Principles of Economics
Final Test Solutions
Course Introduction
Principles of Economics introduces students to the fundamental concepts and theories that underpin microeconomics and macroeconomics. The course explores how individuals, firms, and governments make choices regarding resource allocation, production, and consumption, under conditions of scarcity. Key topics include supply and demand analysis, market structures, opportunity cost, elasticity, economic efficiency, and the role of government policy. The curriculum also examines broader economic indicators, such as GDP, inflation, and unemployment, providing students with an understanding of the forces that shape national and global economies. Through real-world examples, students will develop critical thinking skills essential for analyzing economic issues and making informed decisions.
Recommended Textbook
Principles of Economics 4th Edition by N. Gregory Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) If the average cost of transporting a passenger on the train from Chicago to St.Louis is $75,it would be irrational for the railroad to allow any passenger to ride for less than $75.
A)True
B)False
Answer: False
Q2) Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
A)There is no such thing as a free lunch.
B)People buy more when prices are low than when prices are high.
C)No matter how much people earn, they tend to spend more than they earn.
D)Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.
Answer: D
Q3) The government can potentially improve market outcomes if market inequalities or market failure exists.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) A duty of economists at the Department of Labor is to
A)analyze data on workers.
B)schedule federal holidays.
C)enforce the nation's antitrust laws.
D)All of the above are correct.
Answer: A
Q2) Refer to Figure 2-9.Cups of coffee per day and the hours that someone can go without sleep appear to have
A)a positive correlation.
B)a negative correlation.
C)a random correlation.
D)no correlation.
Answer: A
Q3) Macroeconomics is the study of A)individual decisionmakers.
B)international trade.
C)economy-wide phenomena.
D)markets for large products.
Answer: C
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Page 4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Figure 3-5.The fact that the line slopes downward reflects the fact that
A)for Country A, it is more costly to produce a car than it is to produce a bushel of corn.
B)Country A will produce more cars and fewer bushels of corn as time goes by.
C)Country A faces a tradeoff between producing cars and producing corn.
D)Country A should specialize in producing corn.
Answer: C
Q2) Shannon bakes cookies and Justin grows vegetables.In which of the following cases is it impossible for both Shannon and Justin to benefit from trade?
A)Shannon does not like vegetables and Justin does not like cookies.
B)Shannon is better than Justin at baking cookies and Justin is better than Shannon at growing vegetables.
C)Justin is better than Shannon at baking cookies and at growing vegetables.
D)All of the above are correct.
Answer: A
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) Suppose you like to make,from scratch,pies filled with banana cream and vanilla pudding.You notice that the price of bananas has increased.How would this price increase affect your demand for vanilla pudding?
A)It would decrease.
B)It would increase.
C)It would be unaffected.
D)There is insufficient information given to answer the question.
Q2) When there is a shortage of 100 units of a particular good,
A)the law of supply predicts upward pressure on the price of the good from its current level.
B)the law of demand predicts downward pressure on the price of the good from its current level.
C)we say that there is a scarcity of 100 units of the good. D)None of the above is correct.
Q3) A reduction in an input price will cause a change in quantity supplied,but not a change in supply.
A)True
B)False
Q4) The behavior of buyers and sellers drives markets toward equilibrium.
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) When demand is perfectly inelastic,the demand curve will be
A)negatively sloped, because buyers decrease their purchases when the price rises.
B)vertical, because buyers purchase the same amount as before whenever the price rises or falls.
C)positively sloped, because buyers respond by increasing the market quantity demanded of the good when price rises.
D)positively sloped, because buyers respond by increasing their total expenditure on the good when price rises.
Q2) For a good that is a luxury,demand
A)tends to be inelastic.
B)tends to be elastic.
C)has unit elasticity.
D)cannot be represented by a demand curve in the usual way.
Q3) The midpoint method is used to compute elasticity because it
A)automatically computes a positive number instead of a negative number.
B)results in an elasticity that is the same as the slope of the demand curve.
