Economic Analysis
Exam Solutions
Course Introduction
Economic Analysis is a foundational course that introduces students to the core principles and tools used in examining how individuals, firms, and governments make decisions regarding the allocation of scarce resources. Emphasizing both microeconomic and macroeconomic perspectives, the course explores concepts such as supply and demand, market structures, consumer behavior, production, costs, and the impact of government policies. Through analytical methods and real-world applications, students learn how to critically assess economic issues, interpret data, and evaluate the outcomes of various economic policies and strategies in different contexts.
Recommended Textbook
Economics Principles and Policy 13th Edition by William J. Baumol
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Page 2
Chapter 1: What Is Economics
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Sample Questions
Q1) Government controls over market prices frequently "backfire."
A)True
B)False
Answer: True
Q2) Abstraction ignores many details in order to focus on the most important elements of a problem.
A)True
B)False
Answer: True
Q3) Economic theory is a necessity, not a luxury.This statement is true because theory
A)always leads to practical and useful policy.
B)can prevent depressions in the economy.
C)substitutes for vast amounts of data.
D)provides a structure for organizing and analyzing data.
E)always leads to accurate predictions.
Answer: D
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Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) What you mean by business cycles? What are their consequences?
Answer: Business cycles are periodic upswings and downswings in economic growth.One important consequence of these ups and downs in economic growth is that employment varies considerably from one year to the next.
Q2) The United States has approximately A)80,000 businesses.
B)5.1 million businesses.
C)12.5 million businesses.
D)28.million businesses.
Answer: D
Q3) Annual incomes of James, Jack, and Stanley are $30,000, $50,000, and $80,000 and their tax rates are 10%, 20%, and 30% respectively.Which tax structure is this an example of?
A)Proportional tax
B)Progressive tax
C)Regressive tax
D)Digressive tax
Answer: B
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4
Chapter 3: The Fundamental Economic Problem: Scarcity and
Choice
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Sample Questions
Q1) Suppose a farmer produces 50 bushels of corn and 10 bushels of peanuts.According to Table 3-1, the opportunity cost of 10 more bushels of peanuts is
A)8 bushels of corn.
B)42 bushels of corn.
C)50 bushels of corn.
D)impossible to determine from the information given.
Answer: A
Q2) The law of comparative advantage explains why
A)individuals choose specialized careers.
B)firms specialize in the production of certain goods.
C)nations develop strengths in certain industries.
D)All of the above are correct.
Answer: D
Q3) If the budget deficit was eliminated, the federal government would have more money than it could spend.
A)True
B)False
Answer: False
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Chapter 4: Supply and Demand: an Initial Look
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Sample Questions
Q1) The U.S.government banned cigarette advertising on radio and television after January, 1971.You would expect to find that after the ban took effect the price of magazine ads for
A)all goods fell.
B)only cigarettes fell.
C)all goods rose.
D)only cigarettes rose.
Q2) Which of the following is the correct way to describe equilibrium in a market?
A)At equilibrium, demand equals supply.
B)At equilibrium, quantity demanded equals quantity supplied.
C)At equilibrium, market forces are no longer at work.
D)Equilibrium is a tendency, a state of perpetual motion.
E)Equilibrium is the best combination of price and quantity.
Q3) The supply curve of books (which are produced using paper made from trees) will shift to the left in response to
A)a decline in college tuition.
B)an increase in home building.
C)an increase in the supply of lumberjacks.
D)an end to government regulations that limit timber harvesting in national forests.
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Page 6
Chapter 5: Consumer Choice: Individual and Market Demand
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Sample Questions
Q1) Why is it that the consumer can maximize total net utility only if the purchase quantity brings marginal utility as close as possible to equality with price?
Q2) Hal initially consumes the combination marked as A in Figure 5-15.After his income increases, Hal consumes combination B.We can conclude that Hal views
A)X as an inferior good and Y as a noninferior good.
B)X as a noninferior good and Y as an inferior good.
C)both X and Y as noninferior goods.
D)both X and Y as inferior goods.
Q3) Economic behavior is always rational.
A)True B)False
Q4) Total utility increases if one more unit of a product is purchased and marginal utility is positive.
A)True B)False
Q5) The budget line represents a consumer's preferences for a commodity.
