by President Obama in 2010, attempted to solve the problem of rising health care costs and inefficient outcomes by

A) creating a single-payer system in which the government pays for all medical care.

B) offering tax credits and subsidies to help low-income households afford insurance.

C) increasing the income thresholds for Medicaid eligibility.

D) requiring all employers to offer free health care to their employees.

21)

In 2017, the largest single source of funds for adults 65 and older was

A) earnings from work.

B) Social Security payments.

C) public pensions.

D) income from assets.

22) If your retirement income from your employer's retirement plan depends on the performance of the pretax investments that you and your employer have made over time, then your employer's plan is a

A) defined benefit plan.

B) defined contribution plan.

C) Social Security plan.

D) calculated retirement plan.

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23) In 1980, __________ of full-time employees in large and midsize private firms participated in __________ plans.

A) 84 percent; defined benefit B) 84 percent; defined contribution C) 16 percent; Social Security D) 16 percent; 401(k)

24)

In terms of employee retirement plans, many companies have been switching to

A) defined benefit plans, because this allows them to transfer the risk to the employee.

B) defined contribution plans, because this allows them to transfer the risk to the employee.

C) defined benefit plans, because of the tax advantages of these plans.

D) defined contribution plans, because of the tax advantages of these plans.

25) Consider a retiree who is currently receiving Social Security benefits. Which of the following is true about the benefits?

A) The benefits are being paid for with the contributions of current workers.

B) The benefits are being paid for with the past contributions of this retiree.

C) The benefits will be paid for with the future contributions of future workers.

D) The benefits are being paid for with the interest earned on the past contributions of this retiree.

26)

Social Security taxes are currently invested in

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A) a mix of conservative stocks and bonds.

B) U.S. Treasury bonds.

C) gold.

D) money market accounts and certificates of deposit.

27) The Social Security payroll tax is __________ on the employee, and __________ on the employer, levied on all earned income up to a cap, which is adjusted for inflation each year.

A) 7.65 percent; 7.65 percent B) 0 percent; 15.3 percent C) 15.3 percent; 0 percent D) 6.2 percent; 6.2 percent

28) In most defined contribution retirement plans, employees have a choice about whether or not to participate. Which of the following statements about worker participation is true?

A) Current U.S. law says that workers must be automatically enrolled in employer retirement plans.

B) Full-time workers are less likely to participate than part-time workers because parttime workers need the retirement income more.

C) Workers are more likely to participate if they are automatically enrolled and are permitted to opt out, rather than not enrolled and permitted to opt in.

D) Workers are more likely to be part of a defined benefit plan than a defined contribution plan.

29)

What type of system puts the greatest risk of market fluctuations on retired employees?

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A) A defined contribution plan B) A defined benefit plan C) The Social Security system D) The risk of market fluctuations is the same for all retirement plans.

30) Which of the following is a recent trend observed in retirement plans in the United States?

A) Participation in retirement plans is declining as workers begin to rely more on Social Security.

B) Many companies have been switching from defined benefit plans to defined contribution plans.

C) More Americans are opting out of Social Security because of the low rates of return compared to private alternatives.

D) More employer retirement plans are beginning to switch from defined contribution plans to defined benefit plans.

31) Which of the following groups is most likely to participate in an employer-sponsored retirement plan?

A) Low-wage workers B) Workers with defined benefit plans in small workplaces C) High-wage workers in part-time jobs D) High-wage workers in full-time jobs

32)

Which of the following would tend to reduce overall health care expenses?

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A) A reduction in the incidence of third-party payers B) An increase in national income C) Higher technology in medical care D) An increase in court awards of damages in malpractice lawsuits

33)

The old-age dependency ratio is found by

A) dividing the number of people of working age by the number of retirees.

B) dividing the number of older people by the number of people in the entire population.

C) multiplying the number of older people by the percentage in that group who have no retirement savings.

D) dividing the number of older people by the number of people of working age.

34) Which of the following would increase the old-age dependency ratio over the next 25 years?

A) An increase in the birth rate B) An increase in the number of young immigrants C) Medical advances that extend the lives of people over the age of 50 D) A reduction in Social Security taxes

35) Which group in the United States tends to spend the largest amount of money per person on health care?

A) Children and teens from infancy to 18 B) Young and middle-aged people from 19 to 64 C) Elderly people from 65 and up D) All groups spend about the same amount of money per person.