C)gives the same answer regardless of the direction of change.
D)automatically rounds quantities to the nearest whole unit.
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Chapter 6: Supply, demand, and Government Policies
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Sample Questions
Q1) The incidence of a tax depends on whether the tax is levied on buyers or sellers.
A)True
B)False
Q2) The minimum wage
A)alters the quantity of labor demanded, but not the quantity of labor supplied.
B)is binding for all workers, regardless of their levels of experience and skills.
C)has its greatest impact on the market for teenage labor.
D)All of the above are correct.
Q3) Which of the following would be the least likely result of a price ceiling imposed in the market for rental cars?
A)an accumulation of dirt in the interior of rental cars
B)poor engine maintenance in rental cars
C)free gasoline given to people as an incentive to a rent a car
D)slow replacement of old rental cars with new ones
Q4) Using a supply-demand diagram,show a labor market with a binding minimum wage.Now,use the diagram to show those who are helped by the minimum wage,and those who are hurt by the minimum wage.
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8
Chapter 7: Consumers, producers, and the Efficiency of Markets
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Sample Questions
Q1) Total surplus in a market is the total area
A)below the demand curve and above the price.
B)below price and up to the point of equilibrium.
C)below the demand curve and above the supply curve, up to the equilibrium quantity.
D)below the demand curve and above the horizontal axis, up to the equilibrium quantity.
Q2) We can say that the allocation of resources is efficient if
A)producer surplus is maximized.
B)consumer surplus is maximized.
C)total surplus is maximized.
D)sellers' costs are minimized.
Q3) Economists tend to see ticket scalping as
A)a way for a few to profit without producing anything of value.
B)an inequitable interference in the orderly process of ticket distribution.
C)a way of increasing the efficiency of ticket distribution.
D)an unproductive activity which should be made illegal everywhere.
Q4) Total surplus in a market is consumer surplus minus producer surplus.
A)True
B)False
Page 9
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Chapter 8: Application: the Costs of Taxation
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Sample Questions
Q1) Refer to Figure 8-6.Before the tax is imposed,
A)the equilibrium price is $16 and the equilibrium quantity is 15.
B)the equilibrium price is $12 and the equilibrium quantity is 25.
C)the equilibrium price is $12 and the equilibrium quantity is 25
D)the equilibrium price is $8 and the equilibrium quantity is 15.
Q2) Refer to Figure 8-6.Which of the following statements summarizes the incidence of the tax?
A)For each unit of the good that is sold, buyers bear one-half of the tax burden and sellers bear one-half of the tax burden.
B)For each unit of the good that is sold, buyers bear one-third of the tax burden and sellers bear two-thirds of the tax burden.
C)For each unit of the good that is sold, buyers bear one-fourth of the tax burden and sellers bear three-fourths of the tax burden.
D)For each unit of the good that is sold, buyers bear three-fourths of the tax burden and sellers bear one-fourth of the tax burden.
Q3) A tax raises the price received by sellers and lowers the price paid by buyers.
A)True
B)False
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Chapter 9: Application: International Trade
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Sample Questions
Q1) Aquilonia has decided to end its policy of not trading with the rest of the world.When it ends its trade restrictions,it discovers that it is importing incense,exporting steel,and neither importing nor exporting rugs.We can conclude that producer surplus in Aquilonia is now
A)higher in the steel market, lower in the incense market, and unchanged in the rug market.
B)higher in the incense and steel markets, and unchanged in the rug market.
C)lower in the incense and rug markets, and higher in the steel market.
D)lower in the incense and steel markets, and the same in the rug market.
Q2) When a country allows trade and becomes an exporter of a good,
A)consumer surplus and producer surplus both increase.
B)consumer surplus and producer surplus both decrease.
C)consumer surplus increases and producer surplus decreases.
D)consumer surplus decreases and producer surplus increases.
Q3) If Argentina exports oranges to the rest of the world,Argentina's producers of oranges are worse off,and Argentina's consumers of oranges are better off,as a result of trade.