A)True
B)False
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Chapter 6: Demand and Elasticity
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Sample Questions
Q1) The ratio of the percentage change in quantity demanded to the percentage change in income is known as the cross elasticity of demand.
A)True
B)False
Q2) If demand is unit elastic, then a 10 percent increase in the price will lead to a 10 percent increase in quantity demanded.
A)True
B)False
Q3) A demand curve to remain unit elastic along its entire length should
A)cross the X axis.
B)touch the X axis but not the Y axis.
C)never touch either the X or the Y axis.
D)touch the Y axis but not the X axis.
Q4) The price elasticity of demand measure is generally stated as an absolute value.
A)True B)False
Q5) Necessities such as food and shelter have inelastic demand. A)True B)False
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Chapter 7: Production, Inputs, and Cost: Building Blocks for Supply Analysis
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Sample Questions
Q1) Explain why the average cost curve for the long run differs from that for the short run.
Q2) Labor is available at a wage of $10.The last worker hired by Cal's Corn Farm added 20 ears of corn, which Cal has priced at four ears for $1.What advice would you give Cal?
Q3) Economies of scale is another term for
A)increasing returns to scale.
B)constant returns to scale.
C)increasing marginal physical productivity.
D)decreasing returns to scale.
Q4) In the short run the firm has at least one fixed input.
A)True B)False
Q5) The behavior of historical cost curves says nothing about the cost advantages or disadvantages of a single large firm. A)True
B)False
Q6) Production indifference curves generally have a positive slope.
A)True
B)False
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Chapter 8: Output, Price, and Profit: the Importance of Marginal Analysis
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Sample Questions
Q1) If the average cost of a product is $10 per unit and the price is $5, the firm is losing money.
A)True
B)False
Q2) The assumption that firms attempt to maximize profits will yield good predictions even if firms sometimes pursue other goals.
A)True
B)False
Q3) Figure 8-2 shows a manufacturer's total profit curve.To maximize her total profit, the manufacturer should produce ____ units of output.
A)10
B)12
C)16
D)18
Q4) When a firm's fixed cost rises, its total profit curve shifts
A)up at every output level.
B)down at every output level.
C)left at every profit level.
D)right at every profit level.
10
Chapter 9: Securities: Business Finance and the Economy:
the Tail That Wags the
Dog
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Sample Questions
Q1) What is true of stock exchanges in the United States?
A)There are two major stock exchanges in New York, several smaller regional exchanges across the nation, and over-the-counter trading via NASDAQ.
B)The New York Stock Exchange is the only stock exchange in the United States.
C)There are only two stock exchanges, NYSE and AMEX.
D)There are only three stock exchanges, NYSE, AMEX, and NASDAQ.
Q2) Double taxation of corporate earnings means
A)for individuals who get dividends on personal income, tax rates are twice as high as for wage earners.
B)stockholders pay personal income taxes and corporation taxes on profits.
C)stockholders don't get the plowback but still pay taxes on it.
D)the corporation tax raises stock prices so individuals also pay a capital gains tax in addition to a tax on dividends.
Q3) The primary source of corporate financing in the United States is
A)the sale of stock.
B)the sale of bonds.
C)retained earnings.
D)lending from commercial banks.
Q4) Explain why bond prices and interest rates are inversely related.
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Chapter 10: The Firm and the Industry Under Perfect Competition
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Sample Questions
Q1) When new farmers enter the wheat industry, the equilibrium price of wheat
A)always falls.
B)falls only if existing firms gang up on the entrant.
C)falls only if existing firms are earning no economic profit.
D)falls only if the new firm is more efficient than existing firms.
Q2) In Figure 10-5, points which lie on the firm's short-run supply curve are
A)A, B, C.
B)C, D, H.
C)F, E, G.
D)A, C, H.
Q3) Figure 10-9 shows supply and demand conditions in a perfectly competitive industry and for a firm in that industry.Assume the industry initially has supply curve S and demand curve D
)If demand shifts to D , then in the short run price will
A)rise to A.
B)rise to some level between A and B.
C)remain at B.
D)fall to C.
Q4) Why doesn't a perfectly competitive firm charge a price slightly higher than the industry price in order to earn extra profit?
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Chapter 11: Monopoly
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Sample Questions
Q1) Which of the following is not potentially a barrier to entry into the widget market?