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36)

The name "401(k)" for some retirement plans is a reference to

A) the trademarked name of the first defined contribution retirement plan.

B) the section of the tax code that defines such plans.

C) a specific cell in the spreadsheet that a government official used to create these retirement plans.

D) a room number inside the Social Security Administration headquarters.

37) In 2019, if you earned $200,000 in income, you would pay approximately __________ in taxes to fund Social Security; if you earned $1,000,000 in income, you would pay approximately __________ in taxes to fund Social Security.

A) $12,400.00; $62,000.00 B) $8,239.80; $8,239.80 C) $14,700.00; $73,500.00 D) $74,000.00; $240,000.00

38)

Ida May Fuller was the first

A) director of the Social Security Administration.

B) person enrolled in a 401(k) retirement plan.

C) recipient of a Social Security check.

D) person issued a Social Security number.

39)

Which of the following is a way in which Social Security benefits could be cut?

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A) An increase in the rate of inflation B) A higher retirement age C) A smaller penalty for early retirement D) An increase in the payroll tax rate

40)

Which of the following countries spends the most per capita on health care?

A) The United States B) Canada C) Germany D) China

41) The health care of low-income children, their parents, and individuals with disabilities is covered (though not always completely) through

A) Medicare.

B) Medicaid.

C) Social Security.

D) employer health insurance plans.

42) Economists who are cautious about government intervention in health care markets are probably worried about each of the following except

A) the incentive problem.

B) rent-seeking behavior.

C) lack of innovation.

D) excessive flexibility.

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43)

How does the tax code contribute to rising health care costs?

A) Since health insurance benefits are untaxed, workers have an incentive to receive more of their compensation in the form of health insurance benefits.

B) Since services are not subject to state sales taxes, households tend to spend more of their money on health care services than on other goods.

C) Since health care purchases are subject to such high taxes, total spending on health care (including taxes) is quite high.

D) Since the tax code provides exemptions for research and development, it provides an incentive for businesses to develop high-tech and expensive new treatments.

44)

With respect to health care decisions, which party is the "third" party?

A) The doctor B) The patient C) The health insurance company D) The federal regulator

45) People in which group are the least likely to have some form of health insurance coverage in the absence of a mandate dictating that everyone must have insurance?

A) Healthy people over the age of 65 B) Sick people under the age of 5 C) Healthy people in their 20s D) Sick people between the ages of 30 and 40

46)

Which of the following is not part of the "four-legged stool" of retirement income?

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A) Full-time work B) Employer retirement plans C) Social Security D) Individual savings

47) A government program that provides income support to older citizens who earlier contributed to the program is known as

A) a defined benefit plan.

B) a defined contribution plan.

C) Social Security.

D) a 401(k) plan.

48) The primary and secondary sources of income, on average, for U.S. adults aged 65 and over are

A) individual retirement accounts and Social Security, respectively.

B) Social Security and earnings from work, respectively.

C) earnings from work and pensions, respectively.

D) pensions and individual retirement accounts, respectively.

49) In 2017, income from the assets that workers have saved over their working lives constituted on average __________ of income for U.S. adults aged 65 and over.

A) 3 percent B) 10 percent C) 18 percent D) 29 percent

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50) Workers may not know how much money they will need to save for retirement and may not earn enough to have income to save. These two problems

A) led economists to develop the life cycle theory of retirement.

B) are known collectively as the life cycle theory of retirement.

C) can be mitigated through application of the life cycle theory of retirement.

D) present problems that may complicate the life cycle theory of retirement.

51) In the absence of government or employer-sponsored health insurance, which of the following would be true about health expenses for the elderly?

A) It would not be financially worthwhile for the elderly to purchase insurance to cover medical expenses.

B) The elderly would have to pay for health care expenses out of their current income.

C) The elderly would only need to worry about catastrophic health events.

D) Insurance companies would earn greater profits on health insurance for the elderly.

52) According to the life cycle of retirement, in the absence of government- or employersponsored health coverage, workers in middle age would A) stop paying for the catastrophic care insurance they purchased when they were young.

B) save an enormous amount of money to pay for health expenses in old age.

C) use the money that they saved when they were young to pay for routine medical expenses.

D) have fewer out-of-pocket medical expenses than when they were young.