A)True
B)False
Q4) How does an import quota differ from an equivalent tariff?
Page 11
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Chapter 10: Externalities
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Sample Questions
Q1) In the absence of externalities,the "invisible hand" leads a market to maximize
A)producer profit from that market.
B)total benefit to society from that market.
C)both equity and efficiency in that market.
D)output of goods or services in that market.
Q2) Refer to Figure 10-3.At the private market outcome,the equilibrium price will be
A)P .
B)P .
C)P .
D)None of the above is correct.
Q3) Some environmentalists argue that we should protect the environment as much as possible,regardless of cost.Which of the following is not a likely outcome of pursuing such a course of action?
A)lower levels of nutrition, health care, and housing
B)a lower standard of living
C)slowing or reversing technological advancement
D)the elimination of all pollution
Q4) Using a supply and demand diagram,demonstrate how a positive externality leads to market inefficiency.How might the government help to eliminate this inefficiency?
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) A lighthouse is typically considered to be a public good because
A)the owner of the lighthouse is able to exclude beneficiaries from enjoying the lighthouse.
B)there is rarely another lighthouse nearby to provide competition.
C)a nearby port authority cannot avoid paying fees to the lighthouse owner.
D)all passing ships are able to enjoy the benefits of the lighthouse without paying.
Q2) The Ogallala aquifer is a large underground pool of fresh water under several western states in the United States.Any farmer with land above the aquifer can at present pump water out of it.We might expect that
A)over time, the aquifer is likely to be overused.
B)each farmer has a sufficient incentive to conserve the water.
C)state governments have an incentive to insure that their farmers do not overuse the water.
D)resources would be used more efficiently if the government paid for the pumps farmers use to get the water.
Q3) Why do wild salmon populations face the threat of extinction while goldfish populations are in no such danger?
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Page 13
Chapter 12: The Design of the Tax System
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Sample Questions
Q1) Antipoverty programs funded by taxes on the wealthy are sometimes advocated on the basis of the benefits principle.
A)True
B)False
Q2) One of the most difficult issues associated with trying to structure a tax policy to satisfy horizontal equity is determining
A)whether or not a taxpayer falls within the highest income quintile.
B)the level of transfer payments made to low-income groups.
C)the source of income for taxpayers.
D)what differences are relevant to a family's ability to pay.
Q3) Part of the deadweight loss from taxing labor earnings is that people
A)will work more.
B)will be reluctant to hire accountants to file their tax returns.
C)with low tax liabilities will universally be worse off than under some other tax policy.
D)will work less.
Q4) The U.S.federal government collects about one-half of the taxes in our economy.
A)True
B)False
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Page 14
Chapter 13: The Costs of Production
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Sample Questions
Q1) Refer to Figure 13-6.Which of the curves is most likely to represent average variable cost?
A)A
B)B
C)C
D)D
Q2) A key difference between accountants and economists is their different treatment of the cost of capital.Does this cause an accountant's estimate of total costs to be higher or lower than an economist's estimate? Explain.
Q3) Refer to Table 13-6.What is the total cost associated with making 890 boxes of premium chocolates per week?
A)$1,250
B)$1,325
C)$1,400
D)$1,575
Q4) The use of specialization to achieve economies of scale is one reason modern societies are as prosperous as they are.
A)True
B)False
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Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) Refer to Table 14-4.What is the marginal cost of the 8th unit?
A)$0
B)$68
C)$120
D)$242
Q2) To answer the question,"How much revenue does the farm receive for the typical gallon of milk?" a dairy farmer must be able to calculate sunk cost.
A)True
B)False
Q3) When a profit-maximizing firm in a competitive market has zero economic profit,accounting profit
A)is negative (accounting losses).
B)is positive.
C)is also zero.
D)could be positive, negative or zero.
Q4) When a profit-maximizing firm in a competitive market experiences rising prices,it will respond with an increase in production.