A)patent protection on the design of widgets
B)high prices for widgets
C)government licensing of widget producers
D)massive advertising by existing widget producers
Q2) Price discrimination
A)may lead to greater output.
B)always leads to a reduction of output.
C)leads to lower profits for the firm.
D)causes firms to operate at a higher cost.
Q3) Monopolies are always large firms with great economies of scale.
A)True
B)False
Q4) Which of the following observations concerning price discrimination is true?
A)It only occurs in monopolies.
B)It is easier for a monopolist than for a firm that is affected by competition.
C)It means that sales to all customers are equally profitable.
D)It is considered as a bad business practice under all circumstance.
Q5) Explain why a monopolist does not have a supply curve.
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Chapter 12: Between Competition and Monopoly
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Sample Questions
Q1) To maximize sales revenue, an oligopoly will expand output until the price is zero.
A)True
B)False
Q2) Which oligopoly model leads to price rigidity?
Graphically show why.
Q3) The goal of the manager of a firm is sales maximization.The firm will produce
A)the output level at which MR = 0.
B)as much output as it can.
C)the same output that it would if the goal was profit maximization.
D)the same output that it would if the goal was cost minimization.
Q4) At any given airport, the airlines hold long-term leases for passenger loading gates.New gates cannot be added without approval of the airlines.Frequent flier programs are also common in the industry.It is, therefore, more difficult for a new airline to enter a given airport (market).Such factors:(i)are called barriers to entry.(ii)tend to decrease the contestability of the air travel market.
A)i and ii
B)i not ii
C)ii not i
D)neither i nor ii
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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Sample Questions
Q1) The Antitrust Division of the Department of Justice carefully scrutinizes mergers.Why?
Q2) Economists cite some beneficial effects of price discrimination.What are these benefits and how do the antitrust laws treat price discrimination?
Q3) "Anticompetitive practices" are actions by a powerful firm that:
A)threaten to destroy competitors
B)force competitors to compete less vigorously
C)prevent the entry of new rivals.
D)all of these are true.
Q4) Economies of scope are savings acquired by
A)producing many goods simultaneously.
B)producing enough of one good to reach the minimum efficient scale of production.
C)selling one product at a loss but selling other products at a profit.
D)decreasing the regulation of an industry.
Q5) If there are strong economies of scale and scope, then society
A)will not be able to prevent overt collusion.
B)will benefit from establishing a cartel.
C)cannot benefit from regulation of a natural monopoly.
D)will not be able to preserve free competition.
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Chapter 14: The Case for Free Markets: the Price System
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Sample Questions
Q1) Free markets produce relatively high levels of efficiency but low rates of growth.
A)True
B)False
Q2) For any combination or outputs, there is an efficient allocation of income.
A)True
B)False
Q3) Which type of economic system will produce the highest degree of allocative efficiency?
A)a perfectly competitive market system
B)a purely command economic system
C)a market system with limited price controls and price ceilings
D)a command system with limited market activity for non-essentials
Q4) Keeping landing fees low at airports during the "peak" hours
A)perpetuates congestion during those hours.
B)is politically unpopular.
C)contributes to efficient allocation of airport facilities.
D)would lessen the problem of delayed flight landings.
Q5) Is an efficient market allocation fair?
Explain.
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Chapter 15: The Shortcomings of Free Markets
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Sample Questions
Q1) Rent seeking is the term given
A)to an attempt by firms to create a profitable monopoly even though resources may be wasted in the process.
B)to filing a lawsuit, which wastes resources, in the hope of obtaining monetary gain or a strategic market position.
C)to attempts by firms to obtain earnings without contributing to production.
D)All of the above are correct.
Q2) Discuss the role of trust as a critical piece of any principal-agent situation.In particular, what role did trust play in the recent stock market scandals?
Q3) Often when consumers enter the used car market to make a purchase,
A)they know little about what they are purchasing.
B)the motto "let the buyer beware" applies.
C)the information they gain may not be perfect, but may be what economists call "optimally imperfect."
D)All of the above are correct.
Q4) There is no way that externalities can be corrected.
A)True
B)False
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Page 17
Chapter 16: Externalities, the Environment, and Natural Resources
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Sample Questions
Q1) Direct controls have a clear advantage where
A)an emission is so dangerous that it is prohibited altogether.
B)a sudden change in circumstances calls for prompt and substantial change in conduct.
