Stock Introduction to Economics Social Issues and Economic Thinking Test Bank

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Test Bank

Stock Introduction to Economics Resource: Social Issues and Economic Thinking Edition:

1st Edition

Author(s):

Wendy A. Stock

Introduction to Economics: Social Issues and Economic Thinking

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Chapter 1: An Introduction to the Economic Way of Thinking

Learning Objective Guide (LO-1) Define economics (LO-2) Explain how scarce resources influence choices (LO-3) Describe the influence of benefits and costs on deciding among alternatives (LO-4) Identify the decision rules individuals and firms use to make choices (LO-5) Explain why decisions are made “at the margin” (LO-6) Assess the general conditions that generate maximum utility or profits

1. a. b. c. d.

Economics is the study of production the study of unemployment and inflation the study of choices the study of Gross Domestic Product

Answer: C LO-1 Level: Easy

2. a. b. c. d.

Because of the concept of scarcity choices need to be made marginal benefits increases marginal costs decrease total returns of benefit remains unchanged

Answer: A LO-2 Level: Easy

3. a. b. c. d.

Which of the following statements is most correct?

Scarcity forces us to allocate our scarce resources among the many uses for them.

Marginal benefits require greater costs for decisions to be made.

Choices arise from trade-offs.

Scarcity is not common to all societies.

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Level: Easy

4. a. b. c. d.

________________ is a synonym for satisfaction or happiness.

Marginal cost Opportunity cost Utility Scarcity

Answer: C LO-3 Level: Easy

5. The difference between the earnings that a firm receives from selling its good or service and the costs of production for the good or service is the a. marginal benefit b. opportunity cost c. utility d. profit Answer: D LO-4 Level: Easy

6. a. b. c. d.

The value of the next-best alternative forgone is the opportunity cost profit utility marginal benefit

Answer: A LO-3 Level: Easy

7. a. b. c. d.

The concept of ____________________ is used to isolate important relationships. opportunity cost marginal benefit ceteris paribus diminishing marginal cost Page 2 of 10

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Answer: C LO-1 Level: Easy

8. a. b. c. d.

The additional or incremental cost associated with a choice is known as the marginal cost the marginal benefit marginal utility utility

Answer: A LO-3 Level: Easy

9. a. b. c. d.

The additional or incremental benefit associated with a choice is known as the marginal cost the marginal benefit opportunity cost ceteris paribus

Answer: B LO-3 Level: Easy

10. Which of the following would be a focus of macroeconomics? a. The study of how individuals make a decision. b. The study of how businesses make a profit. c. The study of how the price for a product is determined. d. The study of changes of price levels in an economy Answer: D LO-1 Level: Easy

11. The study of how prices for a good is determined is an example of a. macroeconomics b. microeconomics Page 3 of 10

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c. economic growth d. diminishing marginal returns Answer: B LO-1 Level: Easy

12. Each of the following is an economic resource except a. land b. labor c. capital d. rent Answer: D LO-1 Level: Easy

13. Your second glass of water on a hot summer day will a. increase total utility and decrease marginal utility b. decrease total utility and decrease marginal utility c. increase total utility and increase marginal utility d. decrease total utility and increase marginal utility Answer: A LO-5 Level: Easy

14. A _______________ is a cost that, once incurred, cannot be recovered. a. marginal cost b. diminishing cost c. sunk cost d. incremental cost Answer: C LO-5 Level: Easy

15. This type of cost is irrelevant when making decisions at the margin.

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a. b. c. d.

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Marginal cost Diminishing cost Sunk cost Incremental cost

Answer: C LO-5 Level: Easy

16. Engaging in an activity until marginal benefits equal marginal costs is known as a. the diminishing marginal returns b. the diminishing marginal utility c. the marginal decision rule d. the marginal utility rule Answer: C LO-6 Level: Easy

17. Which of the following is true? a. Net benefit = total benefit – total cost b. Net benefit = total cost – total benefit c. Net benefit = total cost + total benefit d. Net benefit = total benefit/total cost Answer: A LO-6 Level: Easy

18. The law of increasing marginal costs states that a. Ceteris paribus, as more and more of an activity are done; the additional costs of the activity tend to decrease. b. Ceteris paribus, as more and more of an activity are done; the additional costs of the activity tend to increase. c. Ceteris paribus, as more and more of an activity are done; the additional benefits of the activity tend to decrease. d. Ceteris paribus, as more and more of an activity are done; the additional benefits of the activity tend to increase.

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LO-5 Level: Easy

19. Ceteris paribus, as more and more of an activity is done, the additional benefits derived from the activity decreases represents a. the law of increasing marginal costs b. the law of diminishing marginal costs c. the law of increasing marginal benefits d. the law of diminishing marginal benefits Answer: D LO-5 Level: Easy

20. Decisions made “at the margin” require a. comparing the benefits and costs of the next, or incremental, of consuming a good or service b. comparing the total benefits and costs of a consuming a good c. comparing the total benefits and the net costs of consuming a good d. comparing the net benefits and total costs of consuming a good Answer: A LO-3 Level: Easy

21. You are considering buying a new laptop. The economic way of thinking suggests that you will buy the laptop if a. total benefits is greater than total costs b. your income is above average c. the marginal cost of is less than the marginal benefit for the laptop. d. the marginal benefit is greater than the marginal cost of the laptop.

Answer: C LO-3 Level: Medium

22. Which of the following would represent a microeconomic question? a. How will a decrease in government spending affect the output gap? b. How will a merger of two local banks affect competition and prices for banking services?

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c. What type of unemployment is on the rise? d. How have the changes in types of unemployment affect the efficiency of the labor force?

Answer: B LO- 1 Level: Medium

23. Diminishing marginal benefits is reflected in a. a consumer’s ability to pay b. a consumer’s willingness to pay c. a producer’s ability to produce d. a producer’s willingness to produce Answer: B LO-3 Level: Medium

24. In the following table, the marginal benefits for the 3rd malt is Table 1: Marginal and Total Benefit for Chocolate Malts # of Chocolate Total Malts Marginal Benefits Benefits 1 $6.00 2 $5.00 $11.00 3 $15.00 4 $3.00 5 $20.00 a. $1.00 b. $4.00 c. $5.00 d. $15.00 Answer: B LO-3 Level: Medium

25. The opportunity cost of consuming more today is a. less production of goods in the future b. less consumption of goods in the future c. more production of goods in the future d. more consumption of goods in the future Page 7 of 10

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Answer: B LO-1 Level: Difficult

26. This forces us to allocate resources a. marginal benefits b. marginal costs c. economic resources d. scarcity Answer: D LO-2 Level: Medium

27. Utility is all of the following except a. a measurement of satisfaction b. benefits received from a choice c. decreases with consumption of additional units d. remains constant for all units consumed Answer: D LO-2 Level: Difficult

28. Consider the data in Table 2. What is the net benefit for the third app purchased?

Table 2: Total Benefits and Total Costs for Apps Number of Apps Total Benefit ($) Total Costs ($) 1 20 15 2 50 30 3 70 45 4 85 60 a. $25 b. $20 c. $15 d. $10 Answer: A LO-3 Level: Difficult Page 8 of 10

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29. Consider the data in Table 2. How many apps would satisfy the marginal decision rule? a. 1 b. 2 c. 3 d. 4 Answer: D LO-6 Level: Difficult

30. You and a friend decide to go to a concert and you purchase a ticket for $50. Your manager calls and asks you to work that evening for four hours. You earn $9.50 per hour. What is the value of the opportunity cost of going to the concert?

Answer: $38.

Solution: $9.50 x 4 hours of work LO-1 Level: Difficult

31. You and a friend decide to go to a concert and you purchase a ticket for $50. Your manager calls and asks you to work that evening for four hours. You earn $9.50 per hour. What is the value of the opportunity cost of working?

Answer: $50 Hint: The foregone concert LO-1 Level: Difficult

32. Explain why money would not be considered an economic resource.

Answer: Money is not considered an economic resource because it is not directly used to produce a good or service. It is considered not productive. Economic resources are inputs or sources directly used to produce a good or service.

LO-1 Level: Medium

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33. Explain how microeconomics affects macroeconomics.

Answer: While macroeconomics focuses on the total, or aggregate, economy the issues faced by the total economy is founded on the decisions of individual consumers and producers.

LO-1 Level: Difficult

34. Explain how the concepts of scarcity and opportunity cost are related.

Answer: The inputs of production, or resources, are limited in quantity and have alternative uses.

Because of this scarcity choices need to be made as to how they should be used. Economics is the study of how these scarce resources are allocated to provide society their unlimited wants. However, because a choice needs to be made as to how the resources are to be used, something is given up. This alternative use is the opportunity cost.

LO-1 Level: Difficult

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Chapter 2: Production Possibilities

Learning Objective Guide (LO-1) Explain the importance of models in economics (LO-2) Describe the production possibilities model (LO-3) Illustrate the use of the production possibilities model (LO-4) Calculate opportunity costs of production (LO-5) Define the concept of comparative advantage (LO-6) Apply the concept of comparative advantage to demonstrate the benefits of specialization and trade (LO-7) Discuss the difference between positive and normative economics

1. a. b. c. d.

An economic model is A value judgment A simplification of reality A tool to explain exceptions to a theory Eliminate differences in the variables

Answer: B LO-1 Level: Easy

2. a. b. c. d.

Models represent Reality Market corrections Behavior differences Exceptions to general rules

Answer: A LO-1 Level: Easy

3. a. b. c. d.

A production possibilities model identifies Choices available to individuals only given available resources Choices available to groups only given available resources Choices available to aggregate economies only given available resources Choices available to individuals, groups, and aggregate economies given available resources

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Answer: D LO-2 Level: Easy

4. A production possibilities frontier (PPF) illustrates this a. The maximum amount of capital that is available for production with a given set of resources and technology, ceteris paribus b. The maximum amount of labor available for production with a given set of resources and technology, ceteris paribus c. The maximum amount of output that can be produced with a given set of resources and technology, ceteris paribus d. The maximum amount of goods attainable if prices are fixed.

Answer: C LO-2 Level: Easy

Reference: Table 1: Production Possibilities Production Possibilities A B C Tractors 0 1 2 Food 75 50 30

D 3 15

E 4 5

F 5 0

5. Consider the Table 1. When moving from A to F, the cost of a unit of Tractors in terms of food a. Increases b. Decreases c. Remains constant d. Fluctuates Answer: A LO-3 Level: Moderate

6. Consider Table 1. If the society would change from D to C this would mean a. The society would give up 1 tractor for 15 units of food b. The society would give up 15 units of food for 1 tractor

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c. The society would gain 2 units of tractors for 30 units of food d. The society would gain 3 tractors for 15 units of food Answer: A LO-3 Level: Moderate

7. a. b. c. d.

According to Table 1, a combination of 4 tractors and 5 units of food is Attainable and efficient Attainable but not efficient Not attainable Insufficient information provided to determine

Answer: A LO-3 Level: Easy

8. a. b. c. d.

According to Table 1, a combination of 2 tractors and 20 units of food is Attainable and efficient Attainable but not efficient Not attainable Insufficient information provided to determine

Answer: B LO-3 Level: Easy

9. a. b. c. d.

According to Table 1, a combination of 3 tractors and 30 units of food is Attainable and efficient Attainable but not efficient Not attainable Insufficient information provided to determine

Answer: C LO-3 Level: Easy

10. Points located within the production possibilities frontiers is best described as

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a. b. c. d.

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Efficient Unattainable Attainable Possible

Answer: C LO-2 Level: Easy

11. Combinations of output that lie on the production possibilities frontier represent _____________ choices a. Efficient b. Unattainable c. Inefficient d. Unproductive Answer: A LO-2 Level: Easy

12. The slope of the production possibilities frontier equals the __________________ of producing one more unit of the good measured on the x-axis. a. Opportunity cost b. Marginal cost c. Marginal benefit d. Total cost Answer: A LO-2 Level: Easy

13. The __________________ is the ability to produce something with fewer resources or to produce more with the same resources as another producer. a. Opportunity cost b. Absolute advantage c. Comparative advantage d. Marginal benefit Answer: B LO-5

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Level: Easy

14. The ________________________ is the ability to produce a good or service at a lower opportunity cost than another producer. a. Opportunity cost b. Absolute advantage c. Comparative advantage d. Marginal benefit Answer: C LO-5 Level: Easy

15. The choice of specialization is founded on a. Marginal benefit b. Opportunity cost c. Average costs of production d. Total costs of production Answer: B LO-4 Level: Easy

16. Which of the following is a normative statement? a. An output gap can be either expansionary or contractionary. b. Structural unemployment has increased. c. If the price of gasoline increases, people will probably buy less. d. The taxes on cigarette and alcohol should be increased.

Answer: D LO-7 Level: Moderate

17. A positive statement a. Cannot be tested b. Is dependent on a person’s opinion c. Always has a positive value d. Might be right or wrong but is quantifiable

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Answer: D LO-5 Level: Easy

18. Which of the following is a positive statement? a. The average on the next class exam should be higher than average. b. A five per cent increase in tuition leads to a one per cent decrease in student enrollment. c. To increase consumer buying, taxes should be decreased. d. Government programs aimed at retraining should reduce structural unemployment.

Answer: B LO-7 Level: Moderate

19. A blueprint of a home is an example of a model because it a. Provides a “picture” of the home to be built b. Is precise c. Provides layers of development d. Represents reality Answer: D LO-1 Level: Moderate

20. Of the following which would not contribute to economic growth? a. Increases in consumer spending b. Technology c. Trade d. Despecialization Answer: D LO-1 Level: Moderate

Reference:

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Figure 1: Production Possibilities Frontier

21. Consider Figure 1. If the economy is at Point C what is the opportunity cost of one more unit of consumer goods? a. 2 consumer goods b. 2 capital goods c. .5 consumer goods d. .5 capital goods Answer: D LO-4 Level: Difficult

22. Consider Figure 1. Which of the following would not apply to the economy facing this production possibilities frontier? a. The opportunity cost of increasing consumer goods from four units to seven units is one unit of capital good. b. The economy faces a trade-off when considering how to use scarce resources between the production goods of consumer goods and capital goods. c. The economy faces constant opportunity costs for the trade-off between consumer goods and capital goods. d. The graph illustrates the detail that resources suitable for the production of consumer goods are not equally suitable for the production of capital goods.

Answer: C LO-3 Level: Moderate

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23. Consider Figure 1. The opportunity cost of producing more consumer goods a. Decreases b. Increases c. Is constant d. Changes after the first four units of capital goods Answer: B LO-4 Level: Moderate

24. On a production possibilities frontier economic growth is illustrated by a a. Shift of the PPF curve to the left. b. Shift of the PPF curve to the right c. A movement along an existing PPF d. A movement from on the PPF to inside the PPF Answer: B LO-2 Level: Moderate

25. The production possibilities frontier illustrates the boundary between the a. Goods and services an economy can and cannot produce b. Goods and services wanted and not wanted by an economy c. Attainable and unattainable combinations of goods and services d. Affordable and not affordable combinations of goods and services Answer: C LO-3 Level: Difficult

26. Which of the following will increase economic growth for an economy? a. Decrease immigration limits b. Increase financial aid for college students c. Decrease consumer consumption d. Increase trade tariffs Answer: B LO-3 Level: Moderate

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Reference: Figure 2: Production Possibilities Frontier

27. Suppose Figure 2 illustrates the production possibilities frontier for a country. Of the following what would explain the movement of a production possibilities frontier from PPF1 to PPF2? a. Research and development of new technology in the production of computers b. An increase in investment spending c. A decrease in the trade deficit d. An increase in consumption spending of automobiles Answer: D LO-3 Level: Difficulty

28. John can make sandwiches at a lower opportunity cost than Grace. Grace, however, can make more sandwiches in a day than John. a. Grace cannot benefit from trade b. John has absolute value in sandwich making over Grace c. Grace has comparative value in sandwich making over John d. John has comparative value in sandwich making over Grace Answer: D LO-6 Level: Easy

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29. A country has a comparative advantage in the production of a good if a. The country can produce the good at the lowest opportunity cost b. The country can produce the good at the greatest opportunity cost c. The country can produce more of the good d. The country can produce a combination on its production possibilities frontier Answer: A LO-6 Level: Easy

30. You and your friend, Terri, work in a bakery. You can produce more cookies and cakes than Terri. This means that a. You work harder than Terri b. You have a comparative advantage for both cookies and cakes than Terri c. You have an absolute advantage for both cookies and cakes than Terri d. You have a comparative advantage for cookies and cakes than Terri, but Terri has an absolute advantage for cookies and cakes Answer: C LO-5 Level: Moderate

Reference: Table 2 Cucumbers (pounds) Jacob 12 Kade 9

Tomatoes (pounds) 8 3

31. Jacob and Kade can grow tomatoes or cucumbers. Table 1 illustrates the amounts both can grow in a week. Based on the table, Jacob’s opportunity cost of producing one pound of tomatoes is a. 1.5 pounds of cucumbers b. 1.33 pounds of cucumbers c. .75 pounds of cucumbers d. .67 pounds of cucumbers Answer: A LO-5 Level: Difficult

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32. How can a combination of goods be unattainable?

Answer: A production combination, or mix, of goods and services can be unattainable for an economy when it requires more resources or ability to produce the combination than available.

LO-2 Level: Moderate

33. Draw a production possibilities frontier for two goods or services. Identify ranges that are attainable, unattainable, and what would illustrate those combinations of production that are attainable and efficient.

Answer:

LO-2 Level: Moderate

34. Explain why the production possibilities frontier has a bowed out shape rather than a straight line?

Answer: As an economy transfers resources from the production of one good to another its opportunity cost increases creating a bowed out shape. Opportunity costs increase because resources are not equally productive in all uses and do not equally transfer from the production of one good to another. If the opportunity cost was constant the production possibilities frontier would be straight.

LO-2

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Level: Moderate

35. How is economic growth illustrated in a production possibilities frontier?

Answer: Economic growth is illustrated by an outward shift of the PPF. LO-3 Level: Moderate

36. Highly developed countries such as the United States have the ability to produce anything it needs domestically. Because of this ability there would be go gain for the United States from trade. Would you agree or disagree to the previous statements?

Answer: The statement is not correct. While the United States is a wealthy economy that is highly developed, it can still gain from trade when it specializes and considers its comparative advantage.

LO-6 Level: Moderate

37. Explain why specialization and trade increases a country’s level of consumption.

Answer: Trade allows a country to consume beyond its production possibilities frontier because goods and services are gained at lower opportunity costs.

LO-6 Level: Difficult

Reference: Table 3 Country A’s production in 1 hour Dresses 12 Laptop 6

Country Z’s production in 1 hour Dresses 9 Laptop 3

38. Table 3 above illustrates the amount of dresses and laptops two countries can produce with their given amount of resources and level of technology. Which country has the comparative advantage of producing dresses and which country has the comparative advantage of producing laptops?

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Answer: Country A has the comparative advantage in producing dresses. Country Z has the comparative advantage in producing laptops.

Solution: Opportunity Costs Country A’s Country Z’s The opportunity cost The opportunity for 1 Dress = cost for 1 Dress 6 laptops/12 dresses = 3 laptops/9 .5 laptop dresses .33 laptop The opportunity cost The opportunity for 1 laptop = 12 cost for 1 laptop dresses/6 laptops = 9 dresses/3 2 dresses laptops 3 dresses LO-6 Level: Difficult

39. Explain and provide an example of positive and normative statements.

Answer: A positive statement focuses on “what is” and can be tested. “The unemployment rate is 8.1%.” is an example of a positive statement A normative statement is one that focuses on a perspective, or opinion. It is based on a value judgment and cannot be tested. “The unemployment rate should never be greater than 8% for our economy,” is an example of a normative statement.

LO-6 Level: Moderate

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Chapter 3: Demand & Supply

Learning Objective Guide LO-1: Describe the relationship between price and quantity demanded LO-2: Describe the relationship between price and quantity supplied LO-3: Diagram demand and supply relationships and identify market equilibrium LO-4: Describe factors that shift demand and supply LO-5: Illustrate how changes in demand or supply affect market equilibrium

1. a. b. c. d.

A market describes the decision making process of suppliers only describes the decision making process of consumers only brings together the interactions of consumers and suppliers brings together the interactions of businesses and the government

Answer: C Learning Objective: LO-1 Level: Easy

2. a. b. c.

Demand shows the relationship between price and transaction costs quantity consumed and income price and the quantity of the good that buyers are willing and able to buy at that price, ceteris paribus d. tastes and preferences and quantity demanded Answer: C Learning Objective: LO-1 Level: Easy

3. This represents the buyers' side of the market and describes the relationship between the price of a good and the quantity of the good that buyers are willing and able to buy at that price. a. Supply b. Quantity Supplied c. Quantity Demanded d. Demand

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Answer: D Learning Objective: LO-1 Level: Easy

4. a. b. c. d.

The inverse relationship between price and quantity demanded is The Law of Diminishing Returns The Income Effect The Law of Demand The Substitution Effect

Answer: C Learning Objective: LO-1 Level: Easy

5. Of the following which does not contribute to the inverse relationship between price and quantity demanded? a. The scale effect b. The income effect c. The substitution effect d. The Law of Diminishing Marginal Utility Answer: A Learning Objective: LO-1 Level: Easy

6. a. b. c. d.

The demand curve illustrates the relationship between income and cost of the good quantity demanded and consumer preferences price and quantity demanded production costs and size of the market

Answer: C Learning Objective: LO-1 Level: Easy

7. Changes in the price of a good resulting in a change in quantity demanded is known as a. The scale effect b. The income effect

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c. The substitution Effect d. The Law of Diminishing Marginal Utility Answer: B Learning Objective: LO-1 Level: Easy

8. a. b. c. d.