53) Which of the following was not a key feature of the Affordable Care Act, signed by President Obama in 2010?

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A) Tax credits and subsidies to help low-income families buy health insurance B) A requirement that almost everyone have health insurance or pay a fine C) Panels of government doctors to review and approve major health care purchases D) A rule preventing insurers from denying coverage because of preexisting conditions

54)

The Affordable Care Act

A) created a single-payer system, similar to the one in the United Kingdom.

B) was a compromise between those who wanted a single payer system and those who did not.

C) created an individual mandate, similar to the one in the United Kingdom.

D) was a compromise between those who wanted an individual mandate and those who did not.

55)

From 2010 to 2018, the Affordable Care Act

A) reduced the percentage of uninsured from 16 percent to 9.4 percent.

B) reduced the percentage of uninsured from 9.4 percent to nearly 0 percent.

C) left the percentage of uninsured unchanged at 9.4 percent.

D) increased the percentage of uninsured from 9.4 percent to 16 percent.

56)

Describe the problem that demographic change presents for Social Security.

57) Describe the basic financial life cycle. How does the life cycle change with Social Security in the picture?

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58) What is the difference between defined benefit and defined contribution retirement plans?

Why are employers switching to defined contribution plans?

59)

List the four possible responses to the Social Security financing gap.

60) What problems with health care did President Obama attempt to address with the health insurance reform bill he signed in 2010, the Affordable Care Act, and how were those problems addressed?

61) Some have argued that a potential solution to rising health care costs is to force hospitals and doctors to more prominently display the prices for certain services, almost like a menu. This could be an attempt to address which problem that is causing rising health care costs? Explain your response.

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62) According to the life cycle model, people tend to borrow while young, pay off debt and build wealth in their middle age, and live off savings during their retirement. ⊚ ⊚

true false

63) While the retirement poverty problem occurs because poor people often cannot save much for retirement, the retirement uncertainty problem occurs because people are not certain if they will live long enough to retire. ⊚ ⊚

true false

64) A defined benefit plan provides retirees income that varies with the market interest rate but continues for a defined number of years. ⊚ ⊚

true false

65) The amount of money paid to a retiree from a defined contribution plan depends on how well investments perform. ⊚ ⊚

66)

true false

A 401(k) plan is a type of defined benefit plan. ⊚ ⊚

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67) Social Security requires workers to contribute to an account that is held in their name at the Treasury and invested in government and highly rated private sector bonds. ⊚ ⊚

true false

68) The old-age dependency ratio is the ratio of the size of the 65 and older population to the size of the working-age population. ⊚ ⊚

true false

69) Between 1998 and 2018, the consumer price index for medical care grew more slowly than the rest of the prices in the economy. ⊚ ⊚

true false

70) The life cycle theory of retirement puts people in the position of projecting how many resources they will need to pay for all expenses when they are old, a problem called the retirement poverty problem. ⊚ ⊚

true false

71) The adverse selection problem in health care occurs because people who are healthier are less likely to buy health insurance because they are less likely to need it. ⊚ ⊚

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Answer Key Test name: chapter 18 1) C 2) A 3) B 4) A 5) D 6) C 7) A 8) C 9) D 10) A 11) C 12) B 13) D 14) B 15) D 16) B 17) D 18) A 19) C 20) B 21) B 22) B 23) A 24) B 25) A 26) B Version 1

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27) D 28) C 29) A 30) B 31) D 32) A 33) D 34) C 35) C 36) B 37) B 38) C 39) B 40) A 41) B 42) D 43) A 44) C 45) C 46) A 47) C 48) B 49) B 50) D 51) A 52) B 53) C 54) B 55) A 62) TRUE Version 1

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63) FALSE 64) FALSE 65) TRUE 66) FALSE 67) FALSE 68) TRUE 69) FALSE 70) FALSE 71) TRUE Student name:__________ 1)

Which of the following will occur if the supply curve for gasoline shifts to the left?

A) The demand for gasoline will shift to the left as people demand less gasoline.

B) The price of gasoline will rise, and the quantity demanded will fall.

C) The price of gasoline will fall, and the quantity demanded will rise.

D) Nothing will happen to the quantity of gasoline used because people are addicted to gasoline.

2)

Which of the following would shift the demand for gasoline to the left?