C)effective and dependable metering devices have not been invented or are prohibitively costly to install and operate.
D)All of the above create an advantage.
Q2) The share of the burden of an emissions tax on output borne by the consumer of the polluting output will rise as
A)the tax rises.
B)demand elasticity falls.
C)demand elasticity rises.
D)the tax falls.
Q3) Wastes impose costs upon the community if they are
A)solid.
B)liquid.
C)gaseous.
D)any of the above.
Q4) Why is it misleading to argue that emissions permits are a "license to pollute"?
Page 18
Q5) What are the advantages of a tax system for pollution control?
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Chapter 17: Taxation and Resource Allocation
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Sample Questions
Q1) Payroll taxes are used to collect revenue for the Social Security program.
A)True
B)False
Q2) The federal income tax began in the United States with the
A)Morrill Act of 1862.
B)addition of the Bill of Rights to the Constitution in 1791.
C)passage of the 16th Amendment to the Constitution in 1913.
D)New Deal legislation of the 1930s.
Q3) Existing loopholes erode the progressivity of the U.S.tax system.
A)True
B)False
Q4) Figure 18-2 shows the widget market before and after an excise tax is imposed.After the tax is imposed, the amount that a firm keeps for itself from the sale of each widget is
A)$95
B)$100
C)$120
D)$125
Q5) Explain the excess burden of a tax on luxury yachts.
Q6) What are tax loopholes and what are their effects?
Page 19
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Chapter 18: Pricing the Factors of Production
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Sample Questions
Q1) The demand curve for capital is
A)its entire marginal physical product curve.
B)the downward-sloping portion of its marginal physical product curve.
C)its entire marginal revenue product curve.
D)the downward-sloping portion of its marginal revenue product curve.
Q2) The interest rate is the A)rate of investment.
B)price of credit.
C)rate of return on investment in capital goods.
D)expected rate of inflation.
Q3) The rate of interest is the price at which money is borrowed and loaned.
A)True
B)False
Q4) Suppose that the rate of interest increases.What will happen to the discounted present value of an investment?
A)It will increase.
B)It will decrease.
C)It will remain unchanged.
D)It depends on the magnitude of the change.
Q5) Explain how to derive the demand for an input.
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Chapter 19: Labor and Entrepreneurship: the Human Inputs
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Sample Questions
Q1) With a monopsony in the labor market, a union can often raise wages and the number of workers hired.
A)True
B)False
Q2) The real minimum wage has increased significantly over the last 40 years.
A)True
B)False
Q3) Among possible union strategies, the one that can both raise wages and add to employment is
A)restricting the supply of workers.
B)raising the demand curve for the product or for labor.
C)fixing the wage.
D)striking frequently.
Q4) Less than 13 percent of U.S.workers belong to unions.
A)True
B)False
Q5) Firms use collective bargaining to set higher market prices for their products. A)True
B)False
Q6) Distinguish between invention and innovation.
Page 21
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Chapter 20: Poverty, Inequality, and Discrimination
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Sample Questions
Q1) The relative concept of poverty is based on how far a family falls behind the A)average family income.
B)top 20 percent of families.
C)minimum in wages.
D)any of the above.
Q2) Which of the following best describes compensating wage differentials?
A)Some jobs are more difficult than others, and the pay for them reflects this.
B)Some jobs require more training than others, and the pay for them reflects this.
C)Some jobs require more experience than others, and the pay for them reflects this.
D)Some jobs require unique abilities, and the pay for them reflects this.
Q3) In Figure 21-1, the optimal amount of equality lies only between which points?
A)A and B
B)C and D
C)D and E
D)B and E
Q4) What are the two important programs in practice in America that strongly resemble a negative income tax?
Q5) How does the idea of a leaky bucket relate to the study of income distribution?
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Chapter 21: Is Useconomic Leadership Threatened
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Q1) Debt grew faster than GDP during and after the recent Great Recession, when the government had to spend more (as for unemployment benefits), while its tax revenue shrank.
A)True
B)False
Q2) According to Piketty, economic history is the story of a race between:
A)capital accumulation
B)population growth
C)technological progress
D)all of the above
E)a and c only
Q3) According to economist Schumpeter, the first step in entrepreneurial growth is:
A)little competition
B)monopoly power
C)zero economic profits
D)creative destruction
Q4) One benefit of U.S.society that encouraged entrepreneurship was the inflow of capable immigrants.