A movement along an existing demand curve caused by a change in price is known as A change in Demand A change in Quantity Demanded A change in the scale effect A change in total utility

Answer: B Learning Objective: LO-1 Level: Easy

9. a. b. c. d.

Which of the following would not result in a change in Demand?

An increase in the number of consumers A decrease in income An increase in price A change in consumer expectations

Answer: C Learning Objective: LO-4 Level: Easy

10. If the demand for memory cards increases when the price of digital cameras decreases, memory cards and digital cameras are a. Inferior goods b. Complementary goods c. Substitute goods d. Normal goods Answer: B Learning Objective: LO-4 Level: Easy

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11. Supply is a. The relationship between the price of a good and the quantity supplied, ceteris paribus. b. The amount of a good that sellers are willing and able to sell at a given price and time, ceteris paribus. c. The relationship between profit and the quantity supplied, ceteris paribus. d. The quantity of a good available to a market at a given period of time.

Answer: A Learning Objective: LO-2 Level: Easy

12. The Law of Supply a. States there is a positive relationship between price and quantity supplied b. States there is a negative relationship between price and quantity supplied c. States there is a positive relationship between consumer income and supply d. States there is a negative relationship between consumer income and supply Answer: A Learning Objective: LO-2 Level: Easy

13. Ceteris paribus, the Law of Supply states that a. When the price of a good decreases, a firm’s costs of production increases b. When the price of a good decreases, firms are able and willing to produce less of the good c. When the price of a good increases, supply increases d. When the price of a good decreases, supply decreases Answer: B Learning Objective: LO-2 Level: Easy

14. Factors that explain the Law of Supply include all of the following except a. The scale effect b. The substitution effect c. The Law of Increasing Marginal Costs d. The Law of Diminishing Marginal Utility Answer: D Learning Objective: LO-2 Level: Easy

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15. This occurs when producers increase production and their quantity supplied of a good because a price increase generates increased incentives a. Scale effect b. Producer substitution effect c. Income effect d. Law of Increasing Marginal Costs Answer: A Learning Objective: LO-2 Level: Easy

16. Which of the following reflects a decrease in supply? a. A decrease in price b. A decrease in the cost of production for a good c. An increase in price d. An increase in the cost of production for a good Answer: D Learning Objective: LO-4 Level: Easy

17. Which of the following is a correct statement about an increase in supply? a. Quantity supplied at each price increases b. The supply curve shifts to the left, or inward c. Quantity supplied at each price decreases d. The position on an existing supply curve shifts to the right Answer: A Learning Objective: LO-4 Level: Easy

18. Market equilibrium occurs when a. Demand equals supply b. Quantity demanded equals quantity supplied c. The consumer expectations matches producer’s expectations d. Efficiency and equal distribution is achieved

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Answer: B Learning Objective: LO-3 Level: Easy

19. If a surplus exists in a market, then a. Price is above market equilibrium and quantity demanded is less than quantity supplied b. Price is below market equilibrium and quantity demanded is less than quantity supplied c. Price is above market equilibrium and quantity demanded is greater than quantity supplied d. Price is below market equilibrium and quantity demanded is greater than quantity supplied Answer: A Learning Objective: LO-3 Level: Easy

20. When price falls below market equilibrium a. A surplus occurs b. A shortage occurs c. There will be an increase in quantity supplied d. There will be a leftward shift of the supply curve Answer: B Learning Objective: LO-3 Level: Easy

21. Which of the following BEST explains the shortage of parking spaces at your college? a. Demand is greater than supply b. Supply is greater than demand c. Quantity of parking spaces demanded is greater than the quantity of parking spaces provided d. Quantity of parking spaces demanded is less than the quantity of parking spaces provided Answer: C Learning Objective: LO-3 Level: Easy

22. Which of the following best describes the concept of demand? a. The relationship between the price of a good and the quantity of the good that buyers are willing and able to buy at that price, ceteris paribus. b. The amount of a good that buyers are willing and able to buy at a given price, ceteris paribus.

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c. The tracking of changes in price and quantity supplied of a good d. The ability of consumers to shift the demand curve Answer: A Learning Objective: LO-1 Level: Medium

23. Due to the increase price of gasoline, consumers are increasingly more interested in fuel efficient vehicles. Because of this, economist can expect a. The demand curve for fuel efficient vehicles to shift to the right. b. The demand curve for fuel efficient vehicles to shift to the left. c. The demand curve for large, gas-consuming SUV’s to shift to the right. d. The demand curve for large, gas-consuming SUV’s to shift to the left. e. “a” and “c” are both correct f. “a” and “d” are both correct Answer: E Learning Objective: LO-4 Level: Medium

Reference: Consider the following graphs for number 24 and 25

24. Refer to the above graphs. Which of the following is represented by Graph B? a. An increase in consumer income for a normal good. b. An increase in income for an inferior good. c. A decrease in price d. An increase in price Answer: C

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Learning Objective: LO-1 Level: Medium

25. Which of the following is represented by Graph A? a. An increase in quantity demanded b. A decrease in quantity demanded c. An increase in demand d. A decrease in demand Answer: A Learning Objective: LO-1 Level: Medium

26. According to the Law of Supply, an increase in the price of laptops results in a. An increase in the supply of laptops b. An increase in the quantity of laptops supplied to the market c. A decrease in the supply of laptops d. A decrease in the quantity of laptops supplied to the market Answer: B Learning Objective: LO-2 Level: Medium

Reference: Use the following graphs for questions 27 and 28.

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27. Which of the following best reflects Graph A a. An increase in the costs of production b. An increase in the relative price of another good c. A decrease in quantity supplied d. A decrease supply e. A government subsidy to produce the good Answer: C Learning Objective: LO-2 Level: Medium

28. Which of the following would best reflect Graph B? a. An decrease in the costs of production b. A decrease in the price of an alternative good that could be produced by the firm. c. A decrease in the price of the good d. A decrease in the number of sellers in the market Answer: D Learning Objective: LO-4 Level: Medium

29. Which of the following would NOT increase the supply of laptops? a. An increase in the number of suppliers of laptops b. A decrease in the cost of production of laptops c. A decrease in the price of laptops d. A technological advancement in the production of laptops that allows for more efficient use of resources.

Answer: C Learning Objective: LO-4 Level: Medium

30. Because of the increased importance of ethanol production as a source of gasoline, the price of corn has increased causing farmers to increase their acreage of corn away from other possible crops. This is known as a. Income effect b. The Law of Increasing Marginal Costs c. Change in quantity supplied d. The producer substitution effect

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Answer: D Learning Objective: LO-4 Level: Medium

31. Which of the following would cause a decrease in the quantity supplied of a good a. An increase in the costs of production b. An increase in the relative price of another good c. A decrease in the price of the good d. A government subsidy to produce the good Answer: C Learning Objective: LO-4 Level: Medium

32. The market equilibrium price for widgets is $18. The current price for a widget is $25. In the market for widgets there is a. Surplus causing the price to fall and quantity demanded to decrease b. Shortage causing the price to fall and quantity demanded to decrease c. Surplus causing the price to fall and quantity demanded to increase d. Shortage causing the price to fall and quantity demanded to increases Answer: C Learning Objective: LO-3 Level: Medium

33. Explain what occurs in a market when there is a surplus.

Answer: A surplus in a market signals that the price is above the equilibrium price. When the price is above equilibrium price, quantity supplied is greater than quantity demanded.

Learning Objective: LO-3 Level: Medium

Reference: Use the following schedule of data for numbers 34 and 35 Price Quantity Demanded Quantity Supplied (Dollars/Widget) (Hundreds) (Hundreds) $25 25 45 24 30 40 22 35 35

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20 18

40 45

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30 25

34. Using the above data the equilibrium price and quantity is a. $25; 45 b. $24; 30 c. $22; 35 d. $18: 45 Answer: C Learning Objective: LO-3 Level: Difficult

35. Using the above data, if the price of a widget is $20, then a ___________________ of widgets exists and the quantity of widgets demanded _____ the quantity of widgets supplied. a. Shortage; is greater than b. Shortage; is less than c. Surplus; is greater than d. Shortage; is less than Answer: A Learning Objective: LO-3 Level: Difficult

36. Goods A and B are considered complement goods. If the price of A increases what are the effects on equilibrium price and quantity of Good B? a. Equilibrium price increases, equilibrium quantity increases b. Equilibrium price decreases, equilibrium quantity decreases c. Equilibrium price increases, equilibrium quantity decreases d. Equilibrium price decreases, equilibrium quantity increases Answer: B Learning Objective: LO-5 Level: Difficult

Reference: For questions 37 and 38 identify how the described changes will affect equilibrium price and equilibrium quantity

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37. Widgets and Wadgets are considered substitute goods in the market for accessories. The price of Widgets falls at the same time there is an increase of suppliers of Wadgets. a. Increase in equilibrium price; increase in equilibrium quantity b. Decrease in equilibrium price; decrease in equilibrium quantity c. Equilibrium price is indeterminate; increase in equilibrium quantity d. Increase in equilibrium price; equilibrium quantity is indeterminate Answer: C Learning Objective: LO-5 Level: Difficult

38. There is an increase in the preference for a good that coincides with an increase in the wages for labor to produce the good. a. Increase in equilibrium price; increase in equilibrium quantity b. Decrease in equilibrium price; decrease in equilibrium quantity c. Equilibrium price is indeterminate; increase in equilibrium quantity d. Increase in equilibrium price; equilibrium quantity is indeterminate Answer: D Learning Objective: LO-5 Level: Difficult

39. Calculate the equilibrium quantity and price when the demand and supply for a good are given by the following equations.

P = 16 − 2QD P = 4 + QS Answer: Equilibrium Price = $8; Equilibrium Quantity = 4 Learning Objective: LO-3 Level: Difficult

40. Explain in terms of demand and supply why stores in locations that also house a college or university stock large quantities of macaroni and cheese and Ramen noodles.

Answer: Macaroni and cheese and Ramen noodles are considered to be inferior goods. When income is relatively low, as is the case for most college students, demand is greater for inferior goods.

Learning Objective: LO-5

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Level: Difficult

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Chapter 4 Consumer Surplus, Producer Surplus, and Economic Efficiency

Learning Objective Guide LO-1: Describe consumer surplus, producer surplus, economic surplus, and deadweight loss LO-2: Illustrate and compute consumer surplus, producer surplus, and deadweight loss LO-3: Describe how economic surplus can represent social welfare and economic efficiency LO-4: Assess the impact of market interventions on economic surplus and social welfare LO-5: Identify groups who benefit and are hurt by market interventions

1. The difference between what someone is willing to pay for a good or service and the price of the good or service is a. A price floor b. A price ceiling c. A consumer surplus d. A producer surplus Answer: C LO-1 Level: Easy

2. The difference between the price at which a seller is willing and able to sell a given good and the actual price received for the good is a. A price floor b. A price ceiling c. A consumer surplus d. A producer surplus Answer: D LO-1 Level: Easy

3. a. b. c. d.

The sum of the consumer surplus and the producer surplus is A price floor A price ceiling A market failure An economic surplus

Answer: D

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LO-1 Level: Easy

4. a. b. c. d.

The loss in economic surplus that results from disequilibrium market outcomes is A deadweight loss A market failure A consumer surplus A producer surplus

Answer: A LO-1 Level: Easy

5. a. b. c. d.

The vertical interpretation of a supply relationship describes the Minimum amount a producer is willing to accept to sell a good or service Maximum amount a producer is willing to accept to sell a good or service Marginal benefit of producing the good Marginal cost of consuming a good

Answer: A LO-1 Level: Moderate

6. a. b. c. d.

An upper limit on the price of a good or service is a Price floor Price ceiling Consumer surplus Producer surplus

Answer: B LO-3 Level: Easy

7. a. b. c. d.

A lower limit on the price of a good or service is a Price floor Price ceiling Consumer surplus Producer surplus

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Answer: A LO-3 Level: Easy

8. a. b. c. d.

This sets the minimum amount that can be charged for a good or service.

Price floor Price ceiling Consumer surplus Producer surplus

Answer: A LO-3 Level: Easy

9. a. b. c. d.

The effect of a quota is to Increase consumer surplus Increase consumer surplus Reduce consumer surplus Reduce producer surplus

Answer: C LO-2 Level: Easy

10. One reason why quotas are not removed is a. There is often insufficient incentive to pressure the government b. There is no cost to consumers c. Government officials believe that they are important to the economy d. Consumers feel they are necessary for market efficiency.

Answer: A LO-3 Level: Difficult

11. A quota is intended to a. Increase production of goods and services b. Enhance trade

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c. Restrict the production of goods and services d. Increase the quality of goods and services Answer: C LO-4 Level: Easy

Reference: Figure 1

12. Consider Figure 1. Consumer surplus at the equilibrium price is a. $20 b. $40 c. $80 d. $120 Answer: B LO-2 Level: Moderate

13. Consider Figure 1. Producer surplus at the equilibrium price is a. $20 b. $40 c. $80 d. $120 Answer: B

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LO-2 Level: Moderate

14. Consider Figure 1. Economic surplus at the equilibrium price is a. $20 b. $40 c. $80 d. $120 Answer: C LO-2 Level: Moderate

15. Consider Figure 1. If the government would impose a minimum price of $10 what is the amount of the consumer surplus? a. $10 b. $20 c. $50 d. $80 Answer: A LO-2 Level: Difficult

16. Consider Figure 1. If the government would impose a minimum price of $10 what is the amount of the producer surplus? a. $10 b. $20 c. $50 d. $80 Answer: AC LO-2 Level: Difficult

17. When considering the imposition of a price minimum of $10 in Figure 1, the group that will benefit the most is a. Consumers

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b. Producers c. Both consumers and producers d. None, the net gain is zero Answer: B LO-5 Level: Difficult

18. Consider Figure 1. If the government would impose a price ceiling of $6 what is the amount of the consumer surplus? a. $10 b. $20 c. $50 d. $80 Answer: C LO-2 Level: Difficult

19. When considering the imposition of a price ceiling of $6 in Figure 1, the group that will benefit the most is a. Consumers b. Producers c. Both consumers and producers d. None, the net gain is zero Answer: A LO-5 Level: Difficult

20. In Figure 1 which of the following statements is true? a. When a price intervention, such as a price ceiling or floor, is imposed economic surplus increases b. When a price intervention, such as a price ceiling or floor, is imposed economic surplus decreases c. When a price intervention, such as a price ceiling or floor, is imposed economic surplus remains the same d. When a price intervention, such as a price ceiling or floor, is imposed economic surplus is proportionate to the change in price

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Answer: B LO-4 Level: Difficult

21. Suppose the market equilibrium price of widgets is $10. The following table lists the willingness to pay for the four consumers in the market.

Consumer Willingness to Pay st 1 $18 2nd $16 rd 3 $14 4th $12 Total consumer surplus is a. $20 b. $17 c. $14 d. $2 Answer: A LO-2 Level: Difficult

22. The net benefit to sellers earn from selling a good or service is called a a. Consumer surplus b. Producer surplus c. Economic surplus d. Economic efficiency Answer: B LO-1 Level: Easy

23. The net benefit from receiving a good is called a a. Consumer surplus b. Producer surplus c. Economic surplus d. Economic efficiency Answer: A LO-1 Level: Easy

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Reference: Figure 2

24. Consider Figure 2. If 500 widgets are produced a. Economic surplus is eliminated b. Economic surplus is increased c. A deadweight loss occurs d. The deadweight loss is eliminated Answer: C LO-4 Level: Difficult

25. You tell your friend that you like your new jacket so much that you would have paid more for it. You are describing the concept of a. Economic surplus b. Total surplus c. Producer surplus d. Consumer surplus Answer: D LO-2 Level: Moderate

26. Consider Figure 2. If a price intervention of $25 is imposed this would be called

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a. b. c. d.

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A price ceiling A price floor A maximum price A mistake

Answer: B LO-1 Level: Easy

27. Consider Figure 2. If a price intervention of $15 is imposed this would be called a. A price ceiling b. A price floor c. A maximum price d. A mistake Answer: A LO-1 Level: Easy

28. Consider Figure 2. If a price intervention of $25 is imposed this would result in a deadweight loss because of a. Underproduction b. Overproduction c. Increasing consumer surplus d. Decreasing producer surplus Answer: B LO-4 Level: Difficult

Reference: Figure 3

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29. Consider Figure 3. If the market price is at equilibrium, area A + E + B equals a. Economic surplus b. Consumer surplus c. Producer surplus d. Deadweight loss Answer: B LO-2 Level: Difficult

30. Consider Figure 3. At a price of $25, the deadweight loss is represented by area a. D + F + C b. E + F c. E + F + B +C d. B + C Answer: D LO-2 Level: Difficult

31. You decide to hire a tutor to help prepare for your graduate entrance exam. Your willingness to pay is provided in the following table.

Tutor’s Opportunity Hours of Tutoring Willingness to Pay Cost per hour st 1 $30 $10 nd 2 $25 $15 3rd $20 $20 Copyright © 2013 John Wiley & Sons, Inc.

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4th $15 $25 th 5 $10 $30 The tutor you hire initially charges $20 per hour, but changes her fee to $30 per hour after learning that more time is needed. a. At the initial price of $20, what is i. Consumer surplus ii. Producer surplus b. At the price of $30 per hour, how many hours of tutoring will be achieved? c. At the price of $25, what is i. Consumer surplus ii. Producer surplus d. How does economic surplus compare for both prices? Comment on any difference.

Answer: a. i. $15. $10 for the 1st hour plus $5 for the second hour ii. $15. $10 for the 1st hour plus $5 for the second hour b. At $30 per hour, there will be one hour of tutoring c. i. $5 ii. $10 d. When the price changes from $20 to $25 consumer surplus and producer surplus decreases.

Both consumers and producers loose benefits as society realizes a deadweight loss.

LO-2, 3, 4, 5 Level: Difficult

32. Define consumer surplus and producer surplus and explain their role in public policy evaluation.

Answer: Consumer surplus is the difference between the market price and the price a consumer is willing to pay. It is the net benefit for acquiring a good. The producer surplus is the difference between the price a supplier is able and will to accept to produce a good or service and the market price. Combined they illustrate society’s economic surplus, consumer and producer’s well-being. Consumer and producer surpluses are helpful in evaluating efficiencies of public policies. The economic analysis of changes in benefit and costs associated with possible policies can provide evaluations of efficiency and equality.

LO-4 Level: Difficult

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c05; Chapter 5: Elasticity

Learning Objectives: LO-1 Define elasticity LO-2 Classify elasticity values into inelastic and elastic categories LO-3 Use the elasticity coefficient to assess the price elasticity of demand LO-4 Assess the relationship between elasticity and total revenue LO-5 Describe the factors that determine the price elasticity of demand

1. a. b. c. d.

The measurement of responsiveness between two variables is known as Marginality Elasticity Demand Total Revenue

Answer: B LO-1 Level: Easy

2. a. b. c. d.

Price elasticity of demand measures The responsiveness of sellers to a change in income The responsiveness of consumers to a change in income The responsiveness of sellers to a change in price The responsiveness of consumers to a change in price

Answer: D LO-1 Level: Easy

3. a. b.

Which of the following measures the price elasticity of demand?

A change in quantity divided by the change in income A percentage change in quantity divided by the percentage change in income

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c. d.

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A change in quantity divided by the change in price A percentage change in quantity divided by the percentage change in price

Answer: D LO-1 Level: Easy

4. a. b. c. d.

The ratio of the percentage change in quantity demanded to the percentage change in price is called Price elasticity of demand Price elasticity of supply Income elasticity of demand Income elasticity of supply

Answer: A LO-1 Level: Easy

5. a. b. c. d.

When a given percent change in the price of a good causes a larger percent change in the quantity demanded of the good the good is considered Elastic Inelastic Unit elastic Nonresponsive

Answer: A LO-1 Level: Easy

6. a. b. c.

When a given percent change in the price of a good causes a smaller percent change in the quantity demanded of the good, the good is considered Elastic Inelastic Unit elastic

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d.

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Responsive

Answer: B LO-1 Level: Easy

Reference: Use Figure 1 to answer questions 7 – 12.

Figure 1: Elasticities of Demand

7. a. b. c. d.

Which of the graphs illustrate a perfectly inelastic demand curve?

Graph A Graph B Graph C Graph D

Answer: A LO-2 Level: Moderate

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8. a. b. c. d.

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Which of the graphs illustrate a perfectly elastic demand curve?

Graph A Graph B Graph C Graph D

Answer: D LO-2 Level: Moderate

9. a. b. c. d.

Which of the graphs illustrate a relatively inelastic demand curve?

Graph A Graph B Graph C Graph D

Answer: C LO-2 Level: Moderate

10. Which of the graphs illustrate a relatively elastic demand curve? a. Graph A b. Graph B c. Graph C d. Graph D Answer: B LO-2 Level: Moderate

11. Which of the graphs illustrate a good whose percentage change in quantity demanded is greater than the percentage change in price?

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a. b. c. d.

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Graph A Graph B Graph C Graph D

Answer: B LO-2 Level: Moderate

12. Which of the graphs illustrate a good whose percentage change in quantity demanded is less than the percentage change in price? a. Graph A b. Graph B c. Graph C d. Graph D Answer: C LO-2 Level: Moderate

13. If the elasticity of demand is greater than one, the price elasticity of demand is a. Elastic b. Inelastic c. Unit elastic d. Unitary elastic Answer: A LO-3 Level: Easy

14. If the elasticity of demand is less than one, the price elasticity of demand is a. Elastic b. Inelastic c. Unit elastic

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d.