A) An excise tax levied on sellers of gasoline B) New regulatory restrictions on the construction of new oil refineries C) A national speed limit maximum set below existing state speed limits D) An increase in the marginal cost of extracting oil from large reserves in the Middle

East

3)

What effect would an excise tax on gasoline have on the market for gasoline?

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A) The quantity supplied would fall, and the quantity demanded would rise.

B) The after-tax price of gasoline would fall as sellers reduce prices to compensate buyers.

C) The demand curve for gasoline would shift to the right.

D) The after-tax price received by the seller would be lower than the price before the tax.

4)

Which of the following is a good example of a negative externality?

A) A forest that absorbs carbon dioxide and generates oxygen B) A landfill that creates undesirable odors on surrounding property C) A "big box" retail store that outcompetes existing retail stores D) A rose garden in your front yard

5) When electricity buyers and electric utility companies trade with one another, the electric utilities may generate electricity with a coal-burning power plant. This produces sulfur dioxide, nitrogen dioxide, particulates, and other air pollutants, which affect people who may not be among the buyers or sellers. This phenomenon is known as A) a negative externality.

B) excess supply.

C) resource overuse.

D) mitigation.

6)

Which of the following is not a negative externality?

A) A homeowner failing to remove trash from his yard, leaving it as an unsightly eyesore in the neighborhood B) Low-flying aircraft creating noise over an otherwise quiet neighborhood C) A household pet leaving waste on a public sidewalk D) E-mail "spam" consisting of advertisements for goods and services

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7) Suppose air pollution creates a haze that obscures a previously clear view of a distant mountain range. This effect of pollution would be called A) a health impact.

B) material and crop damage.

C) harm to environmental amenities.

D) ecological damage.

8)

Which of the following best describes "the value of a statistical life"?

A) The monetary value treated as the cost of an additional death from pollution B) The price society would pay, on average, to avoid a certain death C) The total monetary value of a person's current income and expected future income D) The cost to society of an average person's lifetime consumption

9) To estimate the value of a statistical life, economists sometimes look at the decisions that people make that will change their risk of death. For example, people may accept a more dangerous job in exchange for higher pay. This method of determining the value of a statistical life is known as A) revealed preference.

B) stated preference.

C) the actuarial method.

D) the trade-off method.

10) To estimate the value of a statistical life, economists sometimes ask people how much they would be willing to pay to reduce their risk of death by a small amount. This method of determining the value of a statistical life is known as

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A) revealed preference.

B) stated preference.

C) the actuarial method.

D) the survey method.

11) If the marginal cost curve for paper production were altered to reflect the cost of the odor imposed on surrounding areas, which of the following would occur?

A) The marginal cost curve would shift downward.

B) The market price, accounting for the externality, would rise.

C) It would become socially efficient to produce more paper.

D) The market price, accounting for the externality, would fall.

12) Suppose the production of widgets generates negative externalities but no positive externalities. If widget producers suddenly had to pay the true marginal cost of their product for every unit they produced, including all externalities, producers would A) produce more than the current level of output.

B) produce and sell at a lower price than before.

C) produce less than the current level of output.

D) have less of an incentive to control their pollution output.

13) If the marginal cost of producing a product, including the externality, is higher than the marginal cost when the externality is ignored, then which of the following must be true?

A) The production of the product generates a positive externality.

B) The production of the product is too small compared to the ideal amount.

C) The price of the product is too high compared to what would be socially ideal.

D) The production of the product generates a negative externality.

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14) Adjusting GDP downward for the impact that industry has on the environment results in a number that is greatly disputed, but is often referred to as A) "eco-output."

B) "environment-neutral GDP." C) "resource-adjusted GDP." D) "green GDP."

15) Controlling pollution by setting the same maximum allowable amount of pollution for each polluter, and making specific rules about the way it must be reduced, is called A) the common-law approach.

B) tax-and-fine regulation.

C) cap-and-trade regulation.

D) command-and-control regulation.

16) Among the characteristics of the command-and-control approach to pollution reduction is that it is A) less costly than cap-and-trade systems.

B) easily adjusted to changes in marginal costs of pollution reduction across firms.

C) typically inflexible and thus quite expensive socially.

D) less costly than a carbon tax.

17) If the government sells certificates giving the certificate owner permission to emit a particular amount of pollution, and then allows these certificates to be bought and sold at a market price, then the government is using a market-based approach to pollution reduction called

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A) tradable pollution permits.