A)True
B)False
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Chapter 22: An Introduction to Macroeconomics
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Q1) A good produced in 2009 and held in inventory until it is sold in 2010 would be included in which measure of GDP?
A)Half the value in 2009 and half the value in 2010
B)In 2010 GDP
C)In both 2009 and 2010 GDP
D)In 2009 GDP
Q2) The Great Depression ended in the United States when
A)the New Deal reforms were initiated by President Roosevelt.
B)deficit spending ended in 1937.
C)the United States returned to the gold standard in 1940.
D)the United States began to mobilize for war in the early 1940s.
E)the German economy suffered hyperinflation in the 1920s.
Q3) Economist John Maynard Keynes wrote that the economy naturally gravitates toward smooth growth and high levels of employment.
A)True
B)False
Q4) Gross Domestic Product includes the sale of intermediate goods and services.
A)True
B)False
Q5) Describe some of the steps used to combat inflation.What are their side-effects?
Page 24
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Chapter 23: The Goals of Macroeconomic Policy
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Q1) During periods of high inflation, such as the 1979-1980 period, the existence of usury laws may cause
A)nominal rates of interest to be above real rates.
B)negative nominal rates of interest.
C)negative real rates of interest.
D)real rates of interest to be above nominal rates.
Q2) To measure how productive workers in the economy are, the best measure to use would be
A)real GDP.
B)GDP divided by the population.
C)GDP divided by the nation's capital stock.
D)GDP divided by hours worked.
Q3) Variable inflation rates may be more costly socially than low but predictable rates of inflation.
A)True
B)False
Q4) Does the existence of unemployment insurance eliminate the economic costs of unemployment?
Q5) How is the unemployment rate calculated?
Describe the three principal types of unemployment.
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Chapter 24: Economic Growth: Theory and Policy
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Q1) Because business firms often finance new investments with borrowed money, a key determinant of investment spending is
A)tax rates.
B)the price level.
C)the rate of inflation.
D)the real interest rate.
Q2) In 2010, in order to stimulate capital investment, President Obama proposed
A)a reduction in real interest rates.
B)an increase in the money supply.
C)increased write-offs for businesses purchasing equipment.
D)an increase in the tax on capital gains.
Q3) The distinction between productivity levels and productivity growth rates is theoretical, and has no practical application.
A)True
B)False
Q4) Draw a production function and illustrate the effects of capital investment and technological improvement on labor productivity.
Q5) Describe the three pillars of productivity growth.
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Chapter 25: Aggregate Demand and the Powerful Consumer
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Sample Questions
Q1) Historical data depicted on a scatter diagram show that consumer spending and disposable income
A)converge as income grows.
B)generally move together.
C)diverge as income grows.
D)show no clear relationship.
Q2) When the price level falls, consumers may feel wealthier and the consumption function will shift upward.
A)True
B)False
Q3) In Figure 8-2, which of the following moves can be explained by a decrease in the price level?
A)A to B
B)A to C
C)A to D
D)A to E
Q4) Consumer spending is an injection in the circular flow of income and spending.
A)True
B)False
Q5) Discuss the major determinants of net exports.
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Chapter 26: Demand-Side Equilibrium: Unemployment or Inflation
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Q1) If an increase in investment of $100 billion generates an increase of $500 billion in real GDP, the multiplier is A)20.
B)50.
C)1.50.
D)5.00.
Q2) If the expenditure schedule lies above the level of potential GDP, then there is a(n)
A)recessionary gap.
B)precautionary gap.
C)deflationary gap.
D)inflationary gap.
Q3) The multiplier can be expressed as the ratio of the change in Y over the change in I.
A)True
B)False
Q4) What is a multiplier? How does the multiplier effect occur?
Q5) Leakages from the circular flow include saving and imports.
A)True
B)False
28
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Chapter 27: Bringing in the Supply Side: Unemployment and Inflation
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Sample Questions
Q1) Figure 10-9 describes which of the following periods in the U.S.?
A)1930s
B)1973-1975
C)late 1990s
D)2007-2009
Q2) The 2002-2008 OPEC price increases caused by conflict in the Middle East caused the aggregate
A)demand curve to shift outward.
B)demand curve to shift inward.