A)True
B)False
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Chapter 15: Monopoly
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Sample Questions
Q1) Refer to Figure 15-3.A profit-maximizing monopoly's profit is equal to
A)P × Q .
B)P × Q .
C)(P - P ) × Q .
D)(P - P ) × Q .
Q2) An airline knows that there are two types of travelers: business travelers and vacationers.For a particular flight,there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket.There are 150 seats available on the plane.Suppose the cost to the airline of providing the flight is $20,000,which includes the cost of the pilots,flight attendants,fuel,etc.How much additional profit can the firm earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket?
A)$15,000
B)$25,000
C)$40,000
D)$70,000
Q3) Goods that do not have close substitutes have downward-sloping demand curves.
A)True
B)False
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Page 17
Chapter 16: Oligopoly
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Sample Questions
Q1) The Sherman Act made cooperative agreements
A)unenforceable outside of established judicial review processes.
B)enforceable with proper judicial review.
C)a criminal conspiracy.
D)a crime, but did not give direction on possible penalties.
Q2) Refer to Scenario 16-1.As long as production levels are less than the Nash equilibrium level,both Irun and Urun have the individual incentive to
A)hold production levels constant.
B)decrease production.
C)increase production.
D)increase price.
Q3) The practice of selling a product to retailers and requiring the retailers to charge a specific price for the product is called
A)fixed retail pricing.
B)resale price maintenance.
C)cost plus pricing.
D)unfair trade.
Q4) Briefly contrast the difference between equilibrium market outcomes in a monopoly,oligopoly,and perfect competition.
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Chapter 17: Monopolistic Competition
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Sample Questions
Q1) In a monopolistically competitive market,
A)strategic interactions among the firms are very important.
B)the threat of entry by new firms is not an important consideration.
C)the attainment of a Nash equilibrium is an important objective.
D)firms may enter even though they will earn zero economic profit in the long run.
Q2) A study of the market for optometrists' services in the 1960s showed that
A)all states in the United States prohibited advertising by optometrists.
B)almost all professional optometrists opposed legal restrictions on their rights to advertise.
C)the average price of eyeglasses would be reduced by the removal of legal restrictions on advertising by optometrists.
D)advertising on eyeglasses limited competition among optometrists.
Q3) In a small college town,four microbreweries have opened in the last two years.Demonstrate the effect of these new market entrants on demand for existing firms (microbreweries)that already served this market.Assume that the local community now places a moratorium on new liquor licenses for microbreweries.How will this moratorium affect the long-run profitability of incumbent firms?
Q4) List five goods that are likely sold in a monopolistically competitive market.
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Page 19
Chapter 18: The Markets for the Factors of Production
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Sample Questions
Q1) Consider the market for university economics professors.Consider the following events. Event 1: Because of the dot.com bust of 2000 and the recession in the U.S.economy,the opportunity cost of going to graduate school to get a Ph.D.in economics - which one needs to become a professor of economics - decreased for many individuals.It generally takes about five years to get a Ph.D.in economics.
Event 2: There is an increasing number of students in primary and secondary U.S.schools.In 2005,the number of students entering college will have increased dramatically.Because of this,the output price of university economics professors' services will increase.
Holding all else constant,because of these two events,what likely will happen to the equilibrium quantity of university economics professors in 2006?
A)The equilibrium quantity will increase.
B)The equilibrium quantity will decrease.
C)The equilibrium quantity will not change.
D)It is not possible to determine what will happen to the equilibrium quantity.
Q2) Using the theory of wage determination,explain why wages in developing countries are typically quite low.
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Page 20
Chapter 19: Earnings and Discrimination
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Sample Questions
Q1) A signaling theory of education suggests that
A)people who attend college are more likely to capture a "beauty premium."
B)education is a signal of social status.
C)education does not necessarily increase productivity.
D)education will sever the link between innate ability and compensation.
Q2) The human-capital theory of education maintains that workers who complete specific levels of education enhance their productivity through education.
A)True
B)False
Q3) Which of the following is the most important source of human capital?