B) command-and-control regulation.

C) a carbon tax.

D) mitigation.

18)

One of the characteristics of the cap-and-trade system is that

A) there is no way to ensure that pollution is reduced below some allowable total amount.

B) it is inflexible and does not respond well to differences in the marginal cost of pollution reduction.

C) it is more expensive than a command-and-control system.

D) it reduces the economic damage that would have been done by a command-andcontrol system.

19) Responses to global climate change include the alteration of consumer and business behavior to reduce any damage that might occur from global climate change. This is called A) mitigation.

B) a carbon tax.

C) adaptation.

D) revealed preference systems.

20)

A tax on different kinds of fuels based on their carbon content is called a A) mitigation tax.

B) BTU tax.

C) carbon tax.

D) fossil fuel tax.

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21)

One of the characteristics of a carbon tax is that it would

A) encourage energy consumers to invest in energy efficiency.

B) place the heaviest burden on high-income families.

C) tend to encourage more usage of cheaper fuels like coal and less usage of expensive energy sources like nuclear energy.

D) have little effect on the emission of greenhouse gases.

22)

Which of the following statements about the burden of a carbon tax is true?

A) A carbon tax is progressive, placing a relatively heavy burden on high-income households.

B) A carbon tax is regressive, placing a relatively heavy burden on poor households.

C) A carbon tax is proportional, placing about the same burden on high- and lowincome households.

D) The burden of a carbon tax would fall entirely on fossil fuel–burning energy producers and their stockholders, employees, and suppliers, and would not affect consumers.

23)

Which of the following is considered a "nonrenewable" energy source?

A) Wind turbines B) Hydroelectric power C) Natural gas D) Cellulosic fuel (e.g., wood)

24) In 1972, the EPA banned the pesticide DDT. How would you classify this approach to reducing the environmental contamination caused by DDT?

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A) A marketable permit system B) A cap-and-trade system C) A carbon tax D) Command-and-control regulation

25)

Which of the following is a type of command-and-control regulation?

A) A law setting the maximum allowable amount of sulfur dioxide (SO2) in a certain district and auctioning off permits totaling the allowable tons of SO2 B) A law requiring coke ovens to be built in a certain way so as to restrict the amount of pollution they emit C) A law taxing users of fuels according to the carbon content in the fuel D) A law requiring consumers of electronics to pay a tax according to the amount of toxic heavy metals in each item purchased

26)

Which of the following is a market-based approach to controlling pollution?

A) Government sales of tradable allowances to emit sulfur dioxide up to a certain maximum B) A law requiring auto manufacturers to install catalytic converters to reduce carbon monoxide emissions below a certain level C) A rule requiring municipalities to limit the amount of atrazine in their water supplies to one part per billion D) A regulation banning the use of lead-based solder in household plumbing

27)

Which of the following companies would benefit the most from a carbon tax?

A) An oil company B) A coal mining equipment manufacturer C) A producer of wind turbines D) A trucking company

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28)

Negative externalities resulting from a coal-fired power plant would include A) emissions of sulfur dioxide, a chemical that causes acid rain.

B) creation of lower-cost electricity, which reduces profit.

C) profits to people other than the consumers of the electricity.

D) reduction of crime rates and accidents as a result of better lighting of streets.

29)

Which of the following statements is true?

A) If a buyer ends up being worse off from an exchange rather than better off as expected, this is a negative externality.

B) Secondhand cigarette smoke is an example of a negative externality.

C) As long as the benefits to society from an exchange outweigh the costs to society, no negative externality has occurred.

D) As long as the benefits to society from an exchange outweigh the costs to the producer of the good or service, no negative externality has occurred.

30)

Which of the following is the most widely used energy source in the world?

A) Nuclear energy B) Hydroelectric energy C) Fossil fuels D) Wind power

31) The cost of getting one more ton of coal or one more barrel of oil out of the ground is called the

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A) marginal cost of capital.

B) energy renewal rate.

C) marginal cost of extraction.

D) energy mitigation rate.

32)

Which of the following would occur if the marginal cost of extracting oil rose?

A) People would use less oil.

B) People would use more oil.

C) Oil producers would increase their production of oil.

D) Oil company profits would rise.