C)supply curve to shift outward.
D)supply curve to shift inward.
Q3) The slope of the aggregate supply curve increases as output increases because
A)the cost of resource-use increases as potential is reached.
B)consumers are willing to pay more as output expands.
C)firms substitute capital for labor as prices increase.
D)firms substitute capital for labor as capacity is reached.
Q4) A recessionary gap exists when aggregate demand is above the full employment level of output.
A)True
B)False
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Chapter 28: Managing Aggregate Demand: Fiscal Policy
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Sample Questions
Q1) Congress is debating whether to raise taxes by $100 billion or decrease spending by $100 billion in order to eliminate a budget deficit.Which action will have the larger effect on equilibrium GDP?
A)the increase in taxes
B)the decrease in spending
C)the effects will be equal
D)not possible to determine without knowing the multiplier
Q2) An increase in income taxes was part of President George W.Bush's plan in 2001 and 2008 to increase aggregate demand.
A)True
B)False
Q3) Compared to an economy's self-correcting mechanism, active contractionary fiscal policy will
A)work more slowly and calmly.
B)work more quickly.
C)have less deflationary effects.
D)have a smaller effect on real GDP.
Q4) Explain how a "conservative" and a "liberal" might differ in the types of policies they advocate to counteract a recessionary gap.
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Chapter 29: Money and the Banking System
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Sample Questions
Q1) In the modern U.S.economy, most transactions are made with A)cash.
B)gold and silver.
C)credit cards.
D)checking deposits.
Q2) The largest portion of the M1 money supply consists of
A)coins in circulation.
B)paper currency in circulation.
C)savings deposits at credit unions.
D)checkable deposits.
Q3) Banking under a system of fractional reserves is a(n)
A)inherently risky business that is unsafe regardless of bank management.
B)inherently risky business that is relatively safe under prudent management.
C)fairly safe business unless management is irresponsible.
D)fairly safe business with no unusual risks.
Q4) One conceptual problem in assigning assets to M1, M2, etc.is
A)distinguishing money from "near monies."
B)the problem of measuring asset size.
C)the need to agree on a unit of account.
D)the different size of financial assets.
Page 31
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Chapter 30: Monetary Policy: Conventional and
Unconventional
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Sample Questions
Q1) An increase in the average price level will lead to a decrease in the demand for reserves.
A)True
B)False
Q2) Assume the required reserve ratio is 10 percent and the FOMC orders an open market sale of $50 million in government securities from member banks.If the oversimplified money multiplier is assumed, then the money supply will
A)increase by $500 million.
B)increase by $100 million.
C)decrease by $100 million.
D)decrease by $500 million.
Q3) The principal difference between income and money is that income is a ____ and money is a ____.
A)schedule, curve
B)point, line
C)stock, flow
D)flow, stock
Q4) Describe the origins of the Fed and the arguments about the independence of the Fed.
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Chapter 31: He Financial Crisis and the Great Recession
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Q1) Mortgage-backed securities became a significant issue becauseI.housing prices fell across all regions.II.these securities were not as widely distributed as previously thought.
A)I above only
B)II above only
C)both I and II above
D)neither I nor II above
Q2) The central idea behind the Troubled Asset Relief Program was for the Treasury to sell mortgage-backed securities to interested investors, wait for prices to increase, and then buy these securities back for a profit.
A)True
B)False
Q3) Subprime mortgages frequently featured small or zero down payments.
A)True
B)False
Q4) The intended use of TARP funds was to
A)support the FDIC.
B)increase consumers' disposable income.
C)fund "shovel-ready" projects.
D)purchase unwanted securities.
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Chapter 32: The Debate Over Monetary and Fiscal Policy
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Q1) Which one of the following will cause velocity to increase?
A)a decrease in interest rates
B)increasing the efficiency of the payments system
C)switching from weekly to monthly payroll checks
D)an increase in the money supply
Q2) The alternatives of the active versus passive view of stabilization policy are usually expressed as
A)fiscal versus monetary policy.
B)internal versus external.
C)present value versus future value.
D)discretion versus rules.
Q3) The quantity theory of money assumes that
A)velocity varies inversely with interest rates.
B)if velocity equals six, the Fed can increase nominal GDP by 30 percent if it increases the money supply by 5 percent.
C)changes in the money supply affect output but not prices.