A)education
B)effort
C)chance
D)physical strength
Q4) Which of the following statements represents the idea behind signaling in education?
A)Education can turn an unproductive person into a productive person.
B)Education increases the marginal productivity of naturally productive workers.
C)The more naturally productive people are more inclined to educate themselves.
D)All of the above are correct.
21
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Chapter 20: Income Inequality and Poverty
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Q1) The economic life cycle describes how young people usually have higher savings rates than middle-aged people.
A)True
B)False
Q2) Assume that the government proposes a negative income tax that calculates the taxes owed as follows: Taxes Owed = (1/3 × Income)- 10,000.A family that earns an income of $60,000 will
A)pay $10,000 in taxes.
B)receive an income subsidy of $3,000.
C)receive an income subsidy of $10,000.
D)neither pay taxes nor receive an income subsidy.
Q3) A hail storm would affect a farmer's
A)permanent income.
B)economic life cycle income.
C)transitory income.
D)natural income.
Q4) Fewer than three percent of families are poor for eight or more years.
A)True
B)False
Q5) Explain the relationship between labor earnings and the distribution of income.
Page 22
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Chapter 21: The Theory of Consumer Choice
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Q1) Refer to Figure 21-5.Which of the graphs shown may represent indifference curves?
A)graph (a)
B)graph (b)
C)graph (c)
D)All of the above are correct.
Q2) When two goods are strong complements,such as nickels and dimes,the indifference curves are straight lines.
A)True
B)False
Q3) An optimizing consumer will select the consumption bundle in which the A)ratio of total utilities is equal to the relative price.
B)ratio of income to price equals the marginal rate of substitution.
C)marginal rate of substitution is equal to the relative price of the goods.
D)marginal rate of substitution is equal to marginal utility.
Q4) Refer to Figure 21-6.The consumer is likely to select the consumption bundle at A)point B
B)point C
C)point D
D)point E
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Chapter 22: Frontiers of Microeconomics
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Q1) What is the name of the mathematical result showing that no voting system can simultaneously satisfy the properties of unanimity,transitivity,independence of irrelevant alternatives,and no dictators?
A)The fundamental theorem of behavioral economics
B)Arrow's impossibility theorem
C)The fundamental theorem of voting
D)The median voter theorem
Q2) A life insurance company requires new applicants to have a medical exam prior to writing the insurance policy.This requirement is an example of A)signaling.
B)screening.
C)moral hazard.
D)adverse selection.
Q3) The suggestion that people are "satisficers" is similar to the view that people A)are wealth-maximizers.
B)exhibit "bounded rationality."
C)go to a lot of trouble to weigh costs and benefits before choosing a course of action. D)change their minds often.
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24
Chapter 23: Measuring a Nations Income
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Q1) U.S.GDP includes estimates of things such as unpaid housework and car maintenance.
A)True
B)False
Q2) Suppose that the country of Samiam produces only eggs and ham.In 2005 it produced 100 dozen eggs at $3 per dozen and 50 pounds of ham at $4 per pound.In 2004,the base year,eggs sold for $1.50 per dozen and ham sold for $5 per pound.For 2005,
A)nominal GDP is $500, real GDP is $400, and the GDP deflator is 80.
B)nominal GDP is $500, real GDP is $400, and the GDP deflator is 125.
C)nominal GDP is $400, real GDP is $400, and the GDP deflator is 100.
D)nominal GDP is $400, real GDP is $500, and the GDP deflator is 125.
Q3) GDP may be calculated as either the production of,or the income generated by,the value of final goods and services produced within an economy.
A)True
B)False
Q4) GDP is defined as the market value of all final goods and services produced within a country in a given period of time.In spite of this definition,some production is left out of GDP.Explain why some final goods and services are not included.
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Chapter 24: Measuring the Cost of Living
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Q1) A German automobile company produces cars in the United States,with some of those cars being exported to other nations and some of them being sold within the United States.If the prices of these cars increase,then
A)the GDP deflator and the CPI will both increase.