33) Suppose the government auctions off permits to car and truck owners, with each permit allowing the user to emit five tons of carbon dioxide each year from her or his vehicle. The total amount of carbon dioxide permitted is less than the amount currently emitted by vehicles. These permits could then be bought and sold on a market. Which of the following would occur?

A) Wealthy people would bear a larger burden under this system, relative to their incomes.

B) The total amount of fossil fuels burned in vehicles would actually increase.

C) People would pay less attention to their vehicle emissions than they do now because they could simply buy a permit and emit more.

D) People would tend to purchase cars that emitted less carbon dioxide.

34) Suppose the government auctions off permits to car and truck owners, with each permit allowing the user to emit five tons of carbon dioxide each year from his or her vehicle. The total amount of carbon dioxide permitted is less than the amount currently emitted by vehicles. These permits could then be bought and sold on a market. Which of the following is the best term for this type of system?

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A) A price-based adaptation system B) A cap-and-trade system C) A mitigation allowance D) A command-and-control system

35)

Which of the following is not an example of a negative externality?

A) Damage to homes and businesses caused by a forest fire ignited by lightning B) Noise from a neighbor's motorcycle as he prepares to ride to work at 5 a.m.

C) Fertilizer on a farmer's field that enters a river and promotes algae growth and kills fish downstream D) Secondhand cigarette smoke

36)

Since the 1970s, energy use per person in the United States has A) fallen dramatically.

B) fallen slightly.

C) risen slightly.

D) risen dramatically.

37) Which of the following is a reason why German per capita energy consumption is significantly lower than American per capita energy consumption?

A) German homes tend to be larger.

B) German homes have energy-efficient appliances.

C) German consumers pay hefty fees for overuse of energy.

D) Germany tends to have smaller homes.

38)

In 2015, Exxon Mobil, the world's largest oil company, spent $31 billion on

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A) payments to people affected by oil spills.

B) defending itself against class-action lawsuits.

C) exploration and capital investment.

D) executive compensation.

39) The National Maximum Speed Law, passed in 1974, forced states to keep speed limits at 55 miles per hour in an attempt to A) conserve energy.

B) save lives.

C) raise law enforcement revenues through traffic fines.

D) reduce the variability of speed limits across states.

40) Which of these attempts at promoting energy conservation would shift the demand curve for energy to the left?

A) A higher tax on gasoline B) A tougher fuel efficiency standard for cars C) A reduction in the amount of available oil D) A higher average speed limit

41) The revealed preference and stated preference approaches may help someone determine the value associated with avoiding a death as a result of pollution. This is sometimes referred to as the A) value of a statistical life.

B) true value of any human life.

C) daily cost of cleaning up water pollution.

D) total economic value of clean air regulations.

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42) If the cost of the negative pollution externality was added to the marginal cost of production, the true cost curve would be A) to the right of the marginal cost curve for production only.

B) above the marginal cost curve for production only.

C) steeper than the marginal cost curve for production only.

D) vertical.

43)

One example of the health damage that can be caused by pollution is A) the harm to agriculture.

B) the reduction in enjoyment from damaged environmental amenities.

C) a greater incidence of asthma due to air pollution.

D) damage to a functioning ecosystem.

44) Command-and-control approaches to reducing pollution can be criticized on the grounds that they may be all of the following except A) inflexible.

B) politically unpopular.

C) overly expensive.

D) counterproductive.

45)

The "cap" in cap-and-trade refers to the A) cap on pollution implied by the limited number of permits issued.

B) captain who oversees the reduction of pollution by businesses.

C) cap on the number of pollution permits that any one business may use.

D) name of a specific piece of equipment that is used to reduce air pollution.

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46)

Greenhouse gases arise from A) the combustion of carbon-based fossil fuels.

B) the chemicals that are used in agriculture.

C) the use of toxic household cleansers.

D) rising global temperatures.

47)

In some ways, adaptation is similar to A) mitigation.

B) a cap-and-trade system.

C) the usual demand response to a price change.

D) a supply curve shift.

48)

Which of the following is true about nuclear power?

A) It is likely to become a less and less important source of energy in the future.

B) Its use does not contribute to global climate change.

C) The cost of building and operating nuclear power plants is likely to fall.

D) There are very few safety concerns surrounding its use.

49) CAFE standards, which set fuel efficiency standards that automakers must meet, are an example of what type of energy conservation?