Test Bank

Unitary elastic

Answer: B LO-3 Level: Easy

15. The amount of money earned when a supplier sells a given quantity of a good is a. Total revenue b. Marginal revenue c. Total product d. Marginal product Answer: A LO-4 Level: Easy

16. The price of a good increases by 4%. The total revenue would probably increase on all of the following except a. Salt b. Gasoline c. Insulin for a diabetic d. A European vacation Answer: D LO-4 Level: Difficult

Reference: Use the following information to answer questions 17 – 19.

Price Elasticity of Demand Good A 4.5 Good B .45 Good C .45 Good D 45

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17. Which of the above goods is the most responsive to changes in price? a. Good A b. Good B c. Good C d. Good D Answer: D LO-3 Level: Easy

18. When price increases 7% quantity demanded decreases 5%. What is the price elasticity of demand? a. 0.07 b. 0.71 c. 0.14 d. 1.4 Answer: B LO-3 Level: Moderate

19. If the price elasticity of demand for a product is equal to 0.7, then a 5 percent increase in price will a. Increase quantity demand by .035% b. Increase quantity demanded by 3.5% c. Decrease quantity demanded by .035% d. Decrease quantity demanded by 3.5% Answer: D LO-3 Level: Moderate

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20. All of the following are determinants of the price elasticity of demand except a. The availability of substitutes b. The availability of normal goods c. Time d. The portion of income spent on the good Answer: B LO-5 Level: Moderate

21. All of the following would result in a higher price elasticity of demand except a. A longer time period b. Many substitutes c. Fewer substitutes d. A good that is considered a luxury Answer: C LO-5 Level: Moderate

22. You are the owner of a quick stop shop across the street from a college specializing in a burger named after the school’s mascot. It is a specialty in town and on game day is considered a staple for tailgaters. Which of the following would be an accurate assumption, given the above information, if you increase the price of the burger? a. Total revenue will increase b. Total revenue will decrease c. There will be no change in total revenue d. Hot dog sales will increase Answer: A LO-5 Level: Difficult

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23. Understanding elasticity is important to understand how policy changes will impact a. Election outcomes b. Political platforms c. Market outcomes d. Quantity supplied Answer: C LO-4 Level: Difficult

24. The local city council wants to increase the tax on alcohol sales. The intent of the tax is to help raise tax revenue to supplement funds needed for a new elementary school. This tax would only be effective if the price elasticity of demand for alcohol is a. Elastic b. Inelastic c. Unit d. Perfectly elastic Answer: B LO-4 Level: Moderate

25. A policy that focuses on a tax increases typically are on a. Products that have price elasticity of demand that is elastic b. Products that have price elasticity of demand that is inelastic c. Products that have unit price elasticity of demand d. Products that have many substitutes Answer: B LO-4 Level: Difficult

Reference: Use Figure 2 to answer questions 26 – 27.

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Figure 2: Demand for Widgets 60 50

Price per unit ($)

40 30

20 10 0 0

10

20

30

40

50

Quantities of Widgets per day

26. If the price of a widget increases from $40 to $50 the absolute value of the price elasticity of demand is a. .25 b. .67 c. 1.5 d. 4 Answer: D LO-3 Level: Difficult

27. If the price of a widget increases from $10 to $20 the absolute value of the price elasticity of demand is a. .25 b. .67 c. 1.5 d. 4 Answer: A Copyright © 2013 John Wiley & Sons, Inc.

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LO-3 Level: Difficult

28. If the price of a widget increases from $10 to $20 which of the following would be the expected result a. Total revenue will increase b. Total revenue will decrease c. Total revenue will initially increase but return to previous level d. Total revenue will not be affected Answer: A LO-4 Level: Moderate

29. If the price of a widget increases from $40 to $50 which of the following would be the expected result a. Total revenue will increase b. Total revenue will decrease c. Total revenue will initially increase but return to previous level d. Total revenue will not be affected Answer: B LO-4 Level: Moderate

30. If the price elasticity of demand is 4 than a. A 1 percent change in the good’s price will cause a 4 percent decrease in the quantity demanded of the good. b. A 1 percent change in the good’s price will cause a 4 percent increase in the quantity demanded of the good. c. A 10 percent change in the good’s price will cause a 4 percent decrease in the quantity demanded of the good d. A 10 percent change in the good’s price will cause a 4 percent increase in the quantity demanded of the good.

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Answer: A LO-3 Level: Moderate

31. Consider the following goods. Which of the following options provide the correct order of increasing elasticities? i.

Salt ii.

Wonder Bread iii.

Bread a. i, ii, iii b. ii, iii, i c. iii, ii, i d. They are the same Answer: C LO-3 Level: Difficult

32. Which of the following would indicate an elasticity of demand for a necessity? a. 0.5 b. 1.5 c. 2.5 d. 5 Answer: A LO-3 Level: Moderate

Essay

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33. You have exclusive rights for the sale of liquid beverages at the college games. Outside beverages are not allowed inside the stadium. Your friend, currently enrolled in an economics class, suggests that you decrease the price of your beverages to increase the quantity sold. Explain why, or why not, your friend is correct.

Answer: Your friend is not correct. Because there are no substitutes available within the stadium price elasticity of demand would be inelastic. Reducing the price would cause total revenue to fall because while the quantity demanded would increase, the percentage change of quantity demanded is less than the percentage change in price.

LO-5 Level: Moderate

34. Explain why, when demand is elastic, a reduction in price will result in an increase in total revenue.

Answer: When demand is elastic, the percentage change in quantity demanded is greater than the percentage change in price. Therefore when demand is elastic a reduction in price will result in a greater percentage of goods to be sold.

LO-4 Level: Difficult

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c06; Chapter 6: Measuring Economic Activity

Learning Objectives: LO-1: Explain the circular flow model LO-2: Define gross domestic product LO-3: Describe differences in GDP across countries and time LO-4: Describe what business cycles are and how they occur LO-5: Illustrate the workings of the aggregate demand/aggregate supply model

1. a. b. c. d.

A general model of an aggregate economy that gives an overview of the main sectors of the economy and shows the flows of income and output between them is The circular flow diagram Total revenue diagram Marginal cost diagram Gross Domestic Product

Answer: A LO-1 Level: Moderate

2. a. b. c. d.

This illustrates the exchange of resources and output between producers and consumers.

Gross Domestic Product Total revenue diagram Marginal cost diagram The circular flow diagram

Answer: D LO-1 Level: Easy

3. a.

These are the primary demander of goods and services in the economy.

Businesses

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b. c. d.

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Households Government Foreign investors

Answer: B LO-1 Level: Easy

4. a. b. c. d.

These are the primary suppliers of output and the primary demanders of labor and other economic resources Businesses Households Government Foreign investors

Answer: A LO-1 Level: Easy

5. a. b. c. d.

This determines the quantity of goods and services sold in the economy and the prices at which the goods and services are traded.

The economic system The interaction of domestic and foreign trade The interaction of demand and supply The amount of returns on trade

Answer: C LO-1 Level: Easy

6. a. b. c.

This provides a measure of all of the income that is being earned in the economy.

Spending in output markets Spending in input markets Spending in foreign markets

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d.

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Spending in domestic markets

Answer: B LO-1 Level: Easy

7. a. b. c. d.

This provides a measure of all the production occurring in the economy.

Spending in output markets Spending in input markets Spending in foreign markets Spending in domestic markets

Answer: A LO-1 Level: Easy

8. a. b. c. d.

Gross Domestic Product is the dollar value of All goods and services produced in an economy during a specific period of time.

All domestic goods produced in an economy during a specific period of time All final goods and services produced in an economy during a specific period of time All spending on the resources of labor and capital

Answer: C LO-2 Level: Easy

9. a. b. c. d.

Each of the following is counted in Gross Domestic Product except A bottle of wine produced in California A new building for a manufacturing plant Salaries for government workers Windows to be used in the building of a new office building

Answer: D LO-2

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Level: Moderate

10. Which of the following is correct? a. GDP = C + I + G –M b. GDP = C + I + G +M c. GDP = C + I + G +(X-M) d. GDP = C + I + G Answer: C LO-2 Level: Easy

11. Refer to the table below. GDP in this economy is equal to Imports $100 Exports 75 Consumption 5,000 Private Investment 1,000 Durables 750 Services 2,500 Government Expenditures 950 a. $10,375 b. $10,175 c. $10,025 d. $6,925 Answer: D LO-2 Level: Moderate

12. This approach in measuring GDP uses incomes earned by producers. a. Income b. Expenditure c. Value-added d. Total revenue

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Answer: A LO-2 Level: Easy

13. This approach in measuring GDP uses total sales minus the value of inputs. a. Income b. Expenditure c. Value-added d. Total revenue Answer: C LO-2 Level: Easy

14. This approach in measuring GDP uses total expenditures on final goods and services to measure GDP a. Income b. Expenditure c. Value-added d. Total revenue Answer: B LO-2 Level: Easy

15. The value added approach in measuring GDP is the value of a firm’s output minus a. The expenditures on personal consumption b. The change of inventories c. The value of inputs used to make those sales d. The value of foreign investment Answer: C LO-2

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Level: Easy

16. You own a business. You purchase $6,500 in land, labor and capital to produce widgets.

Your business produced 150 units of widgets and sold them for $25 each. The value added is a. $6,500 b. $5,520 c. $3,750 d. $1,500 Answer: B LO-2 Level: Moderate

17. Jacob decides to sell a used car. He buys a $25 ad in the local paper and lists the car for $3,000. It sold the next day! Because of this sale a. Gross Domestic Product increased $3,025. b. Gross Domestic Product increased $3,000. c. Gross Domestic Product increased $25. d. Gross Domestic Product did not change.

Answer: C LO-2 Level: Moderate

18. Consistently, the largest component of GDP is a. Consumption b. Private investment c. Government spending d. Net exports Answer: A LO-3 Level: Easy

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19. During the last decades, net exports have consistently been a. Negative b. Positive c. Equal to zero d. Changing due to changes in economic conditions in Europe Answer: A LO-3 Level: Easy

20. A measurement of relative productivity and output across countries is a. Gross Domestic Product b. Gross National Product c. Gross Domestic Product per capita d. Gross National Product per capita Answer: A LO-3 Level: Easy

21. A measurement of average standard of living across countries is a. Gross Domestic Product b. Gross National Product c. Gross Domestic Product per capita d. Gross National Product per capita Answer: C LO-3 Level: Easy

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22. GDP for two hypothetical countries, Alpha and Beta, are $500 billion and $750 billion, respectively. Alpha has a population of 750 million while Beta’s population is 1.24 billion people. Which of the following statements is true? a. Alpha has greater productivity than Beta. b. Alpha and Beta both enjoy equal productivity. c. Alpha has a greater standard of living than Beta. d. Alpha both enjoy equal standards of living.

Answer: C LO-3 Level: Difficult

23. A business cycle is a. Recurring fluctuations in the level of consumption expenditures b. Recurring fluctuations in the level of business investment c. Recurring expansions and contractions in the level of foreign involvement in aggregate economic activity d. Recurring expansions and contractions in the level of aggregate economic activity Answer: D LO-4 Level: Easy

24. Business cycles are officially tracked by a. The National Bureau of Economic Research b. The Whitehouse economists c. The Census Bureau d. The central bank Answer: A LO-4 Level: Moderate

25. The expansion phase of a business cycle can be characterized by all of the following except

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a. b. c. d.

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Decreasing output Increasing output Decreasing unemployment Increasing employment

Answer: A LO-4 Level: Moderate

26. The contraction phase of a business cycle can be characterized by all of the following except a. Decreasing output b. Increasing output c. Increasing unemployment d. Increasing employment Answer: B LO-4 Level: Moderate

27. Periods of increasing economic activity, rising production, and increasing employment are a. Business cycle expansions b. Business cycle contractions c. Business cycle peaks d. Business cycle troughs Answer: A LO-4 Level: Easy

28. Periods of decreasing economic activity, falling production, and falling employment are a. Business cycle expansions b. Business cycle contractions c. Business cycle peaks d. Business cycle troughs

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Answer: B LO-4 Level: Easy

Reference: Use the graph to answer questions 29-30.

29. A business cycle contraction occurs a. between years 1 and 2. b. between years 1 and 3. c. between years 2 and 3. d. between years 2 and 4.

Answer: C LO-4 Level: Easy

30. A business cycle expansion occurs a. between years 2 and 3. b. between years 1 and 3.

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c. d.

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between years 3 and 4. between years 2 and 4.

Answer: C LO-4 Level: Easy

31. Aggregate demand is the demand a. by private consumers in an economy. b. for goods and services by business firms. c. for goods and services by the government. d. for goods and services in an economy.

Answer: D LO-5 Level: Easy

32. Which of the following is not a component of aggregate demand? a. Consumption b. Investment c. Government purchases d. Government transfer payments Answer: D LO-5 Level: Easy

33. The aggregate demand curve is the relationship between a. the price level and consumption b. total revenue and consumption c. the price level and supply of all goods and services in an economy d. total revenue and the supply of all goods and services in an economy Answer: A

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LO-5 Level: Easy

34. Which of the following would represent a factor capable of shifting the aggregate demand curve? a. An increase in input costs b. A change in union contracts c. An increase in labor sources d. An increase in profit expectations for businesses Answer: D LO-5 Level: Moderate

Essay

35. Provide a circular flow diagram for households only, and describe the circular flow of income.

Answer: Households and businesses interact through the input and output markets. Resources are supplied by the household sector to the input market. These resources are used by the businesses to produce goods and services to the output market and are consumed by the household sector through their consumer spending. The consumer spending becomes revenue for the businesses that pay for the resources through rents, wages, and interest.

These payments become income for the households.

LO-1 Level: Moderate

36. Explain why the shape of the aggregate supply curve is important to the health of an economy.

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Answer: Depending upon the location on the aggregate supply and the size and shape of the aggregate supply curve, a shift of the aggregate demand can cause a slowdown or pressure on the price level.

LO-5 Level: Moderate

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c07: Chapter 7: Inflation and the Measurement of Prices

Learning Objectives: LO-1: Explain the difference between the face value of money and the purchasing power of money LO-2: Describe inflation and calculate inflation across time periods LO-3: Describe the winners and losers from inflation LO-4: Distinguish the sources of inflation LO-5: Illustrate the difference between real and nominal values

1. a. b. c. d.

Inflation is the rise in all prices in an economy. the rise in the general level of prices in an economy. the rise in the general level of prices of personal consumption of urban consumers. the rise in the rate of increase in all prices in an economy.

Answer: B LO-2 Level: Easy

2. a. b. c. d.

Purchasing power reflects the number of goods and services that can be acquired with a given amount of money. reflects the dollar value of goods and services purchased. reflects the increase of prices for goods and services. reflects the change in consumption patterns.

Answer: A LO-1 Level: Moderate

3.

You receive a raise of 3% at work. The rate of inflation is reported to be 5%.

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a. b. c. d.

Test Bank

Your purchasing power has decreased 2%.

Your purchasing power has increased 2%.

Your purchasing power remains the same.

Your purchasing power is not a variable and therefore is not affected.

Answer: A LO-1 Level: Moderate

4. a. b. c. d.

A decline in the overall prices of goods and services is disinflation. inflation. deflation. hyperinflation.

Answer: C LO-2 Level: Easy

5. a. b. c. d.

A slowing of the rate of price increases in the economy is disinflation. inflation. deflation. hyperinflation.

Answer: A LO-2 Level: Easy

6. a. b. c. d.

Which of the following is not a role of money?

Unit of account Store of value Medium of exchange Unit of standard

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Answer: D LO-1 Level: Easy

7. a. b. c. d.

When you use money to compare value it is used as a store of value. a medium of exchange. a unit of account. a unit of standard.

Answer: C LO-1 Level: Easy

8. a. b. c. d.

Fiat money is money that has value because of government law or regulation. money because it is backed by gold or silver. money because of tradition and acceptance. counterfeit money.

Answer: A LO-1 Level: Easy

9. a. b. c. d.

When money is used to purchase a good or service it is serving the role of a unit of account. store of value. medium of exchange. unit of standard.

Answer: C LO-1 Level: Moderate

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10. Providing a common measure of the worth of a good is money’s role as a a. unit of account. b. store of value. c. medium of exchange. d. unit of standard.

Answer: A LO-1 Level: Easy

11. Using money earned today for future purchases is money’s role as a a. unit of account. b. store of value. c. medium of exchange. d. unit of standard.

Answer: B LO-1 Level: Easy

12. The measure of the average prices of a given set of goods and services over time is a(n) a. business cycle. b. reflection of consumption patterns. c. price index. d. indicator of employment levels.

Answer: C LO-1 Level: Easy

13. The most widely used measure for tracking prices in the United States is the

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a. b. c. d.

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GDP Inflator.

Consumer Price Index.

Personal Consumption Expenditures.

Producer Price Index.

Answer: B LO-2 Level: Easy

14. Which of the following statements is correct? a. The CPI is the ratio of the cost of the market basket in the base year to the cost of the market basket in one year. b. The CPI is the ratio of the cost of the market basket in the base year to the cost of the market basket in one year multiplied by 100. c. The CPI is the ratio of the cost of the market basket in one year to the cost of the market basket in the base year. d. The CPI is the ratio of the cost of the market basket in one year to the cost of the market basket in the base year multiplied by 100.

Answer: D LO-2 Level: Moderate

15. You decide you want to compare your average price level for what you spend on entertainment. Last year, which you decide will be the base year, your spent $50 for a concert, $15 per movie, and $25 for a dinner out. This year, these same activities cost $75, $20, and $40, respectively. Calculate your entertainment index. a. 1.5 b. 150 c. .67 d. 66.7 Answer: B LO-2 Level: Difficult

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16. You decide you want to compare your average price level for what you spend on entertainment. Last year, which you decide will be the base year, your spent $50 for a concert, $15 per movie, and $25 for a dinner out. This year, these same activities cost $75, $20, and $40, respectively. Calculate your entertainment index in the base year. a. 1 b. 100 c. 1.5 d. 150 Answer: B LO-2 Level: Difficult

17. A measure used to calculate inflation is the a. difference in Consumer Price Index between two periods. b. change in the PPI between two periods. c. percent change in the price index between two periods. d. summation of the price indices between two periods.

Answer: C LO-2 Level: Moderate

18. A price level of 120 means that prices have a. increased 120 percent since the base year. b. increased 20 percent since the base year. c. increased 0.12 percent since the base year. d. increased 12 times since the base year.

Answer: B LO-2 Level: Moderate

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19. In year 1 the Consumer Price Index was 125 and 131 in the next year. What is the rate of inflation? a. 4.5 b. 4.8% c. 6% d. 6.3% Answer: B LO-2 Level: Moderate

20. If the Consumer Price Index in year 1 was 131 and the rate of inflation was 6.1% what is the Consumer Price Index in year 2? a. 7.86 b. 123.5 c. 139 d. 209.6 Answer: C LO-2 Level: Difficult

21. When inflation occurs, money saved ____________ its purchasing power and becomes a poor ____________. a. gains in; unit of value b. loses; unit of value c. gains in; store of value d. loses; store of value Answer: C LO-3 Level: Moderate

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22. Consider the following sectors of an economy’s population. i.

Savers ii.

Borrowers iii.

People of fixed income iv.

Lenders Which of the above lose due to inflation? a. i, ii ,iii b. i, ii ,iii, iv c. i, iv d. i, iii, iv Answer: D LO-3 Level: Moderate

23. _____________________ will benefit from inflation. a. Savers b. Borrowers c. Lenders d. People on fixed income Answer: B LO-3 Level: Easy

24. This type of inflation is a result of increases in aggregate demand. a. Hyperinflation b. Cost-push c. Stagflation d. Demand-pull Answer: D LO-4 Level: Easy

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25. This type of inflation is a result of decreases in aggregate supply. a. Hyperinflation b. Cost-push c. Stagflation d. Demand-pull Answer: B LO-4 Level: Easy

26. All of the following can be identifies as a source of inflation except a. aggregate demand. b. aggregate supply. c. increases in the money supply. d. decreases in the money supply.

Answer: D LO-4 Level: Easy

27. Inflation that results from an increase in any of the components of aggregate demand is a. demand-push inflation. b. demand-pull inflation. c. cost-push inflation. d. cost-pull inflation.

Answer: B LO-4 Level: Easy

28. If an economy is at Point a as illustrated, which of the following can be expected?

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a. b. c. d.

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Demand-push inflation Demand-pull inflation Cost-push inflation Cost-pull inflation

Answer: B LO-4 Level: Moderate

29. Cost-push inflation can be caused by a. an increase in government spending. b. an increase in a source of raw material. c. a change in aggregate demand. d. the supply side of the market.

Answer: D LO-4 Level: Easy

30. Which of the following would contribute to cost-push inflation? a. An increase in the costs of inputs of production b. An increase in the supply of inputs of production c. An increase in government spending d. An increase in income taxes Answer: A LO-4

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Level: Moderate

31. The inflation experienced by the United States during the 1970s was a result of a. demand-push inflation. b. demand-pull inflation. c. cost-push inflation. d. cost-pull inflation.

Answer: B LO-4 Level: Moderate

32. Values that are in current, or face, value, is known as a. real value. b. nominal value. c. marginal value. d. constant value.

Answer: B LO-5 Level: Easy

33. Values that have been adjusted for inflation is known as a. real value. b. nominal value. c. marginal value. d. face value.

Answer: A LO-5 Level: Easy

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34. A nominal quantity is one that is measured a. using the GDP deflator. b. in current dollar value. c. in physical, or constant, terms. d. using the CPI. Answer: B LO-5 Level: Easy

35. A quantity identified in constant terms is called a _______________ quantity. a. real value b. nominal value c. marginal value d. face value Answer: A LO-5 Level: Easy

36. You are attending the same University where your grandparents attended and have just landed a job at a local retail store when your Grandfather also worked in 1972. You accept the position for a t wage of $10.00 per hour. Your Grandfather’s wage was $2.37 per hour.