D)changes in velocity are so small that velocity can be considered constant.
Q4) Both M1 and M2 are monetary values much larger than nominal GDP.
A)True
B)False
Page 34
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Chapter 33: Budget Deficits in the Short and Long Run
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Sample Questions
Q1) The U.S.national debt at the end of 2014 was about $30 trillion.
A)True
B)False
Q2) When the economy has substantial additional saving, deficit spending will have a large "crowding out" effect.
A)True
B)False
Q3) The decisions on the part of the government to increase spending by $5 billion will have the largest impact on aggregate demand when the spending is financed by the sale of bonds to
A)the member banks.
B)the public.
C)the Fed. D)foreigners.
Q4) Deficit is to debt as
A)responsible is to irresponsible.
B)increase is to decrease.
C)flow is to stock.
D)important is to unimportant.
Q5) Differentiate between "off-budget" deficit and the "on-budget" deficit.
Page 35
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Chapter 34: The Trade-Off Between Inflation and Unemployment
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Q1) When the aggregate supply curve shifts adversely, what happens to the relationship shown in the Phillips curve?
A)It is reinforced, and made more applicable for policy.
B)It is destroyed, and no longer applies for policy.
C)It is unchanged, although the curve becomes less steep.
D)It is unchanged, although the curve shifts inward and to the left.
Q2) The U.S.economy in the 1990s benefited from an aggregate supply curve shifting outward.
A)True
B)False
Q3) If workers always see inflation coming, and if they demand wage increases in advance so that inflation does not erode real wages, then the economy's aggregate supply curve on the AD-AS diagram will
A)be a vertical line corresponding to potential GDP.
B)be a horizontal line corresponding to potential GDP.
C)slope downward.
D)slope upward.
Q4) An economy eliminates a recessionary gap by reducing wages and prices.
A)True
B)False
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Chapter 35: International Trade and Comparative Advantage
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Q1) After the American Civil War, many prominent Southerners lamented the fact that the South "overproduced" cotton and "underproduced" food.In fact, the South did import a very large percentage of its food.Nevertheless, rather than reduce cotton production and grow more food, Southern farmers did the opposite because A)they were irrational and distraught over the loss of slavery.
B)the South had a comparative advantage in cotton production.
C)the North had a comparative advantage in cotton production. D)corn was absolutely cheaper to produce in the North.
Q2) The infant industry argument is valid when
A)a new industry is suffering financial losses.
B)a new industry is less efficient than foreign competitors.
C)the industry's prospective gains are sufficient to repay the social losses incurred while it is being protected.
D)the industry is not likely to be profitable in the future.
Q3) An import quota will ordinarily raise the price of the good in the importing country.
A)True
B)False
Q4) Why is comparative advantage rather than absolute advantage the basis for trade?
Page 37
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Chapter 36: The International Monetary System: Order or Disorder
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Q1) A country running a balance of payments surplus in a fixed exchange rate system may have to ____ its currency.
A)depreciate
B)devalue
C)revalue
D)appreciate
Q2) The currency of the European Union, the euro, was established as part of the Bretton Woods agreements.
A)True
B)False
Q3) To "cure" their balance of payments deficits without altering exchange rates, Southeast Asian countries in 1997 were forced to create
A)more inflation.
B)recessions.
C)faster economic growth.
D)money at an accelerated rate.
Q4) Explain the role of the International Monetary Fund.Discuss the criticisms leveled against this agency in the wake of economic crises of the 1990s.
Page 38
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Chapter 37: Exchange Rates and the Macroeconomy
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Sample Questions
Q1) An expansionary fiscal policy makes the exchange rate appreciate.
A)True
B)False
Q2) In the mid-1990s, real interest rates fell in the United States.This was the result of budget deficit
A)increases and tighter monetary policy.
B)increases and looser monetary policy.
C)reductions and looser monetary policy.
D)reductions and tighter monetary policy.
Q3) International capital flows tend to strengthen the effects of interest rate changes on aggregate demand.
A)True
B)False
Q4) The government budget deficit must be equal to the surplus
A)of saving over investment.
B)in the current account in international trade.
C)of saving over consumption.
D)of saving over investment plus the trade deficit.
Q5) Explain how exchange rate changes affect aggregate demand.
Q6) Discuss the opposing points of view on U.S.trade deficit.
Page 39
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