B)the GDP deflator will increase and the CPI will be unchanged.
C)the GDP deflator will be unchanged and the CPI will increase.
D)the GDP deflator and the CPI will both be unchanged.
Q2) An increase in the price of dairy products produced domestically will be reflected in
A)both the GDP deflator and the consumer price index.
B)neither the GDP deflator nor the consumer price index.
C)the GDP deflator but not in the consumer price index.
D)the consumer price index but not in the GDP deflator.
Q3) Why does the GDP deflator give a different rate of inflation than does the CPI?
Q4) The producer price index measures the cost of a basket of goods and services
A)typical of those produced in the economy.
B)produced for a typical consumer.
C)sold by producers.
D)bought by firms.
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Chapter 25: Production and Growth
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Q1) Proprietary technology is knowledge that is
A)known but no longer used much.
B)known, but only recently discovered.
C)known mostly by only those in a certain profession.
D)known only by the company that discovered it.
Q2) Which of the following nations experienced average rates of economic growth of less than 2.0 percent over the last 100 years?
A)Bangladesh
B)Pakistan
C)United Kingdom
D)All of the above are correct.
Q3) Other things the same,a country that increases its saving rate increases
A)its future productivity and future real GDP.
B)neither its future productivity nor future real GDP.
C)its future productivity, but not its future real GDP.
D)its future real GDP, but not its future productivity.
Q4) At first patents might seem like a deterrent to growth because in effect they restrict the use of new technology.Yet many economists believe that patents generate growth.Explain why.
Q5) What is the difference between human capital and technology?
Page 27
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Chapter 26: Saving, investment, and the Financial System
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Q1) Other things the same,bonds are likely to have higher interest rates if they have
A)tax exemptions and short terms.
B)tax exemptions and long terms.
C)no tax exemptions and short terms.
D)no tax exemptions and long terms.
Q2) Suppose that a government that taxed all interest income changed its tax law so that the first $5,000 of a taxpayer's interest income was tax free.This would shift the
A)supply for loanable funds right making interest rates fall.
B)supply of loanable funds left making interest rates rise.
C)demand for loanable funds right making the interest rate rise.
D)demand for loanable funds left making the interest rate fall.
Q3) Suppose that Congress were to institute an investment tax credit.What would happen in the market for loanable funds?
A)The demand for loanable funds would shift left.
B)The supply of loanable funds would shift left.
C)The demand for loanable funds would shift right.
D)The supply of loanable funds would shift right.
Q4) What are the basic differences between bonds and stocks?
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Chapter 27: The Basic Tools of Finance
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Sample Questions
Q1) Fourteen years ago Alfred put money in his account at First National Bank.Alfred decides to cash in his account and is told that his money has quadrupled.According to the rule of 70,what rate of interest did Alfred earn?
A)5 percent
B)7 percent
C)10 percent
D)14 percent
Q2) Dividends
A)are the rates of return on mutual funds.
B)are cash payments that companies make to shareholders.
C)are the difference between the price and present value per share of a stock.
D)are the rates of return on a company's capital stock.
Q3) The efficient markets hypothesis says that
A)only individual investors can make money in the stock market.
B)it should be difficult to find stocks whose price differs from their fundamental value.
C)stock prices do not follow a random walk.
D)All of the above.
Q4) Discuss the statistical evidence concerning the efficient markets hypothesis.
Q5) List three different ways that a risk-averse person can reduce financial risk.
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Chapter 28: Unemployment
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Questions
Q1) Since the 1940s and 1950s,the percentage of U.S.workers who belong to unions has risen by about one-third.
A)True
B)False
Q2) Refer to Figure 28-2.If the minimum wage fell from $7 to $5,in this market unemployment would
A)fall by 20.
B)fall by 40.
C)be unchanged.
D)would rise by 20.
Q3) The labor force equals the
A)number of people who are employed.
B)number of people who are unemployed.
C)number of people employed plus the number of people unemployed.
D)adult population.