The CPI in 1972 was 41.8 and is 230.21 today. Real income between 1972 and today has a. increased. b. decreased. c. stayed the same. d. fluctuated.

Answer: B LO-5 Level: Difficult

Essay

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37. You have been offered two jobs in two different cities. The jobs are very similar in description. The first job offer is in Denver, Colorado at an annual salary of $52,000. The second job offer is for a job in Chicago, Illinois at an annual salary of $60,000. The cost of living index for Denver is 115 and 135 for Chicago. Which position will provide you the greater purchasing power?

Answer: Denver; the real income for the position in Denver is $52,000/1.15 = $45,217.39. The real income for the position in Chicago is $60,000/1.35 = $44,444.44. The position in Denver provides the great purchasing power.

LO-5 Level: Difficult

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c08; Chapter 8: The Power and Limits of Markets

Learning Objectives: LO-1: Describe the resource allocation and resource ownership decisions facing societies LO-2: Classify the basic types of economic systems LO-3: Describe the differences in types of ownership of resources LO-4: Describe the differences in types of decision making about resource allocation LO-5: Evaluate the tradeoffs between efficiency and equity; security and liberty LO-6: Understand the concept of market failure

1. a. b. c. d.

Resource allocation and resource ownership choices include decisions about each of the following except What to produce How to produce Where to produce For whom to produce

Answer: C LO-1 Level: Moderate

2. a. b. c. d.

This is a rationing process that provides an incentive to be efficient with use of resources.

Prices Government laws and policy Community mandates Governmental committees

Answer: A LO-1 Level: Moderate

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3. a. b. c. d.

Test Bank

The __________________ decisions of a society determine how the resources are shared among society’s citizens. resource ownership resource allocation resource income resource transfer

Answer: B LO-1 Level: Easy

4. a. b. c. d.

The _______________________ decisions of a society determine the property rights over the resources in a society. resource ownership resource allocation resource income resource transfer

Answer: A LO-1 Level: Easy

5. a. b. c. d.

This type of economic system uses private property ownership and private resource allocation decisions.

Command capitalism Market socialism Command socialism Market capitalism

Answer: D LO-2 Level: Easy

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6. a. b. c. d.

Test Bank

This type of economic system uses private property ownership and public resource allocation decisions.

Command capitalism Market socialism Command socialism Market capitalism

Answer: A LO-2 Level: Easy

7. a. b. c. d.

This type of economic system uses public property ownership and private resource allocation decisions.

Command capitalism Market socialism Command socialism Market capitalism

Answer: B LO-2 Level: Easy

8. a. b. c. d.

This type of economic system uses public property ownership and public resource allocation decisions.

Command capitalism Market socialism Command socialism Market capitalism

Answer: C LO-2 Level: Easy

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9. a. b. c. d.

Test Bank

All of the following are considered primary tradeoffs when one economic system is emphasized over another except efficiency. equity. conformity. liberty.

Answer: D LO-2 Level: Medium

10. Efficient markets are considered rationing devices because a. consumers how value the good or service the most will be the one who get it. b. suppliers can produce the good or service at the lowest cost ensuring a lower price. c. the equality of the market allows for all to benefit. d. of government decree.

Answer: A LO-5 Level: Difficult

11. All of the following indicate resource ownership except having a. the right to consume the good. b. the right to keep it. c. the right to sell it. d. the need to seek permission.

Answer: D LO-3 Level: Easy

12. This system provides for a public rationing. a. Market system b. Command system

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c. d.

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Capitalist system Socialist system

Answer: B LO-1 Level: Moderate

13. Black Friday has become an American tradition that signals the start of the holiday shopping season. This event provides special sales for consumers and is an example of _______________ system resource allocation. a. Command b. Socialist c. Market d. Capitalist Answer: C LO-1 Level: Difficult

Reference: Use the following spectrum diagram to answer questions 14-15.

14. If A on the spectrum above represents a resource ownership system where resources are jointly owned by the public and held by the government, what type of resource ownership system is represented by B? a. Command b. Socialist c. Market d. Capitalist

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Answer: D LO-3 Level: Difficult

15. If B on the spectrum above represents a resource ownership system where individual people, household, or businesses have tradable ownership rights to resources, what type of resource ownership system is represented by A? a. Command b. Socialist c. Market d. Capitalist Answer: B LO-3 Level: Difficult

Reference: Use the figure to answer questions 16-19.

16. Letter A represents this type of economic system. a. Market Socialism b. Command Capitalism c. Market Capitalism d. Command socialism

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Answer: C LO-2 Level: Easy

17. Letter B represents this type of economic system. a. Market Socialism b. Command Capitalism c. Market Capitalism d. Command socialism Answer: B LO-2 Level: Easy

18. Letter C represents this type of economic system. a. Market Socialism b. Command Capitalism c. Market Capitalism d. Command socialism Answer: A LO-2 Level: Easy

19. Letter D represents this type of economic system. a. Market Socialism b. Command Capitalism c. Market Capitalism d. Command Socialism Answer: D LO-2 Level: Easy

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20. Economic Efficiency can be attained when a. marginal benefit is greater than marginal cost. b. marginal benefit is less than marginal cost. c. marginal benefit equals marginal cost. d. marginal cost is zero.

Answer: C LO-5 Level: Easy

21. Which of the following statements is true concerning economic efficiency? a. Equilibriums that achieve economic efficiency generate maximum net benefit possible from a given set of resources. b. Equilibriums that achieve economic efficiency generate maximum net profit possible from a given set of resources. c. Equilibriums that achieve economic efficiency generate minimum marginal cost possible from a given set of resources. d. Equilibriums that achieve economic efficiency generate maximum marginal benefit possible from a given set of resources.

Answer: A LO-5 Level: Moderate

22. Adam Smith’s invisible hand implied that efficiency could be attained if a. A Government committee coordinate production based on people’s comparative advantage b. Government coordinated the price and quantities of goods and services produced c. Government would leave the price and output decisions to the market capitalist system d. Government provided subsidies and other incentives for production Answer: C LO-5 Level: Difficult

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23. One criticism of market capitalism is a. It generates efficient resource allocation b. Producers are provided incentive to find the lowest cost method of producing goods and services c. Goods and services are produced according to comparative advantage d. They are unlikely to produce many goods and services for the poor because the poor lack the ability to pay for the goods and services.

Answer: D LO-5 Level: Moderate

24. An egalitarian system is one that is a. Based on economic efficiency b. Based on economic equity c. Based on economic comparative advantage d. Based on economic surplus Answer: B LO-5 Level: Easy

25. An economic trade-off for liberty is a. authority. b. liberation. c. security. d. individuality.

Answer: C LO-5 Level: Easy

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26. Each of the following is a trade-off for some of our economic liberty in an effort to increase our economic security except a. mandatory Social Security taxes. b. worker’s compensation insurance. c. speed limits. d. deregulation.

Answer: D LO-5 Level: Moderate

27. A market failure will occur when a. an efficient amount of goods and services is not provided. b. new laws regulating taxes and subsidies are created. c. government involvement is minimal. d. when the mall does not open on time.

Answer: A LO-6 Level: Moderate

28. When decision makers are not faced with full costs or benefits of their actions, the result is the market system a. will generate sufficient allocation of goods or services for society. b. generates an inefficient allocation of goods or services. c. generates sufficient quantities of goods and services for consumers. d. generates an efficient allocation of goods and services.

Answer: B LO-6 Level: Easy

29. Each of the follow is a source of market failure except a. public goods.

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b. c. d.

Test Bank

externalities. monopolies. inferior goods.

Answer: D LO-6 Level: Easy

30. Pollution would be an example of a market failure because it a. represents imperfect information. b. is often caused by firms that are a monopolies. c. is a non-excludable public good. d. represents an externality where costs of production are born by someone other than the producer.

Answer: D LO-6 Level: Easy

Essay

31. Explain the three basic questions fundamental to all economies and provide explanations for each question for both resource allocation systems.

Answer: The three basic economic questions that each society must answer are (1) What goods and services are to be produced? (2) How are the goods and services to be produced? (3) Who will receive the goods and services? The response an economy makes to the first question—what to produce—depends on the goods and services a society wants. In a command economy, the government decides what a society wants, but in a market economy consumers are allowed to signal what products they want by way of their demands for specific commodities. Once an economy knows the goods a society wants, the next question the economic system must answer is how the goods and services are to be produced. In other words, how will scarce resources be allocated and used to produce what society desires. Once an economy has determined what goods and services to produce and how to

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Test Bank

produce them, it is faced with the distribution question: For whom will the goods and services be produced? This is a distribution question. Distribution refers to the way an economy allocates the goods and services it produces to consumers. In a market economy, most products are distributed through private markets. In a command economy goods are produced in state-owned facilities and distributed according to the government.

LO-1 Level: Moderate

32. (Relating this Chapter to Chapter 4: Consumer Surplus) Explain why the following statement is accurate. The sum of consumer surplus and producer surplus is maximized when economic efficiency is achieved.

Answer: When economic efficiency is achieved the sum of consumer and producer surplus is as large as possible. At this equilibrium marginal benefit equals marginal cost. It is at this equilibrium that maximum net benefit possible from a given set of resources is achieved.

LO-5 Level: Difficult

33. Explain why Adam Smith’s invisible hand represents the efficiency a market achieves without government interference.

Answer: Adam Smith called the self-regulating mechanism of allocation in the market capitalist system the invisible hand. This mechanism generates an allocation of resources based on self-interest, competition, and comparative advantage. In the market capitalist system the people who have the ability to produce a good at a lower comparative advantage and then trades with others who have a comparative advantage in other goods or services.

LO-5 Level: Moderate

34. Explain why market-based systems tend to generate more personal liberty than do command-based systems.

Answer: In a market-based system individuals consumers and producers, are acting on selfinterest generated decisions.

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LO-5 Level: Moderate

35. How is economic security measured?

Answer: One frequently used measurement of economic security and growth is GDP per capita.

This is because economic security can come from a steady income.

LO-5 Level: Difficult

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c09; Chapter 9: Wage Determination and Superstar Salaries

Learning Objectives: LO-1: Explain how buyers in the labor market make hiring and salary decisions LO-2: Demonstrate the importance of the value of the marginal product of labor and the marginal cost of labor LO-3: Explain why there are pay differences across occupations LO-4: Explain why individual salary comparisons are not valid for determining how much society values different occupations

Multiple Choice

1. a. b. c. d.

Profit maximizing firms will make their hiring and salary decisions by comparing Marginal benefits and costs of producing one more product Total benefits and costs of producing one more product Marginal benefits and costs of hiring one more worker Total benefits and costs of hiring one more worker

Answer: C LO-1 Level: Easy

2. a. b. c. d.

A production function can be explained as The relationship between the quantity of resources used and the total output of a product A process of the amounts of labor used to produce a good or service The ability to produce a good or service given resources The marginal output possible of a good or service with a given amount of labor and capital.

Answer: A LO-1 Level: Moderate

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3. a. b. c. d.

Test Bank

This would determine the cheapest combination of factors needed to produce a given product.

Total revenue The production possibility frontier The production function The marginal product of labor

Answer: C LO-1 Level: Moderate

4. a. b. c. d.

The sum of a product produced in a given period of time is Total product Marginal product Average product Standard product

Answer: A LO-1 Level: Easy

5. a. b. c. d.

This is the rate of output for a given period of time.

Marginal product Total product Average product Standard product

Answer: B LO-1 Level: Moderate

6.

The output gained from hiring one more unit of labor is known as

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a. b. c. d.

Test Bank

Marginal product of labor Total product of labor Marginal revenue of labor Total revenue of labor

Answer: A LO-2 Level: Moderate

7. a. b. c. d.

Marginal product of labor is The total output produced The extra output produced with each additional unit of labor The total revenue received from output The extra revenue received from the output from each additional unit of labor

Answer: B LO-2 Level: Easy

8. a. b. c. d.

Which of the following is true about the law of diminishing marginal product?

The law of diminishing marginal product implies negative marginal product.

The law of diminishing marginal product occurs at the same rate for different firms.

The law of diminishing marginal product is illustrated by a downward sloping marginal product of labor curve.

The law of diminishing marginal product illustrates the total product of labor hired.

Answer: C LO-2 Level: Moderate

9. a. b.

The rule that states that as a firm uses more of a variable resource with a fixed resource and fixed technology the additional, or extra, output will fall is known as The law of substantiated return The law of diminishing total product

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c. d.

Test Bank

The law of diminishing marginal product The law of increasing marginal product

Answer: C LO-2 Level: Moderate

10. The Value of the Marginal Product of Labor represents the a. Increase in total revenue earned when the firm hires an additional worker b. Decrease in total revenue earned when the firm hires an additional worker c. Increase in marginal revenue earned when the firm hires an additional worker d. Decrease in marginal revenue earned when the firm hires an additional worker Answer: A LO-2 Level: Easy

11. This is determined by the productivity of workers and the price of the output produced. a. The diminishing marginal product b. The marginal cost of labor c. The value of the marginal cost of labor d. The value of marginal product of labor Answer: D LO-2 Level: Easy

12. ______________ is the acquired skills and knowledge that makes workers more productive. a. Labor b. Capital c. Human capital d. Entrepreneurial ability Answer: C

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LO-2 Level: Easy

13. Of the following which is not a factor of productivity? a. Human capital b. Technology c. Availability to capital equipment d. Wages Answer: D LO-2 Level: Easy

14. This represents the demand curve for labor. a. The diminishing marginal product b. The marginal cost of labor c. The value of the marginal cost of labor d. The value of marginal product of labor Answer: D LO-2 Level: Easy

15. Consider the table. If the price per unit of output is $15 and wages paid each day is $225, how many people should the firm hire to maximize profit?

Units of Labor Output 0 0 1 7 2 19 3 34 4 47 5 57 a. 2

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b. c. d.

Test Bank

3 4 5

Answer: C LO-2 Level: Difficult

16. Which is an accurate definition of the marginal cost of labor? a. The marginal cost of labor is the fixed cost of production b. The change in revenue from one more unit of product c. The additional cost from producing one more unit of product d. The additional cost from hiring one more worker Answer: D LO-2 Level: Easy

17. The wage is $10 per hour. What is the marginal cost of labor for the fourth unit of labor? a. $10 b. $20 c. $30 d. $40 Answer: D LO-2 Level: Moderate

Reference: Use the graph to answer questions 18-20.

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18. Identify where hiring will maximize profits. a. To the left of point B b. To the right of point B c. At point B d. Any point on W Answer: C LO-2 Level: Moderate

19. Identify where hiring will increase profits. a. To the left of point B b. To the right of point B c. At point B d. Any point on W Answer: A LO-2 Level: Moderate

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Test Bank

20. Identify where hiring will decrease profits. a. To the left of point B b. To the right of point B c. At point B d. Any point on W Answer: B LO-2 Level: Moderate

21. The profit-maximizing level of employment is the quantity of labor where a. Marginal revenue product is equal to marginal cost b. Marginal product is equal to marginal cost c. Marginal revenue product is equal to market price of the good d. Marginal product is equal to market price of the good Answer: A LO-2 Level: Moderate

22. You find that you have a backlog of orders due to an increase in demand for your product.

You determine that if you hire one more person you will be able to increase your sales volume by $300 because of projected output by this extra person. Wages per day for this extra person will be $100. The marginal revenue product for this extra worker is a. $100 b. $200 c. $300 d. $400 Answer: C LO-2 Level: Moderate

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Test Bank

23. Which of the following would explain why skilled workers generally earn more than unskilled workers? a. Skilled labor has higher value of the marginal product of labor. b. Skilled labor has a more elastic demand curve. c. There is more of a supply of unskilled labor. d. There is more demand for unskilled labor.

Answer: A LO-3 Level: Moderate

24. Which of the following is not a correct evaluation of pay discrepancies? a. Salaries reflect the value of marginal unit of labor hired b. The difference is due to the margin c. Demand and supply d. The values society puts on the occupation Answer: D LO-4 Level: Easy

25. Which of the following would lead to a pay difference? a. Lack of interest by workers b. Standardized workers c. A special skill or talent by some of the labor force d. Purely competitive markets Answer: C LO-3 Level: Moderate

26. Salary differences will most likely be the greatest when a. The labor demand is inelastic b. The labor demand in elastic

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c. d.

Test Bank

The labor supply is elastic The market is an oligopoly and the labor demand is elastic

Answer: A LO-4 Level: Easy

Reference: Use the set of graphs to answer questions 27-30.

27. Which graph best depicts a labor market where a greater wage could be demanded? a. Graph A b. Graph B c. Graph C d. Graphs A and B Answer: A LO-3 Level: Moderate

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Test Bank

28. Which graph best depicts a labor market where there would be ability to demand a greater wage? a. Graph A b. Graph B c. Graph C d. Graphs A and B Answer: B LO-3 Level: Moderate

29. Which would represent a demand curve for high-skilled labor? a. Graph A b. Graph B c. Graph C d. Graphs A and B Answer: A LO-3 Level: Moderate

30. Which would represent a demand for low-skilled labor? a. Graph A b. Graph B c. Graph C d. Graphs A and B Answer: B LO-3 Level: Moderate

Essay

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Test Bank

31. Do you agree with the following statement? Why or why not?

A profit-maximizing firm will increase units of labor up to the point where the value of marginal product equals the wage rate.

Answer: Consider the following graph. If the value of the marginal product of labor is greater than the wage rate the firm could hire additional units of labor and its profits would increase. Because the MPL decreases as additional workers are employed, the VMPL will also decrease. Eventually the firm will reach a point where the VMPL equals the wage rate.

If the firm continues to add units of labor the wage rate is greater than the VMPL causing profit to decrease.

LO-2 Level: Difficult

32. Explain the importance of thinking at the margin when explaining the discrepancies of pay for different occupations.

Answer: Salaries reflect the value of the marginal, or next, unit of labor hired not the value of labor in total. The wage rate reflects the value of the marginal product of the next unit hired not the value produced by workers in total.

LO-3 Level: Moderate

33. How would the price of a product affect the demand for labor for the product?

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Test Bank

Answer: The value of the marginal product of labor equals the marginal product multiplied by the price of the product. Therefore, an increase would increase the demand for labor for the product. A decrease in the price would result in a decrease in the demand for labor.

LO-2 Level: Easy

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Test Bank

c10; Chapter 10: The Minimum Wage

Learning Objectives: LO-1: Define the minimum wage LO-2: Describe the history of the minimum wage LO-3: Describe the difference between the real and nominal values of the labor market LO-4: Explain why minimum wage laws are controversial LO-5: Describe research finding regarding impacts of the minimum wage

Multiple Choice

1. a. b. c. d.

Which of the following best defines the minimum wage?

The minimum annual salary a worker can make The minimum wage a worker can make The minimum annual salary an employer can provide a worker The minimum wage an employer can legally pay a worker

Answer: D LO-1 Level: Easy

2. a. b. c. d.

The minimum wage is A Price ceiling A Price floor A Price maximum Both A and C

Answer: B LO-1 Level: Easy

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3. a. b. c. d.

Test Bank

The lowest wage that employers can legally pay workers is The price ceiling for salaries The minimum wage The historical trend for wages Dependent upon state labor law

Answer: B LO-1 Level: Easy

4. a. b. c. d.

Which of the following is true about the federal minimum wage law?

Only the federal government can issue a federal minimum wage requirement.

The minimum wage requirement allows for more flexibility in hiring decisions.

Some states also have minimum wage laws.

Middle income workers are most impacted by minimum wage laws.

Answer: C LO-1 Level: Easy

5. a. b. c. d.

The ___________________ established minimum wages in the United States.

Federal Reserve Act Federal Employees’ Compensation Act Occupational Safety and Health Act Fair Labor Standards Act

Answer: D LO-2 Level: Easy

6. a. b.

The real value of the minimum wage reached its peak in 1968 1978

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c. d.

Test Bank

1988 2008

Answer: A LO-2 Level: Moderate

7. a. b. c. d.

The current federal minimum wage is $4.75 per hour $5.15 per hour $6.55 per hour $7.25 per hour

Answer: D LO-2 Level: Easy

8. a. b. c. d.

Which of the following is a true statement?

The federal minimum wage has been increased every five years since it was introduced in 1938.

The nominal value of the minimum wage was consistently matched purchasing power.

Because rising prices has eroded purchasing power of the minimum wage, the real value of the minimum wage has fallen since its peak in 1968.

The real value of the minimum wage has increased steadily over the past few decades due to inflation.

Answer: C LO-2 Level: Moderate

9. a. b. c.

For the minimum wage to be applicable to its purpose it must be Set above equilibrium wage Set below equilibrium wage Equal to equilibrium wage

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d.

Test Bank

Equal to marginal product of labor

Answer: A LO-4 Level: Moderate

10. Expressed in current dollar values this is not adjusted for inflation. a. Nominal value of the minimum wage b. Real value of the minimum wage c. Absolute value of the minimum wage d. Comparative value of the minimum wage Answer: A LO-3 Level: Easy

11. This is expressed in constant dollar. a. Nominal value of the minimum wage b. Real value of the minimum wage c. Absolute value of the minimum wage d. Comparative value of the minimum wage Answer: B LO-3 Level: Easy

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Test Bank

12. Refer to Figure 1. This would explain the difference between the nominal minimum wage and the real minimum wage.

a. b. c. d.