A) A normal market response B) A command-and-control approach C) A market-based approach D) A negative externality

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50) Taxes on gasoline and tax rebates for purchasing energy-efficient appliances are alike in that they both A) are market-based approaches implemented by the government.

B) rely on shifting the demand curve for energy to the left.

C) have the effect of raising energy prices.

D) are command-and-control approaches.

51) The normal functioning of the market for energy will naturally lead to conservation as energy prices rise. Despite this fact, the government may still want to intervene in energy use.

Which of the following is not a reason why the government may get involved in energy conservation policies?

A) To accelerate the development of new energy technologies B) To reduce the negative externalities associated with energy use C) To correct for the short-sightedness of individuals D) To generate government tax revenue

52) The Clean Air Act of 1970, which was the command-and-control approach that the government used to reduce the amount of carbon monoxide produced by automobiles, was A) successful in dramatically cutting the amount of carbon monoxide in the air.

B) the least costly way to reduce the amount of carbon monoxide in the air.

C) very flexible in allowing polluters to respond in different ways.

D) unsuccessful in reducing the amount of carbon monoxide.

53) Because a carbon tax is regressive, some economists propose to use the proceeds of a carbon tax to offset other taxes that

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A) are progressive.

B) can, in turn, offset the carbon tax.

C) are even more regressive.

D) also attempt to mitigate global climate change.

54) Probably the toughest part of creating a good mitigation strategy for global climate change is that it is A) an issue that lacks public support.

B) not certain that global climate change is even occurring.

C) an economics problem.

D) an international problem.

55)

The countries that contribute the most to worldwide greenhouse gas emissions A) are all developing countries.

B) are all developed countries.

C) include a mix of developed and developing countries.

D) cannot be identified since greenhouse gases move throughout the atmosphere.

56) Describe the difference between a command-and-control approach and a market-based approach to reducing pollution.

57)

Describe the two main categories of responses to global climate change.

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58) Briefly describe revealed preference and stated preference as means of determining the value of a statistical life.

59)

List and briefly describe the four types of negative impacts from pollution.

60) Suppose the U.S. government imposes a requirement that all passenger cars achieve a minimum fuel economy of 25 miles per gallon fuel efficiency. What impact would this have on the price of gasoline? What impact do you think this would have on deaths from traffic accidents?

61) Provide an example of a response to an externality that would generate harm to environmental amenities. Define what this term means as part of your answer.

62)

The United States consumes more energy per person than any other country in the world. ⊚ true ⊚ false

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63) Wealthier countries tend to consume less energy than poorer countries because wealthier countries can afford energy-efficient technologies. ⊚ true ⊚ false

64) A majority of the world's energy supply today comes from fossil fuels, such as coal, oil, and natural gas. ⊚ true ⊚ false

65) Renewable energy sources, such as solar, hydro, and wind power, make up about half of all energy production in the world today. ⊚ true ⊚ false

66) Concerns about running out of oil are legitimate because the global oil supply curve has been shifting to the left for several decades. ⊚ true ⊚ false

67) The rapid growth of China, India, and other developing countries is pushing the global demand curve for oil to the right. ⊚ true ⊚ false

68) Over the last 115 years, per capita energy use in the United States has more than tripled, with most of the increases occurring in the last 30 years.

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⊚ ⊚

true false

69) Energy conservation is a shift in economic activities to make the use of energy less costly. ⊚ true ⊚ false

70) An externality is a side effect from an exchange that affects someone other than the buyer and seller. ⊚ true ⊚ false

71)

Wind turbines are an alternative energy source that creates no negative externalities. ⊚ true ⊚ false

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Answer Key Test name: chapter 19 1) B 2) C 3) D 4) B 5) A 6) D 7) C 8) B 9) A 10) B 11) B 12) C 13) D 14) D 15) D 16) C 17) A 18) D 19) C 20) C 21) A 22) B 23) C 24) D 25) B 26) A Version 1

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27) C 28) A 29) B 30) C 31) C 32) A 33) D 34) B 35) A 36) B 37) D 38) C 39) A 40) B 41) A 42) B 43) C 44) B 45) A 46) A 47) C 48) B 49) B 50) A 51) D 52) A 53) C 54) D 55) C 62) TRUE Version 1

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63) FALSE 64) TRUE 65) FALSE 66) FALSE 67) TRUE 68) FALSE 69) FALSE 70) TRUE 71) FALSE

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