Q4) The labor-force participation rate is defined as
A)(Employed ÷ Adult Population) × 100.
B)(Employed ÷ Labor Force) × 100.
C)(Labor Force ÷ Adult Population) × 100.
D)(Adult Population ÷ Labor Force) × 100.
30
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Chapter 29: The Monetary System
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Q1) If banks desire to hold no excess reserves,the reserve ratio is 10 percent,and a bank that was previously just meeting its reserve requirement receives a new deposit of $400,then initially the bank has a
A)$400 increase in excess reserves and no increase in required reserves.
B)$400 increase in required reserves and no increase in excess reserves.
C)$360 increase in excess reserves and $40 increase in required reserves.
D)$40 increase in excess reserves and $360 increase in required reserves.
Q2) The reserve requirement ratio is 10%.Which of the following pair of changes would both allow a bank to lend out an additional $10,000?
A)the Fed buys a $10,000 bond from the bank or someone deposits $10,000 in the bank
B)the Fed buys a $10,000 bond from the bank or the Fed lends the bank $10,000
C)the Fed sells a $10,000 bond to the bank or someone deposits $10,000 in the bank
D)the Fed sells a $10,000 bond to the bank or the Fed lends the bank $10,000
Q3) Bank runs and the accompanying increase in the money multiplier caused the U.S.money supply to rise by 28 percent from 1929 to 1933.
A)True
B)False
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Chapter 30: Money Growth and Inflation
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Q1) When the price level rises,the number of dollars needed to buy a representative basket of goods
A)increases, and so the value of money rises.
B)increases, and so the value of money falls.
C)decreases, and so the value of money rises.
D)decreases, and so the value of money falls
Q2) The classical dichotomy argues that changes in the money supply
A)affect both nominal and real variables.
B)affect neither nominal nor real variables.
C)affect nominal variables, but not real variables.
D)do not affect nominal variables, but do affect real variables.
Q3) When deciding how much to save,people care most about
A)after-tax nominal interest rates.
B)after-tax real interest rates.
C)before-tax real interest rates.
D)before-tax nominal interest rates.
Q4) Using separate graphs,demonstrate what happens to the money supply,money demand,the value of money,and the price level if:
a.the Fed increases the money supply.
b.people decide to demand less money at each value of money.
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) Ivan,a Russian citizen,sells several hundred cases of caviar to a restaurant chain in the United States.By itself,this sale
A)increases U.S.net exports and has no effect on Russian net exports.
B)increases U.S.net exports and decreases Russian net exports.
C)decreases U.S.net exports and has no effect on Russian net exports.
D)decreases U.S.net exports and increases Russian net exports.
Q2) If a Starbucks tall-latte cost $2.80 in the United States and 2.93 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A).956 If the exchange rate is less than this, it costs more dollars to buy a tall-latte in the U.S.than in the Euro area.
B).956 If the exchange rate is less than this, it costs fewer dollars to buy a tall-latte in the U.S.then in the Euro area.
C)1.046 If the exchange rate is less than this, it costs more dollars to buy a tall-latte in the U.S.than in the Euro area.
D)1.046 If the exchange rate is less than this, it costs fewer dollars to buy a tall-latte in the U.S.than in the Euro area.
Q3) How do the nominal exchange rate and the real exchange rate differ?
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Chapter 32: A Macroeconomic Theory of the Open Economy
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Q1) A tax on imported goods is called a(n)
A)excise tax.
B)tariff.
C)import quota.
D)None of the above is correct.
Q2) In the 1980s,the U.S.government budget deficit rose.At the same time the U.S.trade deficit grew larger,the real exchange rate of the dollar appreciated,and U.S.net capital outflow decreased.Which of these events is contrary to what the open-economy macroeconomic model predicts concerning the effects of an increase in the budget deficit?
A)The U.S.trade deficit grew.
B)The real exchange rate of the dollar appreciated.
C)U.S.net capital outflow fell.
D)None of the above is contrary to the predictions of the model.