Unemployment Changes in the labor law Inflation The Fair Labor Standards Act

Answer: C LO-3 Level: Difficulty

13. Because the minimum wage is a ___________________ a surplus of workers exists and _________________ is created. a. price ceiling; inflation b. price ceiling; unemployment c. price floor; inflation d. price floor; unemployment Answer: D LO-1 Level of Difficulty

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14. A ___________________ is created when the minimum wage is _______________ market equilibrium. a. shortage; above b. surplus; above c. shortage; equal d. surplus; equal Answer: B LO-4 Level: Moderate

15. The minimum wage would have no impact if it is set _____________ market equilibrium. a. above b. below c. equal to d. inversely to Answer: B LO-4 Level: Moderate

16. You own Collegiate Chow, a local burger joint that is one of many such eateries in your town. You pay an average of $8 per hour to your workers. The minimum wage is $7.25 per hour. The Congress votes in a cut in the minimum wage to $6.50 per hour. Because of this legislation what of the following would be an appropriate action? a. Lower wages to $6.50 per hour b. Increase wages to $8.50 per hour c. Pay $7.25 d. Do nothing Answer: D LO-4 Level: Difficult

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Test Bank

17. The primary reason in support of minimum wage laws is a. They provide a means to reduce poverty b. They provide a means of establishing a legal working age c. They provided a way of controlling unreported income d. They provide a means of increasing union wages Answer: A LO-4 Level: Easy

Reference: Use the graph to answer questions 18-24.

18. If the market wage is set at W1 consumer surplus is a. W1AF. b. W1AB. c. W1AH. d. W1DH. Answer: A LO-5 Level: Difficult

19. If the market wage is set at W1 producer surplus is a. W1AF.

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b. c. d.

Test Bank

W1AB. W1AH. W1DH.

Answer: C LO-5 Level: Difficult

20. If a minimum wage is set at W2 consumer surplus is a. W1AF. b. W1AB. c. W2BF. d. W2HAB. Answer: C LO-5 Level: Difficult

21. If a minimum wage is set at W2 producer surplus is a. W1AF. b. W1AB. c. W2BF. d. HW2BE. Answer: D LO-5 Level: Difficult

22. The number of people unemployed because of the minimum wage is a. the value of B – E. b. the value of B – A. c. the value of C – B. d. the value of E – A.

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Answer: B LO-5 Level: Difficult

23. The deadweight loss from the minimum wage is represented by the area of a. BCA. b. EBA. c. GBA. d. EGA. Answer: B LO-5 Level: Difficult

24. How many people would lose their job as a result of this minimum wage? a. Q0 b. Q1 – Q2 c. Q0 – Q1 d. Q2 – Q1 Answer: C LO-5 Level: Difficult

25. A common criticism of the minimum wage is because a. they conflict with labor union laws. b. they can cause shortages in certain labor markets. c. they reduce the number of job openings. d. they reduce efforts for more equitable income distribution.

Answer: C LO-5 Level: Easy

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26. Losers from the minimum wage laws include all of the following except a. businesses. b. consumers. c. workers. d. all of these may lose from minimum wage laws.

Answer: D LO-5 Level: Moderate

27. All of the following are arguments for minimum wage laws except a. they help the poor by increasing their incomes. b. the increase in income does not come at the expense of taxpayers. c. they provide better work incentives. d. they create a surplus in the labor market.

Answer: D LO-4 Level: Easy

28. All of the following are arguments against minimum wage laws except a. minimum wage laws do not reduce poverty but reduces social welfare instead. b. minimum wage laws contributes to contributes to federal costs of transfer programs. c. minimum wage laws tend to discourage firms from investing in training. d. minimum wages tend to provide incentives to businesses to invest in capital substitutes.

Answer: B LO-4 Level: Moderate

29. According to research the demographic group most affected by minimum wage changes is a. the elderly.

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b. c. d.

Test Bank

females entering the workforce. teenagers. adult males ages 20 – 24.

Answer: C LO-5 Level: Easy

30. Research on the impacts of the minimum wage has focused on all of the following except a. immigration. b. poverty. c. employment. d. school enrollment.

Answer: A LO-5 Level: Easy

31. According to research the relatively small impacts of the minimum wage on employment results from the relatively ______________ demand and supply of labor in minimum wage labor markets. a. elastic b. inelastic c. unit elastic d. comparatively elastic Answer: A LO-5 Level: Moderate

Essay

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Test Bank

32. Proponents of the minimum wage law claim that the minimum wage is no longer able to support working families and should be returned to the 1968 value. Provide an explanation for this claim.

Answer: The real value of has steadily fallen since the peak of 1968 and purchasing power has been eroded because of inflation. This has made it difficult for families with children to maintain a consistent standard of living.

LO-1 Level: Moderate

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Test Bank

c11; Chapter 11: International Trade of Goods

Learning Objectives: LO-1: Discuss the extent of U.S. international trade LO-2: Explain the concepts of comparative advantage and absolute advantage LO-3: Analyze the costs and benefits of international trade LO-4: Describe the distribution of the costs and benefits from international trade LO-5: Assess the arguments for and against limiting international trade LO-6: Describe the costs, benefits, and mechanisms of limiting international trade LO-7: Describe some of the forms of trade liberalization

Multiple Choice

1. a. b. c. d.

Goods and services produced domestically but sold abroad are Exports Imports Elastic Inelastic

Answer: A LO-1 Level: Easy

2. a. b. c. d.

Goods and services produced abroad but sold domestically are Exports Imports Elastic Inelastic

Answer: B LO-1 Level: Easy

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3. a. b. c. d.

Test Bank

You order a bottle of wine from France to be served at your dinner party in Denver, Colorado by the caterers. The bottle of wine is a(n) __________________.

Import Export Complement Personal consumption expenditure

Answer: A LO-1 Level: Easy

4. a. b. c. d.

Seventy-seven percent of total world exports are conducted by __________________ countries.

Five Ten Fifteen Twenty

Answer: B LO-1 Level: Easy

5. a. b. c. d.

The largest category of U.S. goods exported is Capital goods Labor Services Labor and services combined

Answer: A LO-1 Level: Easy

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6. a. b. c. d.

Test Bank

You buy a bottle of wine produced in France. Which of the following is true?

The wine is an import for France and an export for the United States The wine is an export for France and an export for the United States The wine is an import for France and an import for the United States The wine is an export for France and an import for the United States

Answer: D LO-1 Level: Moderate

7. a. b. c. d.

When a country’s imports is greater than its exports, the country is experiencing a Trade deficit Trade surplus Trade balance Trade residual

Answer: A LO-1 Level: Easy

8. a. b. c. d.

A trade surplus is expressed as Exports > Imports Exports < Imports Exports = Imports (Exports – Imports)m

Answer: A LO-1 Level: Moderate

9. a. b.

The top international U.S. trading partners are Canada and India Mexico and China

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c. d.

Test Bank

India and China Canada and Mexico

Answer: D LO-1 Level: Easy

Reference: Use the graph below to answer questions 10-11.

10. Refer to the graph showing the production possibilities for two countries, A and B. Which statement is correct? a. Country A has comparative advantage in producing coffee b. Country A has absolute advantage in producing coffee c. Country B has comparative advantage in producing tractors d. Country B has absolute advantage in producing tractors Answer: C LO-2 Level: Medium

11. Refer to the graph showing the production possibilities for two countries, A and B. Which statement is correct?

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a. b. c. d.

Test Bank

Neither country would benefit from trade Country A would benefit from trading coffee to Country B Country B would benefit from trading tractors to Country A Both countries would gain if Country A specialized and traded tractors to Country B and Country B specialized and traded coffee to Country A

Answer: D LO-2 Level: Moderate

12. A country has absolute advantage in production of a product if a. It can produce more of the product than another country b. It can produce at a smaller dollar cost than another country c. It can produce at a smaller opportunity cost than another country d. It can consume more of a product than another country.

Answer: A LO-2 Level: Easy

13. A country is said to have _____________________ when it can produce a product at a smaller opportunity cost. a. allocative efficiency b. productive efficiency c. absolute advantage d. comparative advantage Answer: D LO-2 Level: Easy

14. The reason why countries trade can best be summarized by which of the following statements? a. International trade allows countries that are labor intensive to employ their labor force.

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b. c. d.

Test Bank

International trade allows countries that are capital intensive to employ their manufacturing plants.

International trade generates benefits to the trading partners who have comparative advantage in production.

International trade generates benefits to the trading partners who have absolute advantage in production.

Answer: C LO-2 Level: Moderate

15. International trade allows countries to a. Specialize in the production of one good over another based on comparative advantage b. Specialize in the production of one good over another based on absolute advantage c. Specialize in the production of capital goods based on absolute value d. Specialize specifically in labor intense products based on comparative advantage Answer: A LO-2 Level: Moderate

16. You and your neighbor both can bake bread and change the oil in your vehicle. You determine that you can change the oil in 10 vehicles or bake 30 loaves of bread in a day.

Your neighbor can change the oil in 18 vehicles in a day or bake 25 loaves of bread. Based on this information a. You should produce both the loaves of bread and change the oil b. Your neighbor should produce both the loaves of bread and change the oil c. You should produce the bread and let your neighbor change the oil d. You should change the oil and let your neighbor bake the bread Answer: C LO-2 Level: Difficult

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Test Bank

17. According to the graph which of the following statements is true?

a. b. c.

d.

Alpha has an absolute advantage in the production of both wheat and tractors and will receive no gain from trade.

Epsilon has an absolute advantage in the production of both wheat and tractors and will receive no gain from trade.

Alpha has an absolute advantage in the production of both wheat and tractors. However, it has a comparative advantage in the production of tractors and should produce tractors and import wheat.

Epsilon has an absolute advantage in the production of both wheat and tractors. However, it has a comparative advantage in the production of tractors and should produce tractors and import wheat.

Answer: C LO-3 Level: Difficult

18. The slope of the production possibilities frontier is equal to a. The opportunity cost of the good measured on the horizontal axis b. The opportunity cost of the good measured on the vertical axis c. The marginal cost of the good measured on the horizontal axis d. The marginal cost of the good measured on the vertical axis Answer: A LO-3 Level: Easy

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Test Bank

19. The terms of trade reflects a. How imports affects the net benefit of international trade b. The costs of limiting international trade c. The rate at which economies will trade two goods d. The currency exchange differentials Answer: C LO-3 Level: Moderate

20. Terms of trade is a. The marginal cost of producing one good for another b. The marginal benefit of one producing one good for another c. The rate of exchange of one good for another d. The absolute advantage of production of two goods Answer: C LO-3 Level: Easy

21. Refer to the graph which illustrates the impact of exports on a domestic market. The amount of exports is represented by

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a. b. c. d.

Test Bank

The distance between PE and P0.

The distance between QD and QE The distance between Q0 and QE The distance between QD and Q0

Answer: B LO-4 Level: Difficult

22. A domestic market exporting goods and services would a. Generate an increase in demand and higher prices for suppliers b. Generate a decrease in demand and higher prices for suppliers c. Generate an increase in demand and lower prices for suppliers d. Generate a decrease in demand and lower prices for suppliers Answer: A LO-4 Level: Moderate

23. Exporting goods and services for the domestic market would result in a. Higher prices for suppliers and a decrease in demand for consumers b. Higher prices for both suppliers and domestic consumers c. Lower prices for domestic consumers caused by an increase in quantity demanded d. Lower prices for suppliers and domestic consumers Answer: B LO-4 Level: Moderate

24. Imports on a domestic market a. Increase demand and prices for consumers b. Increase demand and prices for domestic producers c. Increase supply and prices for domestic producers d. Increase supply and lower prices for consumers

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Test Bank

Answer: D LO-4 Level: Moderate

25. One argument for limiting international trade is a. That benefits are received by the domestic producers facing imports b. That domestic producers lose from international trade c. That domestic consumers lose from international trade d. That only the foreign suppliers lose from international trade Answer: B LO-5 Level: Moderate

26. Of the following all are forms of trade restrictions except a. A tariff b. A quota c. A regulation requiring certain standards for an imported good d. A control on currency exchange Answer: D LO-6 Level: Easy

27. Which of the following statements represent an accurate assessment of the net effects of international trade a. Benefits from trade are greater than costs b. Benefits from trade are equal to costs c. Costs are greater than benefits d. Not possible to determine benefits and costs Answer: A LO-5

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Test Bank

Level: Moderate

28. This refers to a policy that limits free trade between countries. a. Liberalism b. Socialism c. Protectionism d. Privatization Answer: C LO-6 Level: Easy

29. Arguments for limiting free trade include(s) a. Protecting Jobs b. Protecting competition c. National security d. A and C Answer: D LO-6 Level: Easy

30. A tariff is a. A tax on exports b. A tax on agricultural products c. A tax on imports d. A subsidy to domestic firm Answer: C LO-6 Level: Easy

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Test Bank

31. Losers of tariffs include a. Foreign producers b. Domestic consumers c. Government d. Both foreign producers and domestic consumers Answer: D LO-6 Level: Easy

32. Quotas: a. Is a restriction on the quantity of a good that can be imported into a country b. Contributes to the revenue flow of the domestic government c. Contributes to the revenue flow of the foreign government d. Contributes to the elimination of the producer surplus Answer: A LO-6 Level: Easy

33. Which of the following is an example of a quota? a. A domestic government pays a subsidy for foreign production of a melons b. A limit of 23 million melons can be imported c. Foreign methods of production of melons must be made more humanitarian for laborers d. All of the above are examples of quotas Answer: B LO-6 Level: Moderate

34. One effect of a quota is a. A reduction of producer surplus b. An increase of producer surplus c. A reduction of consumer surplus

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d.

Test Bank

An increase of consumer surplus

Answer: C LO-6 Level: Difficult

35. A characteristic of trade liberalization includes a. Regional trade agreements b. Tariffs c. Quotas d. Embargos Answer: A LO-7 Level: Easy

36. The official arbiter of trade disputes between countries is a. The World Trade Organization b. The World Bank c. UNICEF d. USDA ERS Answer: A LO-7 Level: Easy

37. A regional trade agreement formed between the US, Canada, and Mexico is a. CAFTA b. SAFTA c. NAFTA d. EUFTA Answer: C LO-7

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Test Bank

Level: Easy

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Test Bank

c12; Chapter 12: Immigration and the International Trade of Labor

Learning Objectives: LO-1: Describe the extent of international migration LO-2: Assess the costs and benefits of migration for migrant LO-3: Assess the costs and benefits of migration for host and home countries LO-4: Define and describe the extent of outsourcing and offshoring

Multiple Choice

1. a. b. c. d.

Someone moving, or migrating, to another country is a(n) emigrant. immigrant. resident. citizen.

Answer: B LO-1 Level: Easy

2. a. b. c. d.

Someone who has moved, or migrated, out of their own country is a(n) emigrant. immigrant. resident. citizen.

Answer: A LO-1 Level: Easy

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3. a. b. c. d.

Test Bank

Emma migrates from her home country of England to France. In England, she is considered a(n) emigrant. immigrant. resident. citizen.

Answer: A LO-1 Level: Easy

4. a. b. c. d.

Emma migrates from her home country of England to France. In France, she is considered a(n) emigrant. immigrant. resident. citizen.

Answer: B LO-1 Level: Easy

5. a. b. c. d.

In 2010 this percent of the world’s population were immigrants.

3 13 5 15

Answer: A LO-1 Level: Easy

6. a.

An immigrant is ___________________ a country. entering

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b. c. d.

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leaving applying for citizenship to requesting asylum in

Answer: A LO-1 Level: Easy

7. a. b. c. d.

An emigrant is ____________________ a country. entering leaving applying for citizenship to requesting asylum in

Answer: B LO-1 Level: Easy

8. a. b. c. d.

Economists assume that decisions to migrate are based on costs and benefits. exchange rates. population trends. political reasons.

Answer: A LO-2 Level: Moderate

9. a. b. c. d.

An increased immigration in a host country is experienced during periods of economic expansion. economic contractions. short run cuts. recession.

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Answer: A LO-2 Level: Easy

10. The decision to migrate would imply that a. less utility is expected in the host country than in the home country. b. less utility is expected in the home country than in the host country. c. more utility is expected in the host country than in the home country. d. more utility is expected in the home country than in the host country.

Answer: C LO-2 Level: Moderate

11. Costs of migrating include(s) a. monetary costs. b. monetary and nonmonetary costs. c. nonmonetary costs only. d. intrinsic costs only.

Answer: B LO-2 Level: Easy

12. Costs of the migrating includes all of the following except a. the cost of moving belongings. b. the distance from friends and family. c. negative differences in earnings. d. positive differences in earnings.

Answer: D LO-2 Level: Easy

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13. Today, approximately 60 percent of the world’s migrants reside in the ___________ regions of the world a. more developed b. less developed c. developing d. concentrated Answer: A LO-2 Level: Easy

14. The United States is home to approximately a. 10 percent of the world’s migrants. b. 15 percent of the world’s migrants. c. 20 percent of the world’s migrants. d. 60 percent of the world’s migrant.

Answer: C LO-2 Level: Easy

15. When a home country has increased output and job opportunities a. fewer people emigrate. b. fewer people immigrate. c. more people emigrate. d. more people immigrate.

Answer: A LO-2 Level: Moderate

16. Ceteris paribus, research have found that immigrants are more likely to move to countries

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a. b. c. d.

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close to their home country. far from their home country. that are similar in size and culture. that have similar economic situations.

Answer: A LO-2 Level: Easy

17. The largest proportion of migrants to the U.S. comes from a. China. b. South America. c. Caribbean. d. Mexico.

Answer: D LO-2 Level: Easy

18. Which of the following case best describes a migration possibility? a. Emma, a 64-year-old grandmother from England migrates to the United States to travel the country. b. Jacob, a 32-year-old research economist in his home country, migrates to Australia to accept a position twice his current salary. c. Ashtyn, a 46-year-old mother of three with limited income, migrates to look for a better job. d. Michael, a 52-year-old auto mechanic who did not complete high school, migrates half way around the world to discover something new.

Answer: B LO-2 Level: Difficult

19. The majority of immigrants in the world are a. between 19 – 24 years old.

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b. c. d.

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younger than 24 years old. younger than 35 years old. older than 35 years old.

Answer: C LO-2 Level: Easy

Reference: Use the graphs below to answer questions 20-21.

20. Which illustrates the impact of immigration on substitute labor for a host country? a. A b. B Answer: B LO-3 Level: Easy

21. Which illustrates the impact of immigration on complement labor for a host country? a. A b. B

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Answer: A LO-3 Level: Easy

22. For the host country labor market, immigration causes a(n) a. increase in demand. b. decrease in demand. c. increase in supply. d. decrease in supply.

Answer: C LO-3 Level: Moderate

23. An increase in __________________ is caused by immigration in the host country. a. supply b. quantity supplied c. demand d. quantity demanded Answer: A LO-3 Level: Moderate

24. Impacts of immigration on host countries can be measured by a. the consumer surplus. b. the producer surplus. c. both consumer and producer surplus. d. the deadweight loss.

Answer: C LO-3 Level: Easy

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25. The impact of immigration for native workers will depend on the relationship of a. the skills of native workers to immigrant labor. b. the education of native workers to immigrant labor. c. the ages of native workers to immigrant labor. d. the culture of native workers to immigrant labor.

Answer: A LO-3 Level: Moderate

26. When immigrants are relatively low-skilled, they are considered ________________ for other low-skilled native workers. If immigrants have high skill levels, they are ___________ for highly-skilled native workers. a. complement; complement b. substitute; substitute c. complement; substitute d. substitute; complement Answer: B LO-3 Level: Moderate

27. Immigration can cause a(n) ___________________ in the _______________ of labor in markets where immigrants and native workers are _________________. a. increase; demand; substitutes b. decrease; supply; complements c. increase; supply; substitutes d. decrease; demand; complements Answer: C LO-3 Level: Moderate

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Reference: Use the graph to answer questions 28-29.

28. This model illustrates the impact of __________________ on host country labor markets. a. complements b. substitutes c. positive externalities d. inferior goods Answer: B LO-3 Level: Moderate

29. Which of the following statements is true? a. The increase in producer surplus implies that workers are made better off as a result of immigration. b. The decrease in producer surplus implies that workers are worse off as a result of immigration. c. The increase in consumer surplus implies that workers are made better off as a result of immigration d. The decrease in consumer surplus implies that workers are made better off as a result of immigration.

Answer: A

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LO-3 Level: Difficulty

30. In labor markets, native workers who are ________________ to immigrant workers have productivity and income gains from immigration. a. complements b. substitutes c. inferior goods d. negative externalities Answer: A LO-3 Level: Easy

31. Workers who are complements to immigrants ____________ from immigration because their wages and employment levels ____________. a. lose; fall b. lose; rise c. gain; fall d. gain; rise Answer: D LO-3 Level: Moderate

32. This is used by economists as a rough measure of a worker’s skill level. a. Occupational training b. Previous experience c. Education d. Age Answer: C LO-3 Level: Easy

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33. Emigration causes a decrease in a. the quantity supplied of labor in the home country. b. supply of labor in the home country. c. the quantity demanded of labor in the home country. d. the demand of labor in the home country.

Answer: B LO-4 Level: Easy

34. When workers emigrate from the home country a. firms in the host country lose. b. firms in the home country lose. c. workers in the host country lose. d. workers in the home country lose.

Answer: B LO-4 Level: Moderate

35. Hiring a person from another person or firm to produce a good or service is a. outsourcing. b. offshoring. c. collective bargaining. d. trading.

Answer: A LO-4 Level: Easy

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36. Widgets Inc, an international corporation, is moving its company production from the England to the United States. This is known as a. outsourcing. b. offshoring. c. collective bargaining. d. trading.

Answer: B LO-4 Level: Easy

37. Losers from outsourcing and offshoring are a. workers. b. firms. c. economies. d. both workers and firms.

Answer: A LO-4 Level: Moderate

38. Which of the following statements is true? a. When firms outsource jobs to other locations, costs of production fall and the supply of the product increases. The price of the product falls and the quantity demanded increases.

Because of this both firms and consumers benefit from the impact of outsourcing on home country product markets. b. When firms outsource jobs to other locations, costs of production increases and the supply of the product decreases. The price of the product increases and the quantity demanded decreases. Because of this, both firms and consumers lose from the impact of outsourcing on home country product markets. c. When firms outsource jobs to other locations, costs of production increases and the demand of the product decreases. The price of the product decreases and the quantity demanded decreases. Because of this, both firms and consumers lose from the impact of outsourcing on home country product markets. d. When firms outsource jobs to other locations, costs of production fall and the supply of the product decreases. The price of the product increases and the quantity demanded decreases.

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Because of this, both firms and consumers lose from the impact of outsourcing on home country product markets.

Answer: A LO-4 Level: Difficult

39. A remittance is a. when capital equipment is sent to other countries for economic development. b. financial payments sent back to families of immigrants. c. when migrants return home. d. the difference in national income due to immigration.

Answer: B LO-4 Level: Easy

Essay

40. Explain the four predictions about immigration.

Answer: Using a simple cost-benefit analysis of the immigration decision four primary predictions emerge. First improvement in earning opportunities in the host country increases the benefits to migration and increases the likelihood that someone will immigrate. Period of economic expansions in a host country are associated with increased immigration because earnings opportunities improve. Second, an increase in the monetary or other costs of moving reduces the likelihood of immigration. Ceteris paribus, a host country’s immigrants are more likely to come from nearby countries because of smaller costs of moving shorter distances.

Third, individuals who are more financially secure and have more labor market skills are more likely to migrate than others. This predication is based on the assumption that having more wealth or access to money makes it easier to cover the costs of moving. Fourth, younger individuals are more likely to migrate than older individuals. The majority of immigrants in the world are under 35 years old.

LO-2

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Level: Moderate

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c13; Chapter 13: Foreign Exchange and the International Trade of Money

Learning Objectives LO-1: Understand how foreign exchange markets operate LO-2: Demonstrate how foreign exchange rates are determined LO-3: Describe how foreign exchange rate influence international trade

Multiple Choice

1. a. b. c. d.

Foreign exchange markets facilitates the trade of domestic products. the trade of one currency for another. the trade of exports and imports. the trade of euros for American products.

Answer: B LO-1 Level: Moderate

2. a. b. c. d.

Exchange rates are determined in the __________________ for(of) currency. market. demand. supply. distribution.

Answer: A LO-1 Level: Moderate

3.

The conversion of one country’s currency into that of another is known as the

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a. b. c. d.

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net exports. trade deficit. trade surplus. foreign exchange.

Answer: D LO-1 Level: Easy

4. a. b. c. d.

The price of one country’s currency in terms of another country’s currency is known as the exchange rate. trade deficit. trade surplus. foreign exchange.

Answer: A LO-1 Level: Easy

5. a. b. c. d.

The rate at which one currency can be exchanged for another is the foreign trade. trade deficit. exchange rate. trade surplus.

Answer: C LO-1 Level: Easy

6. a. b. c. d.

The foreign exchange market is driven by demand. supply. demand and supply. government policy.

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Answer: C LO-1 Level: Easy

7. a. b. c. d.

One Chinese Yuan Renminbi (CNY) costs .1604 U.S. dollar. What is the cost of 1 U.S. dollar?

0.84 CNY 1.16 CNY 4.06 CNY 6.23 CNY

Answer: D LO-2 Level: Easy

8.

a. b. c. d.

Your dream vacation includes renting a cottage in the County Kerry in Ireland. The cost of this cottage will be, for the week, 330 British pounds. In U.S. dollars your cost will be $511.96. What is the rate of exchange?

0.64 0.55 1.55 1.64

Answer: C LO-2 Level: Moderate

9.

a. b. c.

You decide to take a week off and rent a cottage in Ireland. The cost of the cottage will be €500. If the exchange rate is currently at 1USD = €0.644, what will be the cost of the cottage in U.S. dollars? $322.00 $417.12 $500.00

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d.

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$776.40

Answer: D LO-2 Level: Difficulty

10. Which of the following statements is true about how exchange rates are determined? a. Exchange rates are determined through the interaction of government policies determining the openness to trade. b. Exchange rates are determined through the interaction of buyers and sellers of different currencies. c. Exchange rates are determined through the interaction of businesses. d. Exchange rates are determined through the interaction of consumers.

Answer: B LO-2 Level: Easy

11. Of the following which would not contribute to the demand for a currency? a. A foreigner importing a domestic product b. A domestic citizen vacationing in a foreign country c. A domestic business investing in a foreign country d. A domestic citizen taking a “stay-ca” to a regional B and B Answer: D LO-2 Level: Moderate

12. A currency requires more foreign currency to buy it. It can be said that this currency has a. depreciated in value. b. appreciated in value. c. been inversed. d. been devalued.

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Answer: B LO-2 Level: Easy

Reference: Use the graphs to answer questions 13-14.

13. Which graph illustrates the effects on the appropriate currency when an increase in British citizens decide to vacation in the U.S. a. Graph A b. Graph B c. Either Graph A or Graph B d. Neither Graph A nor Graph B Answer: B LO-2 Level: Moderate

14. Which graph illustrates the effects on the appropriate currency when there is an increase in U.S. citizens importing British tea? a. Graph A b. Graph B c. Either Graph A or Graph B d. Neither Graph A nor Graph B

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Answer: A LO-2 Level: Moderate

15. If Americans increase demand for goods produced in Europe this can a. create a supply of Euros in the foreign exchange market. b. create a demand for Euros in the foreign exchange market. c. create both a supply and a demand for Euros in the foreign exchange market. d. create a demand for U.S. dollars in the foreign exchange market.

Answer: B LO-2 Level: Medium

16. A currency requires less foreign currency to buy it. It can be said that this currency has a. depreciated in value. b. appreciated in value. c. been inversed. d. been devalued.

Answer: A LO-2 Level: Easy

17. Exports are a. goods or services produced domestically but sold abroad. b. goods or services produced abroad but sold domestically. c. goods or services produced domestically and sold domestically. d. goods or services produced abroad and sold abroad.

Answer: A LO-3 Level: Easy

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18. A good or service produced domestically but sold abroad is a(n) a. import. b. export. c. capital good. d. consumer good.

Answer: B LO-3 Level: Easy

19. A good or service produced abroad but sold domestically is a(n) a. import. b. export. c. capital good. d. consumer good.

Answer: A LO-3 Level: Easy

20. An example of a U.S. export would be a. a bottle of a wine produced in California sold to a buyer in England. b. a bottle of wine produced in France sold to a buyer in California. c. a bottle of wine produced in France sold to a buyer in England. d. a bottle of wine purchased for use at home.

Answer: A LO-3 Level: Moderate

21. Goods that we ______________ another country are known as imports. a. buy from

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b. c. d.

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sell to rent to recommend to

Answer: A LO-3 Level: Easy

22. Goods that we _____________ another country are known as exports. a. buy from b. sell to c. rent to d. recommend to Answer: B LO-3 Level: Easy

23. You buy a car from Germany. This constitutes an a. export for the U.S. and an import for Germany. b. import for the U.S. and an export for Germany. c. export for Germany and an import for the U.S. d. import for Germany and an export for the U.S. Answer: C LO-3 Level: Moderate

24. The currency for the hypothetical country of Omicron is the omi. Omicron has had an unstable past and is currently facing further political upheaval. Which of the following statements best describes the effects of political upheaval on Omicron’s international trade and exchange rate? a. This has created an increase in supply of omis in the foreign exchange market. b. There has been an increase in demand for omis in the foreign exchange market.

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c. There has been an increase in investment in Omicron’s businesses. d. There has been an increase in demand for Omicron’s exports.

Answer: A LO-3 Level: Difficult

25. In the graph, the price of the British pound

a. b. c. d.

appreciated because the dollars buys more pounds. appreciated because the dollars buys fewer pounds. depreciated because the dollars buy more pounds. depreciated because the dollars buy fewer pounds.

Answer: C LO-2 Level: Difficult

Reference: Use the following information to answer questions 26-27.

X = Exports M = Imports

26. A trade surplus would be represented by the following equation. a. X < M b. X = M c. M > X d. M < X

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Answer: D LO-3 Level: Moderate

27. A trade deficit would be represented by the following equation. a. M < X b. M = X c. X> M d. M > X Answer: D LO-3 Level: Moderate

28. An exchange rate which is determined by the interactions of the forces of the market is known as a a. fixed exchange rate. b. flexible exchange rate. c. stationary exchange rate. d. pegged exchange rate.

Answer: B LO-3 Level: Easy

29. An exchange rate determined by government action in the foreign exchange markets is a a. pegged exchange rate. b. floating exchange rate. c. fixed exchange rate. d. pegged or fixed exchange rate.

Answer: D LO-3 Level: Easy

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30. Which of the following would not support the use of a fixed exchange rate? a. There will be less susceptibility to risk. b. There will be less susceptibility to market expectations and uncertainties. c. More government resources will be needed to maintain it. d. It is a commonly used exchange rate.

Answer: C LO-3 Level: Easy

31. An appreciation of a currency will a. increase exports because the price of goods will be relatively less expensive to other goods b. decrease exports because the price of goods will be relatively less expensive to other goods c. increase exports because the price of goods will be relatively more expensive to other goods d. decrease exports because the price of goods will be relatively more expensive to other goods Answer: D LO-3 Level: Moderate

32. A depreciation of a currency will a. increase exports because the price of goods will be relatively less expensive to other goods b. decrease exports because the price of goods will be relatively less expensive to other goods c. increase exports because the price of goods will be relatively more expensive to other goods d. decrease exports because the price of goods will be relatively more expensive to other goods Answer: A LO-3 Level: Moderate

33. If the U.S. dollar increases in price in the foreign exchange market the result is that

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a. b. c. d.

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it requires less of other currencies to buy U.S. dollars it requires more of other currencies to buy U.S. dollars it requires less U.S. dollars to buy other currencies it requires more U.S. dollars to buy other currencies.

Answer: A LO-3 Level: Moderate

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c14; Chapter 14: Farm Policy

Learning Objectives: LO-1: Describe the history and evolution of government agricultural policy LO-2: Demonstrate how inelastic demand influences agricultural goods’ prices LO-3: Describe the main components of U.S. farm policy LO-4: Demonstrate the impacts of price supports in agriculture LO-5: Illustrate the impacts of supply restriction policies LO-6: Illustrate the impacts of demand enhancement policies LO-7: Assess the costs and benefits of recent U.S. farm policy

Multiple Choice

1. a. b. c. d.

Historically, the number of farms have decreased but the number of workers have increased. decreased and the number of workers have decreased. increased but the number of workers have decreased. increased and the number of workers have increased.

Answer: B LO-1 Level: Easy

2. a. b. c. d.

A contributing factor for the change in the number of farms has been increased specialization in agricultural production. improved technology. greater advances in farming techniques. the advancement of pivot irrigation.

Answer: A LO-1 Level: Easy

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3. a. b. c. d.

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Economist estimate that between 1950 and 2000 the average amount of output per hour worked by a farmer was 6 times higher in 2000 than in 1950.

12 times higher in 2000 than in 1950.

18 times higher in 2000 than in 1950.

22 times higher in 2000 than in 1950.

Answer: B LO-1 Level: Easy

4. a. b. c. d.

Supply-side explanations for the level of agricultural output in the U.S. today includes technological changes and innovations. increased productivity. increases in the labor force. technological changes and innovations and increased productivity.

Answer: D LO-1 Level: Easy

5. a. b. c. d.

Primary drivers behind the level of agricultural output in the U.S. are all of the following except labor-saving processes. technological innovations. improved crop and livestock techniques. subsidies from the U.S. government.

Answer: D LO-1 Level: Easy

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6. a. b. c. d.

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Demand factors of the agricultural markets include population size and incomes of consumers. population size and age of consumers. incomes of consumers and consumer preferences. incomes of consumers and prices of related goods.

Answer: A LO-1 Level: Easy

7. a. b. c. d.

Historically, a significant number of current U.S. government involvement in the agricultural industry originated with our founding fathers in the 1800s. in the Great Depression era of the 1930s. due to the stagflation of the 80s. in the economic boom of the 1990s.

Answer: B LO-1 Level: Easy

8. a. b. c. d.

Demand for agricultural products tend to be relatively price elastic. relatively price inelastic. relatively unitary elastic. perfectly inelastic.

Answer: B LO-2 Level: Easy

9. a.

Characteristics that have contributed to existing farm policy include the elasticity of the demand for agricultural products.

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b. c. d.

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inelasticity of the demand for agricultural products. elasticity of the supply of agricultural products. inelasticity of the supply for agricultural products.

Answer: B LO-2 Level: Easy

10. A bumper crop of a specific agricultural product will result in a. lower prices and decreases in total revenue. b. higher prices and increases in total revenue. c. lower prices and increases in total revenue. d. higher prices and decreases in total revenue.

Answer: A LO-2 Level: Moderate

11. Paid to producers, this typically is designed to provides assistance and supplement income. a. Farm tax b. Subsidy c. Price ceiling d. Price support Answer: B LO-3 Level: Easy

12. Components of agricultural policies include all of the following except a. Price supports b. Supply restrictions c. Supply enhancements d. Income supports

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Answer: C LO-3 Level: Easy

13. Which of the following statements is correct? a. Price supports results in a shortage of the good b. A subsidy results in an over allocation of resources to farm products c. Price supports results in an over allocation of resources to farm products d. Income supports has a direct impact on agricultural production Answer: C LO-3 Level: Difficult

14. As a result of a price support on an agricultural product a. Consumers will pay a higher price b. Consumers will pay a lower price c. Consumers will increase their quantity demanded d. Consumers will increase their demand Answer: A LO-4 Level: Moderate

15. Which of the following statements is correct? a. Government agricultural policies are often designed to increase demand and decrease supply of agricultural products. b. Government agricultural policies are often designed to decrease demand and increase supply of agricultural products. c. Government agricultural policies are often designed to increase demand and increase supply of agricultural products. d. Government agricultural policies are often designed to decrease demand and decrease supply of agricultural products.

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Answer: A LO-3 Level: Moderate

Reference: Use the graph below to answer questions 16-21.

16. Refer to the graph of an agricultural product. A possible price support would be represented by a. Price P0 b. Price P1 c. Price P2 d. Either Price P1 or Price P0 Answer: B LO-4 Level: Difficult

17. Refer to the graph of an agricultural product. Without the price support consumer surplus is represented by the area of a. P0FA b. P1FB c. GP0A

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d.

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P1BHG

Answer: A LO-4 Level: Difficult

18. Refer to the graph of an agricultural product. Without the price support producer surplus is represented by the area of a. P0FA b. P1FB c. GP0A d. P1BHG Answer: C LO-4 Level: Difficult

19. Refer to the graph of an agricultural product. With the price support enacted the consumer surplus is represented by the area of a. P0FA b. P1FB c. GP0A d. P1BHG Answer: B LO-4 Level: Difficult

20. Refer to the graph of an agricultural product. With the price support in place the producer surplus is represented by the area of a. P0FA b. P1FB c. GP0A d. P1BHG

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Answer: D LO-4 Level: Difficult

21. Refer to the graph of an agricultural product. Identify the deadweight loss to society created by the implementation of a price support. a. Area ABC b. Area HBA c. P0FA d. P1FB Answer: B LO-4 Level: Difficult

22. As a result of a price support a. Consumers lose b. Consumers gain c. Consumers are not affected by a price support d. Society gains Answer: A LO-4 Level: Moderate

23. Acreage controls and soil conservation are programs enacted to a. Increase elasticity of agricultural products b. Decrease elasticity of agricultural products c. Increase supply of agricultural products d. Decrease supply of agricultural products Answer: D LO-5

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Level: Moderate

24. The type of agricultural policy represented by the above graph is best defined as a

a. b. c. d.

price support. supply restriction. demand enhancement. income support.

Answer: B LO-5 Level: Moderate

25. The Conservation Reserve Program (CRP) is an example of a(n) a. price support. b. supply restriction. c. demand enhancement. d. income support.

Answer: B LO-5 Level: Moderate

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26. The Food for Peace program a. Is a demand enhancement policy designed to assist in the distribution of surplus U.S. agricultural output b. Is a supply restriction policy designed to assist in the distribution of surplus U.S. agricultural output c. Is an income support policy designed to assist in the distribution of surplus U.S. agricultural output d. Is a supply support policy designed to assist in the distribution of surplus U.S. agricultural output Answer: A LO-6 Level: Easy

27. In addition to assisting agricultural producers, this agricultural program is targeted toward low-income groups and foreign countries. a. Price support b. Supply restriction c. Demand enhancement d. Income support Answer: C LO-6 Level: Easy

28. Advocates of farm programs argue the policies are necessary to a. Preserve the incomes of traditional family farms and rural communities b. Stabilize demand c. Increase supply which allows for higher prices d. Decrease supply which allows for higher prices Answer: A LO-7 Level: Easy

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29. In recent years, farm household income has __________________ the income of the average U.S. household a. Fallen behind b. Equaled c. Exceeded d. Replicated Answer: C LO-7 Level: Easy

30. Which of the following statements is true? a. Agricultural programs are largely designed to decrease subsidies to the industry. b. Approximately half of the agriculture industry in the United States received support from governmental farm programs. c. The full costs and benefits of agricultural policies and program are easily known and calculated. d. Agricultural policies and programs primarily generate benefits.

Answer: B LO-7 Level: Moderate

31. Critics of farm programs cite that they a. Support large farmers more than smaller farmers b. Subsidize the producers at the expense of the consumers c. Restrict competitiveness of U.S. producers d. All of the above are criticisms of farm programs Answer: D LO-7 Level: Easy

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32. Farm programs such as those found in the United States a. Restrict output b. Cause an inefficient use of resources by over allocating resources to the agricultural industry c. Increases productivity d. Cause the relative price of agricultural land to stagnate Answer: B LO-7 Level: Moderate

33. Economists estimate that current commodity programs reduce U.S. net income by about $5 billion annually because of a. Misallocated resources b. Stagnate farmland prices c. Higher taxes d. Increased competitiveness Answer: A LO-7 Level: Easy

Essay

34. Explain how the supply-side and the demand-side factors work together to generate equilibrium prices and quantity.

Answer: The U.S. population has increased from approximately 75 million in 1900 to over 300 million in 2010. In addition to this increase in population, incomes in the U.S. have also risen.

Since 1967, the average amount of U.S. income earned per person has more than doubled, even after adjusting for inflation. Both of these changes of non-price determinants of demand result in an increase in demand, which results in an increase in equilibrium price and equilibrium quantity. (↑D: ↑PE↑QE) The supply side factors also indicate an increase in supply. An increase in productivity and technological innovations that save labor and increases output provides for an increase in supply,

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which results in a decrease in equilibrium price and an increase in equilibrium quantity. (↑S: ↓PE↑QE) Together, these two forces provide mixed predictions. While an increased in agricultural output can be expected, the size of the two changes will be needed to determine the effects on price. If the demand shift is larger than the supply shift, prices will increase. If the supply shift is larger, prices will fall. The shifts have opposite effects on equilibrium prices. However, because we have seen a decrease in inflation-adjusted prices of agricultural goods and services, it implies that the supply shift must be the larger of the two shifts.

LO-5/LO-6 Level: Moderate

35. Explain the effects and impact of a supply restriction on prices and quantity from a government enacted supply restriction. Provide a graph to illustrate your answer.

Answer: Because of the relatively inelastic demand faced by the agricultural sector, supply restrictions cause higher equilibrium prices but have a smaller impact on equilibrium quantities traded in the agricultural sector. The inelastic nature of demand also implies that producers will earn higher total revenues after the supply restrictions are in place.

LO-5 Difficulty: Difficult

36. Who are the winners and losers from a price support?

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Answer: Producers gain from a price support because the price of the good or service increases.

Because of this the producer surplus will increase. The gain of the producer surplus creates a loss of consumer surplus. Therefore consumers lose from a price support also because of an increase in price. The price support, a price floor, causes a deadweight loss to societies.

LO-4 Difficulty: Moderate

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c15; Chapter 15: The Economics of Illegal Drugs

Learning Objectives: LO-1: Describe the Incidence of drug use LO-2: Model the externalities associated with drug use LO-3: Describe the incomplete information problem associated with drug use LO-4: Appraise the policy responses to drug use LO-5: Analyze supply and demand issues in regulation policy LO-6: Analyze the impacts of drug legalization

Multiple Choice

1. a. b. c. d.

The most commonly used illicit drug used is Alcohol Marijuana Methamphetamine Cocaine

Answer: B LO-1 Level: Easy

2. a. b. c. d.

Costs to a third party from the consumption of a good is known as The scale effect A positive externality A negative externality Imperfect Information

Answer: C LO-1 Level: Easy

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3. a. b. c. d.

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A market failure associated with drugs that is caused because the true costs and benefits associated with the drug is not known is The scale effect A positive externality A negative externality Imperfect information

Answer: D LO-1 Level: Easy

4. a. b. c. d.

The trend in drug use in the U.S. since 200 has been Less than the observed trend during the 1990s Greater than the observed trend during the 1990s The same as the observed trend during the 1990s Is the same as the trends observed in the 1960s

Answer: B LO-1 Level: Easy

5. a. b. c. d.

In the case of illegal drugs which of the following have contributed to market failure?

Prohibition Externalities Imperfect information Both externalities and imperfect information

Answer: D LO-1 Level: Easy

6.

Externalities are effects of a transaction on

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a. b. c. d.