Q3) Refer to Figure 32-1.In the Figure shown,if the real interest rate is 1 percent,there will be a
A)surplus of $10 billion.
B)surplus of $20 billion.
C)shortage of $10 billion.
D)shortage of $20 billion.
Page 34
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Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) Discuss what economists believe is different about the long and short run.
Q2) During the last half of 1980,the U.S.unemployment rate was about 7.5 percent.Historical experience suggests that this is
A)above the natural rate, so that real GDP growth was likely low.
B)above the natural rate, so that real GDP growth was likely high.
C)below the natural rate, so that real GDP growth was likely low.
D)below the natural rate, so that real GDP growth was likely high.
Q3) The explanations for the slopes of the aggregate demand and short-run aggregate supply curves are the same as the explanations for the slopes of demand and supply curves for specific goods and services.
A)True
B)False
Q4) Other things the same,a decrease in the price level causes real wealth to
A)fall, interest rates to fall, and the dollar to appreciate.
B)fall, interest rates to rise, and the dollar to depreciate.
C)rise, interest rates to rise, and the dollar to appreciate.
D)rise, interest rates to fall, and the dollar to depreciate.
Q5) Explain how an increase in the price level changes interest rates.How does this change in interest rates lead to changes in investment and net exports?
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) When the interest rate increases,the opportunity cost of holding money
A)increases, so the quantity of money demanded increases.
B)increases, so the quantity of money demanded decreases.
C)decreases, so the quantity of money demanded increases.
D)decreases, so the quantity of money demanded decreases.
Q2) The economy is in long-run equilibrium.The aggregate demand curve shifts $80 billion to the left.The government wants to change spending to offset this decrease in demand.The MPC is .75.Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure.What should the government do if it wants to offset the decrease in real GDP?
A)raise both taxes and expenditures by $80 billion dollars.
B)raise both taxes and expenditures by $10 billion dollars.
C)reduce both taxes and expenditures by $80 billion dollars.
D)reduce both taxes and expenditures by $10 billion dollars.
Q3) The theory of liquidity preference is most helpful in understanding
A)the wealth effect.
B)the exchange-rate effect.
C)the interest-rate effect.
D)misperceptions theory.
Q4) Explain how unemployment insurance acts as an automatic stabilizer.
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Chapter 35: The Short Run Trade Off Between Inflation and Unemployment
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Q1) Refer to figure 35-4.If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy,in the short run the economy moves to
A)3% unemployment and 5% inflation.In the long run the economy moves to 5% unemployment and 5% inflation.
B)3% unemployment and 5% inflation.In the long run the economy moves to 5% unemployment and 3% inflation.
C)7% unemployment and 3% inflation.In the long run the economy moves to 5% unemployment and 5% inflation.
D)7% unemployment and 3% inflation.In the long run the economy moves to 5% unemployment and 3% inflation.
Q2) Samuelson and Solow reasoned that when aggregate demand was low,unemployment was
A)high, so there was upward pressure on wages and prices.
B)high, so there was downward pressure on wages and prices.
C)low, so there was upward pressure on wages and prices.
D)low, so there was downward pressure on wages and prices.
Q3) In the long run,the inflation rate depends primarily on money supply growth.
A)True
B)False
Page 37
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) President George W.Bush and congress cut taxes and raised government expenditures in 2003.Which of the following is not correct?
A)At the time the economy was just moving into a recession.
B)While there was subsequent improvement in economic performance, it's not entirely clear that this was due to the policy.
C)In general monetary policy can be implemented faster than fiscal policy.
D)In general it is easier to reverse monetary policy than to reverse fiscal policy.
Q2) It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation.
A)True
B)False
Q3) Explain why policy lags could make stabilization policies counterproductive.
Q4) If the budget deficit were reduced
A)interest rates and investment would increase.
B)interest rates would increase and investment would decrease.
C)interest rates and investment would decrease.
D)interest rates would decrease and investment would increase.
Q5) Describe three costs of inflation.
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