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The consumers and suppliers Consumers only Suppliers only Someone other than a consumer or supplier

Answer: D LO-2 Level: Easy

7. a. b. c. d.

Demand-side policies have predominately been aimed at Changing supplier’s expectations to reduce preferences Changing consumer’s expectations to reduce preferences Increasing people’s preferences Increase taxes on offenders

Answer: B LO-5 Level: Easy

8. a. b. c. d.

The majority of efforts of the War on Drugs have been Programs aimed at the prevention and treatment of drug abuse Changing consumer expectations Marketing campaigns Supply-side policies aimed at drug suppliers

Answer: D LO-6 Level: Easy

9. a. b.

Imperfect information occurs when Demanders or suppliers do not know the true costs and benefits associated with a good or service Demanders or suppliers know the true costs and benefits associated with a good or service

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c. d.

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All suppliers have different information about the true costs and benefits associated with a good or service All consumers have the true costs and benefits associated with a good or service

Answer: A LO-3 Level: Easy

10. The changes in the prices and quantity of drugs traded that result from supply-side policies depend on a. The negative externalities b. The positive externalities c. The elasticity of demand for drugs d. The elasticity of supply for drugs Answer: C LO-5 Level: Easy

11. A highly controversial approach to the issue of drug use is a. Legalization b. Prohibition c. Demand-side policies d. Supply-side policies Answer: A LO-6 Level: Easy

12. Which of the following would be an externality associated with drug use? a. Violence stemming from a supplier because of late delivery of product b. Violence stemming from a customer because of late delivery of a product c. The violence from a drug user on other members of the drug user’s family d. The loss of a person’s potential

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Answer: C LO-2 Level: Easy

13. Legalization of an illegal drug will most likely cause a. Supply to become less elastic b. Demand to become less elastic c. Supply to increase d. An increase in price Answer: C LO-6 Level: Easy

14. Which of the following best describes a market failure? a. The market is not producing a socially optimal amount of the good b. The market has failed to operate c. Society has failed to consume sufficient amount of the goods d. The product has been replaced by something better Answer: A LO-2 Level: Moderate

Reference: Use the following diagram to answer questions 15 – 17.

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15. In an unregulated market, the optimal level of production and consumption is a. Q1 b. Point A and P1 c. Point B and P2 d. Point C and P3 Answer: C LO-2 Level: Moderate

16. What would be the level of production and consumption best for society? a. Q1 b. Point A and P1 c. Point B and P2 d. Point C and P3 Answer: B LO-2 Level: Moderate

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17. The negative externality is represented by a. Point A to Point C b. Point A to Point B c. Points B to Point C d. Point A to P1 Answer: C LO-2 Level: Moderate

18. If a tax is imposed on a negative externality, the tax should be a. Equal to the amount of the externality b. Less the amount of the externality c. Such that demand is reduced d. Such that supply is reduced Answer: A LO-4 Level: Moderate

19. Which of the following is a true statement? a. Marginal Private Cost = Marginal Social Cost + Positive Externality b. Marginal Social Cost = Marginal Private Cost + Negative Externality c. Marginal Private Cost = Marginal Social Cost + Negative Externality d. Marginal Social Cost = Marginal Private Cost + Positive Externality Answer: B LO-2 Level: Moderate

20. Which of the following is a correct statement? a. MSC = MPC + external cost b. MSC = MPC - external cost c. MSC = MPB + external cost

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d.

Test Bank

MSC = MPB + external cost

Answer: A LO-2 Level: Moderate

21. Legalizing marijuana would most likely a. Increase demand b. Increase supply c. Increase both demand and supply d. Increase demand but not supply Answer: C LO-5 Level: Moderate

Reference: Use the following graph for numbers 22 and 23.

22. Of the two above graphs which would depict a relative elastic demand? a. Right b. Left Answer: b LO-5 Level: Moderate

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23. Of the two above graphs which would depict a relative inelastic demand? a. Right b. Left Answer: a LO-5 Level: Moderate

24. The impact of supply-side policies are a. A leftward shift of the supply curve resulting in an increase in price and decrease in quantity. b. A rightward shift of the supply curve resulting in a decrease in price and increase in quantity c. A leftward shift of the supply curve resulting in a decrease in price and increase in quantity d. A rightward shift of the supply curve resulting in an increase in price and a decrease in quantity.

Answer: A LO-5 Level: Moderate

25. When demand is relatively inelastic, supply-side programs will generate a. A small reduction in drug use but a large increase in drug price b. A large reduction in drug use but a small increase in drug price c. A small reduction in drug use but a small increase in drug price d. A large reduction in drug use but a large increase in drug price Answer: A LO-5 Level: Difficult

26. When demand is relatively elastic, supply-side programs will generate

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a. b. c. d.

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A small reduction in drug use but a large increase in drug price A large reduction in drug use but a small increase in drug price A small reduction in drug use but a small increase in drug price A large reduction in drug use but a large increase in drug

Answer: A LO-5 Level: Difficult

27. The effect of legalization of marijuana on price and quantity would be a. Increase price; decrease in quantity b. Price is indeterminate; quantity increases c. Price increases; quantity indeterminate d. Decrease price; indeterminate quantity Answer: B LO-2 Level: Difficult

Essay

28. Explain the marginal decision rule and provide a graph to illustrate your answer.

Answer: The marginal decision rule asserts that the maximum net benefit from an activity occurs when the marginal benefits and marginal costs of doing the activity are just equal.

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LO-1 Level: Difficult

29. Why would a negative externality create an inefficient overproduction?

Answer: When a negative externality is present in a market the supply curve does not include the total costs of production. This leads to an increase in supply, or overproduction.

LO-2 Level: Difficult

30. Researchers estimate that if supply-side programs were not in place for drugs like cocaine and heroin, the drugs would sell for prices that are comparable to aspirin. Explain this statement and graphically compare with marijuana and methamphetamine.

Answer: Economics researchers at the U.S. Department of Justice have found that the demand for marijuana and methamphetamine are relatively elastic, while the demand for heroin and cocaine are relatively inelastic. These elasticities imply that supply-side programs to reduce the supply of marijuana tend to generate relatively large reductions in quantity and small increases in price. Alternatively, programs to reduce the supply of cocaine and heroin generate relatively large increases in price but only small reductions in quantity traded.

LO-4 Level: Difficult

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c16; Chapter 16: Pollution, The Environment, and Global Warming

Learning Objectives LO-1: Describe the benefits and costs of pollution LO-2: Model the externalities associated with pollution LO-3: Describe the policy responses to pollution LO-4: Assess methods to address pollution problems

Multiple Choice

1. a. b. c. d.

Pollution is defined as the contamination of the ground causing disruption to ecosystems. the contamination of the ground and sky causing disruption to production. the contamination of the environment that creates inefficiency to production. the contamination of the environment that causes instability, harm, or disruption to ecosystems.

Answer: D LO-1 Level: Easy

2. a. b. c. d.

The main cause of pollution since the 1950s are naturally occurring. anthropogenic in nature. both naturally occurring and anthropogenic in nature. equally caused by nature and anthropogenic.

Answer: B LO-1 Level: Easy

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3. a. b. c. d.

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This allows the use of dollars as a common measure of a comparison of benefits and costs of pollution. diminishing marginal utility. increasing marginal cost. willingness to pay framework for marginal benefits. willingness to pay framework for marginal costs.

Answer: C LO-1 Level: Easy

4. a. b. c. d.

Which of the following is a true statement?

Environmental economists work toward zero-pollution as a morally correct strategy for society.

Environmental economists recognize that a zero-pollution level is not a feasible focus.

Environmental economists accept a strategy of zero-pollution.

Environmental economists accept a strategy of zero-pollution as long as marginal benefits are greater than marginal costs.

Answer: B LO-1 Level: Moderate

Reference: Use the graph to answer questions 5-7.

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5. a. b. c. d.

Test Bank

The downward slope of the curve reflects The inverse relationship between price and quantity demanded. the direct relationship between price and quantity demanded. the direct relationship between price and demand. the inverse relationship between price and demand.

Answer: A LO-1 Level: Moderate

6. a. b. c. d.

For the producer of the electricity which of the following is true?

The marginal revenue at point A will be less than the marginal revenue at point B. The total revenue at point A will be more than the total revenue at point B. The marginal revenue at point B will be less than the marginal revenue at point A. The total revenue at point B will be less than the marginal revenue at point A.

Answer: C LO-1 Level: Moderate

7.

The change in marginal benefits moving from Point A to Point B illustrates

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a. b. c. d.

Test Bank

the Law of Diminishing Return. the Law of Increasing Total Cost. the Law of Diminishing Marginal Benefits. the Law of Increasing Marginal Costs.

Answer: C LO-1 Level: Easy

8. a. b. c. d.

Marginal benefits from producing a product that creates pollution includes revenue to the producer. a desired product to consumers. both revenue to the producer and a desired product to consumers. social costs to consumers.

Answer: C LO-1 Level: Easy

9.

Consider the graph of the marginal costs of producing electricity. After point A this is observed in the production process.

a. b. c.

the Law of Diminishing Return. the Law of Increasing Total Cost. the Law of Diminishing Marginal Benefits.

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d.

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the Law of Increasing Marginal Costs.

Answer: D LO-1 Level: Moderate

10. The optimal level of pollution is where a. total profit is maximized for the producer. b. marginal profit is maximized for the producer. c. marginal benefits of control of the pollution equals marginal costs. d. the marginal benefits of production equals the marginal social costs of production.

Answer: C LO-1 Level: Moderate

11. External costs can be defined as a. the difference between costs to the producer from production and the costs to society from the production of a good. b. the difference between the costs to society and the private benefits of production. c. the difference between the private costs of production and the private benefits of production. d. the difference between the marginal social costs and marginal benefits.

Answer: A LO-2 Level: Moderate

12. Pollution is an example of a. a positive externality. b. a negative externality. c. marginal benefit. d. marginal cost.

Answer: B

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Test Bank

LO-2 Level: Easy

13. A negative externality occurs when a. costs of production are imposed on third parties. b. costs of distribution are imposed on third parties. c. benefits of the product are passed on to third parties. d. both costs of distribution are imposed on third parties and benefits of the product are passed on to third parties.

Answer: A LO-2 Level: Easy

14. When the market system does not generate the optimal, or efficient, allocation of goods and services a ___________________ occurs. a. public good b. private good c. market instability d. market failure Answer: D LO-2 Level: Moderate

15. Which of the following is an example of a market failure? a. The local state football game is sold-out b. Because of concerns of impending storm threats, the local hardware store runs out of plywood c. Because of changes in mortgage loan requirements and regulations, fewer people qualify for mortgages d. The daily traffic jam on the commute to work Answer: D

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LO-2 Level: Moderate

16. When a negative externality exists the market experiences a. a level of production less than optimal. b. a level of production that is greater than optimal. c. a level of production that equals optimal. d. a level of production where society maximizes benefits.

Answer: B LO-2 Level: Easy

17. When benefits are experienced by someone other than the consumer a ______________ occurs. a. a positive externality b. a negative externality c. marginal benefit d. marginal cost Answer: A LO-2 Level: Easy

18. Marginal costs born only by the producer is known as a. private marginal costs. b. private total costs. c. social marginal costs. d. social total costs.

Answer: A LO-2 Level: Easy

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19. Marginal costs that are born by society as a whole is known as a. private marginal costs. b. private total costs. c. social marginal costs. d. social total costs.

Answer: C LO-2 Level: Easy

20. Consider the graph which represents a local power plant. The production process includes the dumping of waste in the local river. The level of output QPrivate

a. b. c. d.

represents an efficient allocation of resources for the production of electricity. represents an overallocation of resources for the production of electricity. represents an underallocation of resources for the production of electricity. represents a cost-effective allocation of resources for the production of electricity.

Answer: B LO-2 Level: Moderate

21. Social market costs include

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a. b. c. d.

Test Bank

private marginal costs. the negative externality present in the market. both the private marginal costs plus the negative externality present in the market. the private marginal costs minus the negative externality present in the market.

Answer: C LO-2 Level: Easy

Reference: Use the following graph to answer questions 22-24.

22. Consider the graph that illustrates the production of electricity where not all of the costs of production are captured in the private costs. Which of the following statements is true? a. An output of QPrivate provides an optimal allocation of resources to the market. b. An output of QPrivate provides an efficient allocation of resources to the market. c. An output of QSocial provides an optimal allocation of resources to the market. d. An output of QPrivate minus QSocial provides an efficient allocation of resources to the market.

Answer: C LO-2 Level: Hard

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23. Consider the graph that illustrates the production of electricity that includes the dumping of waste into the nearby river. The negative externality is represented by a. the distance between Point A and Point B. b. the distance between Point A and Point C. c. the distance between Point B and C. d. the area of the triangle ABC. Answer: C LO-2 Level: Moderate

24. Consider the graph. A negative externality is represented by a. the difference between QPrivate and QSocial. b. the difference between PPrivate and PSocial. c. the difference between S(MCPrivate) and S(MCSocial). d. the difference between MBPrivate and MBSocial.

Answer: C LO-2 Level: Hard

25. Policy responses to pollution can be classified as a. command-and-control. b. assignment of property rights. c. command-and-control and assignment of property rights. d. fees and taxes.

Answer: C LO-3 Level: Easy

26. Policy response to pollution that involves direct government regulation is known as a. command-and-control.

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b. c. d.

Test Bank

assignment of property rights. pollution abatements. common property resources.

Answer: A LO-3 Level: Easy

27. An example of a command-and-control policy is a. public lands and wildlife. b. ITQs. c. the federal taxes on gasoline. d. limits on production.

Answer: C LO-3 Level: Easy

28. Consider the graph that illustrates the impact of a pollution tax imposed on the producer.

The tax imposed would be equal to

a. b. c.

the distance between Point A and Point B. the distance between Point A and Point C. the distance between Point B and C.

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d.

Test Bank

the area of the triangle ABC.

Answer: C LO-3 Level: Hard

29. Example(s) of command-and-control methods of pollution reduction include a. taxes and fees equal to the amount of the negative externality. b. common property resources for collectively owned resources. c. ITQs for the collectively owned resources. d. tradable pollution rights.

Answer: A LO-3 Level: Easy

30. Collectively owned resources are known as a. ITQs. b. tradable pollution rights. c. common property resources. d. cap and trade systems.

Answer: C LO-3 Level: Easy

31. A system of pollution reduction that allows producers to emit a specific amount of pollutants is known as a. ITQs. b. tradable pollution rights. c. common property resources. d. cap and trade systems.

Answer: D

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Test Bank

LO-3 Level: Easy

32. Under cap and trade systems a. an upper limit is set that sets the marginal social costs equal to the marginal benefits of emissions. b. an upper limit that sets marginal private costs equal to the marginal private benefits of emissions. c. an upper limit that sets marginal social costs equal to the marginal private benefits of production. d. an upper limit that sets marginal private costs equal to the marginal social benefits of production.

Answer: A LO-3 Level: Moderate

33. The government sells permits that allow producers to emit a particular amount of pollution which can be bought and sold among producers is known as a. command-and-control regulations. b. common property resources. c. cap and trade systems. d. tradable pollution rights.

Answer: D LO-3 Level: Easy

34. When a resource has no direct price a. overuse of the resource and the tragedy of the commons may occur. b. overuse of resources and underproduction will occur. c. pollution occurs. d. underallocation of resources may occur.

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Test Bank

Answer: A LO-3 Level: Moderate

35. A negative to the command-and-control approaches to reducing pollution would include all of the following except a. the lack of efficiency because of the government intervention. b. the lack of flexibility. c. the expense of regulation. d. the unpopularity.

Answer: D LO-4 Level: Moderate

36. A method of environmental preservation that does not rely on continual government intervention is a. tragedy of the commons. b. command-and-control. c. assignment of property rights. d. emission limits.

Answer: A LO-4 Level: Easy

Essay

37. List and briefly explain three types of negative impacts from pollution.

Answer: Answers will vary. Possible responses include: Health impacts: loss of life and loss of quality of health caused by air, land, and water pollution

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Physical impacts: damages to land, air, and water resulting in damages to plants, wildlife, and quality of soil Ecological: damages to ecosystems resulting in long-term environmental harm as well as changes in property values LO-1 Level: Moderate

38. Describe the consequences to the market when a product is not produced at the optimal level?

Answer: If the production of a good results at a level other than optimal, such as in the case of pollution, marginal benefits do not equal marginal costs. If too much of the good is produced the company’s profits will fall. If too little of the good is produced possible profits will be foregone.

LO-1 Level: Moderate

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c17; Chapter 17: The Economics of Education

Learning Objectives: LO-1: Describe the level and changes in educational attainment over time LO-2: Describe the costs and benefits of education LO-3: Define human capital LO-4: Model the positive externalities associated with education LO-5: Evaluate why some education is publicly provided LO-6: Describe some of the issues surrounding education reform

Multiple Choice

1. a. b. c. d.

In 1948 the highest level of educational attainment of the U.S. population was not a high school graduate. high school graduate. some college. four or more years of college.

Answer: A LO-1 Level: Easy

2. a. b. c. d.

In 2008 the highest level of educational attainment of the U.S. population was not a high school graduate. high school graduate. some college. four or more years of college.

Answer: D LO-1 Level: Easy

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3. a. b. c. d.

Test Bank

Which of the following is included in the cost of education?

Direct costs such as books Opportunity costs Time Direct costs and opportunity costs

Answer: D LO-2 Level: Easy

4.

a. b. c. d.

Jacob attends Greatland University. He is a full time student. Annually he pays $6,000 in tuition and fees, $8,000 for room and board, and $1,300 for books. He also estimates that because he has chosen to be a full time student he is giving up approximately $20,000 in income. He also gives up approximately $600 in interest to finance his education. Jacob’s annual total cost of his education is $14,000. $15,300. $35,300. $35,900.

Answer: D LO-2 Level: Difficult

5. a. b. c. d.

The largest cost of attending college is tuition. tuition and books. room and board. foregone costs.

Answer: D LO-2 Level: Easy

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6. a. b. c. d.

Test Bank

The opportunity cost of education increases with the level of educational attainment. decreases with the level of educational attainment. is consistent with the level of educational attainment. does not appear to be related to the level of educational attainment.

Answer: A LO-2 Level: Moderate

7. a. b. c. d.

Which of the following statements is true concerning marginal benefit and marginal cost of education?

The marginal private benefit is less than the marginal private costs for the first few years of education.

The marginal private benefit is equal to the marginal private costs for the first few years of education.

The marginal private benefit is greater than the marginal private costs for the first few years of education.

The marginal social benefit is greater than the marginal private costs for the first few years of education.

Answer: C LO-2 Level: Difficult

8. a. b. c. d.

As years of education is increased marginal benefit will increase. marginal benefit will decrease. marginal cost will decrease. marginal cost will remain constant.

Answer: B LO-2 Level: Easy

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9. a. b. c. d.

Test Bank

As years of education is increased marginal benefit will increase. marginal benefit will decrease. marginal cost will increase. marginal cost will remain constant.

Answer: C LO-2 Level: Easy

10. The acquired skills and knowledge that make people more productive is a. brain capital. b. human labor. c. human capital. d. physical capital.

Answer: C LO-3 Level: Easy

11. Which of the following statements is most accurate? a. Because of the increase in skills and knowledge demand for workers decrease due to costs. b. Because of the increase in skills and knowledge demand for workers decrease due to productivity. c. Because of the increase in skills and knowledge demand for workers increase due to costs. d. Because of the increase in skills and knowledge demand for workers increase due to productivity.

Answer: D LO-3 Level: Moderate

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Test Bank

12. Which of the following statements is true concerning marginal benefit and marginal cost of education? a. The marginal private benefit is less than the marginal private costs for the 16th year of education. b. The marginal private benefit is equal to the marginal private costs for the16th year of education. c. The marginal private benefit is greater than the marginal private costs for the 16th year of education. d. The marginal social benefit is greater than the marginal private costs for the 16th year of education.

Answer: A LO-2 Level: Difficult

13. When I benefit because you increase your education a ________________ exists in society. a. positive externality b. negative externality c. positive private cost d. positive private benefit Answer: A LO-4 Level: Easy

14. ____________________ are benefits received by third parties. a. Positive externalities b. Negative externalities c. Positive private costs d. Positive private benefits Answer: A LO-4 Level: Easy

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15. _________________ are costs imposed on third parties. a. Positive externalities b. Negative externalities c. Positive private costs d. Positive private benefits Answer: B LO-4 Level: Easy

16. Because of education society experiences a a. positive private cost. b. positive private benefit. c. positive externality. d. negative externality.

Answer: C LO-4 Level: Easy

17. When a positive externality is present in an industry a. resources are overallocated. b. resources are underallocated. c. resources are efficiently allocated. d. there is insufficient information to determine.

Answer: B LO-4 Level: Moderate

18. Which of the following would be a result of a positive externality? a. Increased dependence on social welfare programs

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b. c. d.

Test Bank

More political unrest Lower crime rates Lower voter participation rates

Answer: C LO-4 Level: Easy

19. Because positive externalities present benefits on third parties a. private marginal benefits and social marginal benefits need to be considered to determine an optimal level of output. b. social marginal benefits and social marginal costs need to be considered to determine an optimal level of output. c. private marginal costs and private marginal benefits need to be considered to determine an optimal level of output. d. social marginal costs and private marginal benefits need to be considered to determine an optimal level of output.

Answer: A LO-4 Level: Moderate

20. When a positive externality is present the market will produce a. an efficient amount and charge a fair price. b. too much product and charge a price greater than a fair market value price. c. too little product and charge less than a fair market value price. d. too little and charge more than a fair market value price.

Answer: C LO-4 Level: Moderate

21. Marginal benefits received only by the individual decision maker are a. marginal benefits.

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b. c. d.

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private marginal benefits. social marginal benefits. external benefits.

Answer: B LO-4 Level: Easy

22. Consider the graph. Because there are not incentives for people to consider when buying education the market determined amount of education would be

a. b. c. d.

Q*Private.

Q*Social.

Point A. Point B.

Answer: A LO-4 Level: Moderate

Reference: Use the graph to answer questions 23 and 24.

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23. The socially optimal level of education is a. Point A. b. Point B. c. Q*Private. d. Q*Social.

Answer: D LO-4 Level: Easy

24. The amount of the positive externality is represented by a. The distance between points A and B. b. The distance between points B and C. c. The distance between points C and A. d. The distance between Q*Private and Q*Social.

Answer: A LO-4 Level: Moderate

25. Mathematically the amount of the marginal benefit to society is a. external benefits minus private marginal benefits. b. private marginal benefits minus external benefits. c. private marginal benefits plus external benefits.

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d.

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(Marginal benefits minus external benefits)2.

Answer: C LO-4 Level: Easy

26. As years of education are increased a. external benefits increase. b. external benefits decrease. c. external benefits remain constant. d. the rate of change for external benefits increases after attainment of high school.

Answer: B LO-4 Level: Easy

27. Spending per student in the U.S. has ______________ over the last 50 years. a. grown slowly. b. not exhibited any growth. c. grown rapidly. d. experienced inconsistent rates of growth.

Answer: C LO-4 Level: Easy

28. Governments allocate large budgets to education at K-12 and university levels because _________________ and to ___________________. a. education generates positive externalities for society; increase people’s incentives to obtain more education. b. education generates negative externalities for society; increase willingness to pay for education. c. resources are overallocated; create more efficiency in the market. d. education is a private good; provide easier access to education.

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Answer: A LO-5 Level: Moderate

29. Societies will provide assistance and incentive to encourage people to increase education because a. the marginal cost of increasing educational attainment is less than the marginal benefit to society. b. the productive efficiency of education is limited to the level of private output. c. the optimal private level of educational attainment is lower than the socially optimal level of educational attainment. d. the level of external benefits is insufficient to cover the private benefits received.

Answer: C LO-5 Level: Moderate

30. Educational reform programs place an emphasis on the value of ____________ in providing incentives for teachers and administrators to be as productive as possible with their means. a. private businesses. b. integration. c. competition. d. seclusion.

Answer: C LO-6 Level: Easy

31. An educational reform program that allows parents a choice about where their children attend schools are known as a. private schools. b. charter schools. c. voucher schools.

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d.

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segregated schools.

Answer: B LO-6 Level: Easy

32. The U.S. educational system is widely criticized because of a. the political debate among administration. b. the diversity of students and levels of abilities. c. the lack of parental involvement. d. the increased spending has not seemed to generate better educational outcomes.

Answer: D LO-6 Level: Easy

33. Research on school choice reform programs a. has been inconsistent in their results. b. has found little results that the programs generated systematic academic benefits. c. has found improved students’ test scores. d. has found increased parental involvement.

Answer: A LO-6 Level: Easy

34. Economic research indicates that average teacher quality has fallen since the 1970s. Part of this decline can be attributed to a. alternative, better paying options available. b. selectivity of educational programs limiting entrance. c. the falling number of program completions. d. economic downturn causing fewer openings.

Answer: A

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LO-6 Level: Easy

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c18; Chapter 18: Competition and Monopoly

Learning Objectives LO-1: Understand how firms determine the optimal level of output LO-2: Demonstrate the differences in output choices between firms in perfect competition and monopoly LO-3: Compare profits for perfectly competitive firms and monopolies LO-4: Assess the economic efficiency of firms in perfect competition versus monopolies LO-5: Understand why some economists argue for regulation of monopoly power

1. a. b. c. d.

The difference between total revenue and total cost is known as profit. marginal revenue. average revenue. price.

Answer: A LO-1 Level: Easy

2. a. b. c. d.

Total costs of production include direct costs of producing a good or service. producing a good or service minus depreciation of capital. producing a good or service plus any opportunity cost. raw material only.

Answer: C LO-1 Level: Easy

3.

After being employed at Graphics, Inc. you started your own company, Graphics R Us. In addition to your raw materials to produce custom images, you rent your space and are

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a. b. c. d.

Test Bank

responsible for all utilities and insurance on the building and capital equipment. You employ two assistants. Which of the following is not considered part of the total costs of production?

Costs of raw material to produce a good or service Utilities for the space Lost salary for your skills and talents at your former job Taxes on your building

Answer: D LO-1 Level: Moderate

4. a. b. c. d.

Which of the following defines marginal cost of production?

TC/Q TR/Q ΔTC/ΔQ ΔTR/ΔQ

Answer: C LO-1 Level: Easy

5.

Consider the information in the table.

Quantity Price 1 $20 2 16 3 12 4 8 5 4 The marginal revenue for the fourth unit of output is a. $12 b. $8 c. -$4 d. -$8 Answer: C

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LO-1 Level: Moderate

6. a. b. c. d.

The goal of any firm is to minimize losses. make a profit. maximize revenue. maximize profit.

Answer: D LO-1 Level: Easy

7. a. b. c. d.

In the short run, a profit-maximizing firm will increase output until marginal revenue equals marginal cost. marginal cost equals total revenue. total revenue equals total cost.

MC>MR.

Answer: A LO-1 Level: Moderate

8.

a. b. c. d.

Grace produces widgets and accepts the market price of $10 per widget. Her marginal cost equals $8.50 per widget. To maximize revenue and produce an optimal amount Grace should increase output. decrease output. shut down. increase price.

Answer: A LO-1 Level: Difficult

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9. a. b. c. d.

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The profit maximizing rule applies only when a firm is a price taker. only when a firm is a price maker. to firms in all market structures. to purely competitive firms only.

Answer: C LO-1 Level: Moderate

10. A firm should reduce its quantity of output if a. marginal revenue is greater than marginal cost. b. total revenue is greater than total cost. c. marginal revenue is less than marginal cost. d. total revenue is less than total cost.

Answer: C LO-1 Level: Easy

11. The profit-maximizing level of output occurs where a. TR=TC. b. TR=MC. c. MR=MC. d. MR=TC. Answer: C LO-1 Level: Easy

12. The demand curve for a firm in a market with perfect competition is

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a. b. c. d.

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horizontal. vertical. downward sloping. equal to the marginal cost curve.

Answer: A LO-2 Level: Easy

13. Which of the following statements is true? a. A firm in a market with perfect competition is a price taker and must accept the market equilibrium price. b. A firm in a market with perfect competition is a price maker and can influence the price of the product with their supply of the product. c. A firm in a market with perfect competition can coordinate with other producers to determine a market price. d. A firm in a market with perfect competition has considerable freedom in determining market price.

Answer: A LO-2 Level: Moderate

14. A firm’s price is equal to marginal revenue. What can be said about the firm? a. The firm is maximizing profit. b. The firm is a monopolist. c. The firm is in a market with perfect competition. d. The firm should increase production.

Answer: C LO-2 Level: Easy

15. A firm’s price is greater than marginal revenue. What can be said about the firm?

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a. b. c. d.

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The firm is maximizing profit.

The firm is a monopolist.

The firm is in a market with perfect competition.

The firm should increase production.

Answer: B LO-2 Level: Easy

Reference: Use the graphs to answer questions 16-17.

16. Graph A illustrates a. a market with perfect competition. b. a monopolistic market. c. a firm that is a price taker. d. a firm that has market power.

Answer: A LO-2 Level: Moderate

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17. Graph B illustrates a. a market with perfect competition. b. a monopolistic market. c. a firm that is a price taker. d. a firm that has market power.

Answer: C LO-2 Level: Moderate

18. In a market with perfect competition, prices are determined by a. subsidies and taxes. b. consumption patterns. c. market demand and supply. d. costs of production.

Answer: C LO-2 Level: Easy

19. The firm in a market with perfect competition is a price a. maker because of the ease of entry and exit in the market. b. maker because of the ability to hold information from the market. c. taker because products are identical and cannot be distinguished one from another, information is complete, and because there are so many sellers in the market none can influence price. d. taker because of the lack of buyers in the market.

Answer: C LO-2 Level: Moderate

20. A firm that is the only seller in a market with a product with no close substitutes is known as a

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a. b. c. d.

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perfect competition. perfectly monopolistic. competitive monopolist. monopolist.

Answer: D LO-2 Level: Easy

21. A monopolist is a price a. setter and will select an output where marginal revenue equals marginal cost but charges a price the market will bear. b. setter and will select an output where marginal revenue equals demand and charges a price equal to this point. c. taker and will select an output where demand equals supply and take the market price. d. taker and will select an output dictated by the deadweight loss.

Answer: A LO-2 Level: Moderate

22. In order to see more output a monopoly must __________ the _________ of its good. a. increase; marginal revenue b. increase; producer’s surplus c. decrease; price d. decrease; consumer’s surplus Answer: C LO-2 Level: Easy

23. A monopolist produces an output that is ______________ than a market with perfect competition at a price ______________ than marginal revenue. a. greater; greater

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b. c. d.

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greater; less less; greater less; less

Answer: C LO-2 Level: Easy

24. A firm in a market with perfect competition has the ability to set _________ but not _______. a. marginal cost; price b. output; marginal cost c. output; price d. marginal cost; marginal revenue Answer: C LO-2 Level: Moderate

25. Consider the graph. The monopolist will produce at ______ and charge a price of _______.

a. b. c.

Q1; P1 Q1; P2 Q2; P1

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d.

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Q2; P2

Answer: D LO-3 Level: Difficult

26. For a monopolist a. MR = P. b. MR > P. c. MR < P. d. MR has no relation to P. Answer: C LO-2 Level: Easy

27. For a market with perfect competition a. MR = P. b. MR > P. c. MR < P. d. MR has no relation to P. Answer: A LO-2 Level: Easy

28. Monopolists and markets with perfect competition a. are similar because both maximize consumer surplus. b. are similar because both maximize producer surplus. c. are similar because both will find profit-maximizing output where MR = MC. d. have no similarities because of structure.

Answer: C LO-2

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Level: Moderate

29. Which of the following statements is true? a. In the long run firms in a market with perfect competition earn economic profits. b. In the long run firms in a market with perfect competition earn zero economic profits. c. Monopolists can earn economic profits in the short run only. d. Monopolists earn only normal profits.

Answer: B LO-3 Level: Moderate

30. Because a monopolist is in the market a. barriers to entry prevent the monopolist from earning an economic profit. b. the monopoly firm will tend to earn higher economic profits than perfectly competitive firms. c. the monopoly firm can increase profit by increasing price in the short run. d. the monopoly firm will earn normal profits in the long run.

Answer: B LO-3 Level: Difficult

31. ___________________ occurs when _________________. a. marginal costs; there is a change in price b. economic profit; marginal revenue equals marginal costs c. normal prices; there is an economic profit d. normal profit; there is zero economic profit Answer: D LO-3 Level: Moderate

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32. Which of the following statements is true? a. Normal profits = economic profit b. Normal profits = zero economic profits c. Economic profit = accounting profit d. Economic profit < normal profit Answer: B LO-3 Level: Easy

Reference: Use the graph to answer questions 33-34.

33. The loss to society as a result of a monopolist’s output and price decision is represented by the area of a. P0P2AC. b. P1P2AB. c. P0P1BC. d. CAB. Answer: D LO-4 Level: Difficult

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34. Which of the following statements is true? a. Price P2 is optimal and efficient for both the monopolist and the market with perfect competition. b. Price P2 is optimal for the monopolist and socially efficient. c. Price P2 is optimal for the monopolist but is not socially efficient. d. Price P2 is optimal and socially efficient for the market with perfect competition.

Answer: C LO-4 Level: Difficult

35. The price charged by the monopolist is a. optimal and socially efficient because of the output. b. optimal but socially inefficient because MR < P. c. not optimal nor socially efficient because MC>MR. d. not optimal but socially efficient because of the decrease in producer surplus.

Answer: B LO-4 Level: Moderate

36. Your business wins a patent for a special graphic design construction method. The result in the market because of this patent would include a. an increase in consumer surplus and benefits to consumers. b. an increase in society’s benefits. c. a decrease in producer surplus. d. a decrease in consumer surplus.

Answer: D LO-4 Level: Difficult

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37. Laws that promote competition between businesses and prohibit anti-competitive behavior between firms with large control over markets are a. price discrimination laws. b. discrimination regulations. c. antitrust laws. d. concentration regulations.

Answer: C LO-5 Level: Easy

38. The ___________________ led to federal regulation to ensure that firms charged just and reasonable rates. a. Sherman Anti-Trust Act b. Clayton Anti-Trust Act c. FTC Act d. Federal Reserve Act Answer: A LO-5 Level: Easy

39. The Clayton Anti-Trust Act created the _________________ to “prevent the unlawful suppression of competition.” a. Federal Open Market Committee b. Securities Exchange Commission c. Federal Trade Commission d. Federal Board of Trade Answer: C LO-5 Level: Easy

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40. The goal of antitrust laws is to a. promote competition and prevent use of monopoly power on output and price. b. stop development of large companies. c. monitor and regulate profits of corporations. d. regulate economic and accounting profits.

Answer: A LO-5 Level: Moderate

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c19; Chapter 19: The Economics of Labor Market Discrimination

Learning Objectives LO-1: Describe the sources of earning differences among people LO-2: Define discrimination LO-3: Summarize the predominant economic models of discrimination LO-4: Model the effects of discrimination LO-5: Discuss the main antidiscrimination policies in the U.S. and the research findings on the effectiveness of these policies

Multiple Choice

1. a. b. c. d.

The U.S. workforce has become more racially but less gender diverse over the past 30 years. less racially but more gender diverse over the past 30 years. more racially and gender diverse over the past 30 years. less racially and gender diverse over the past 30 years.

Answer: C LO-1 Level: Easy

2. a. b. c. d.

The comparison of earnings of two groups of the labor force is known as the Gini index. the wealth index. an earnings ratio. the GNH.

Answer: C LO-1 Level: Easy

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3. a. b. c. d.

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Another term for the income disparity between two groups of the workforce is the Gini index. the wealth index. an earnings ratio. the GNH.

Answer: C LO-1 Level: Easy

4. a. b. c. d.

In the fourth quarter 2012 the median weekly earning for men in current dollars was $868, while the median weekly earnings for women was $690. The male/female earnings ratio was 0.26.

0.79.

1.23.

1.79.

Answer: C LO-1 Level: Moderate

5.

a. b. c. d.

The median weekly earnings for Asian men in the fourth quarter of 2012 were $1,051. The median weekly earnings for White men for the same time period were $895. The earnings ratio of Asian men to White men is 0.17.

1.17.

0.85.

1.85.

Answer: B LO-1 Level: Moderate

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6. a. b. c. d.

Test Bank

Sources of the pay gaps among groups in the work force can be found using marginal analysis. cost-benefit analysis. aggregate demand and aggregate supply model. demand and supply models.

Answer: D LO-1 Level: Easy

7. a. b. c. d.

The percent difference in earnings between two groups is known as the earnings ratio.

Gini Index.

GNH. pay gap.

Answer: D LO-1 Level: Easy

8.

a. b. c. d.

In the fourth quarter 2012 the median weekly earning for men in current dollars was $868, while the median weekly earnings for women was $690. The pay gap between men and women is 0.24 0.27 0.47 0.79

Answer: B LO-1 Level: Difficult

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9. a. b. c. d.

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Members of the labor market who are equally productive but treated differently based on characteristics not related to productivity are victims of harassment. segregation. discrimination. labor disputes.

Answer: C LO-2 Level: Easy

10. Labor market discrimination includes a. employment discrimination. b. wage discrimination. c. industrial discrimination. d. employment and wage discrimination.

Answer: D LO-2 Level: Easy

11. The form of labor market discrimination that results in Joe being hired before Jane because of sex, race, or other demographic characteristics is a. wage discrimination. b. employment discrimination. c. industrial discrimination. d. harassment.

Answer: B LO-2 Level: Easy

12. Which of the following is an example of employment discrimination?

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a. b. c.

d.

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John and Carrie work in the same office and have the same job responsibility. John is paid ten cents more an hour because he has a family.

Louis and Arnie work on the same production line. Both receive the same base rate but Louis also receives an additional per hour stipend.

Nattie and Jacob apply for the same open position. Both have similar educational and prior work experiences. Jacob is hired over Nattie because administration felt the position was better suited for a man.

Grace, who is married, earns less than Gabby who is not married.

Answer: C LO-2 Level: Easy

13. The form of labor market discrimination that results in Joan receiving a higher wage not because of productivity but due to some other characteristic is a. wage discrimination. b. employment discrimination. c. industrial discrimination. d. harassment.

Answer: A LO-2 Level: Easy

14. Predominant economic theories of discrimination can be categorized by a. personal prejudice. b. logistical prejudice. c. incomplete information. d. personal prejudice and incomplete information.

Answer: D LO-3 Level: Easy

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15. The model of discrimination that illustrates how preferences create discrimination in the work place is the a. employer discrimination model. b. rational discrimination model. c. comprehensive discrimination model. d. taste-based model of discrimination.

Answer: D LO-3 Level: Easy

16. The taste-based model of discrimination assumes discrimination occurs because people a. will receive more utility if they have to work with the selected group. b. will receive less utility if they have to work with the selected group. c. perceive costs will be lower when they have to work with the selected group. d. perceive revenue will be affected.

Answer: B LO-3 Level: Moderate

17. Discrimination occurs in the taste-for-discrimination model because discriminating employers a. refuse to hire certain segments of the workforce. b. act as if additional costs will incur if a certain segment of the workforce is hired increasing costs of production. c. characterize certain segments of the workforce by statistical information. d. will only hire a certain segment of the workforce.

Answer: B LO-3 Level: Difficult

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18. When employers base their employment decisions on prejudice against certain workers ______________ occurs. a. statistical discrimination. b. comprehensive discrimination. c. employer discrimination. d. taste-based discrimination.

Answer: C LO-3 Level: Easy

19. Joan will always go to another female cashier when shopping. This would be an example of a. statistical discrimination. b. customer discrimination. c. employer discrimination. d. taste-based discrimination.

Answer: B LO-3 Level: Moderate

20. ___________ discrimination occurs when customers base their purchasing decisions on the race, sex, or to other demographic characteristics of the workers with whom they interact. a. Statistical b. Customer c. Employer d. Taste-based Answer: B LO-3 Level: Easy

21. Incomplete information gives rise to ________________ when wages and hiring are based in part on group characteristics.

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a. b. c. d.

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statistical discrimination comprehensive discrimination employer discrimination taste-based discrimination

Answer: A LO-3 Level: Easy

22. Using characteristics of workers’ demographic groups to predict potential in the absence of information on individual workers’ productivity is known as a. statistical discrimination. b. comprehensive discrimination. c. employer discrimination. d. taste-based discrimination.

Answer: C LO-3 Level: Easy

23. During periods of U.S. history certain groups of immigrants were avoided by employers due to their preference against the targeted group. This illustrates a. statistical discrimination. b. comprehensive discrimination. c. employer discrimination. d. taste-based discrimination.

Answer: D LO-3 Level: Moderate

24. The practice of charging higher rates to male drivers under the age of 25 regardless of their driving history illustrates a. statistical discrimination.

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b. c. d.

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comprehensive discrimination. employer discrimination. taste-based discrimination.

Answer: A LO-3 Level: Moderate

25. Carrie and Stacy apply for the same entry-level position that requires a small amount of traveling. Both are 27 years old and have the same educational and prior work experience.

Carrie has been married for two years. Stacy does not plan on getting married in the near future. Stacy is hired for the position because administration is concerned that the trend for newlyweds is to begin planning a family requiring time away from the company. This is an example of a. statistical discrimination. b. comprehensive discrimination. c. employer discrimination. d. taste-based discrimination.

Answer: A LO-3 Level: Easy

26. If a firm discriminates against a segment of the workforce it a. perceives the marginal revenue will be greater and will hire fewer workers. b. perceives the marginal revenue product will be less and will hire fewer workers. c. perceives the cost of hiring will be greater and will hire fewer workers. d. perceives the cost of hiring will be less and will hire fewer workers.

Answer: C LO-4 Level: Difficult

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27. Consider the graph. Market wage is at P3.

If a firm discriminates against a specific segment of the work force it will a. hire Q2 if the firm perceives the costs of hiring the specific segment to be higher than their actual market wage. b. hire Q1 if the firm perceives the costs of hiring the specific segment to be equal to their actual market wage. c. hire Q3 because it is the actual market wage. d. hire Q2 regardless of costs.

Answer: A LO-4 Level: Difficult

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28. Consider the graph.

The impact on output from employer discrimination is represented by a. Point A. b. Point B. c. Point C. d. the distance between Points A and Point C. Answer: B LO-4 Level: Difficult

29. The first federal legislation to prohibit employment discrimination was the a. Age Discrimination in Employment Act of 1967. b. Fair Employment Act of 1941. c. Equal Pay Act of 1963. d. Civil Rights Act of 1964.

Answer: D LO-5 Level: Easy

30. The 1964 Civil Rights Act was the first federal legislation to prohibit employment discrimination based on all of the following except a. race.

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b. c. d.

Test Bank

religion. gender. age.

Answer: D LO-5 Level: Easy

31. ____________________ is a set of policies that mandate taking action to ensure the equal treatment of people regardless of their race, creed, color or national origin. a. The Equal Opportunity Act b. Affirmative Action c. The Civil Rights Act of 1968 d. The Fair Employment Act of 1941 Answer: B LO-5 Level: Easy

32. A goal of antidiscrimination laws is to a. increase the supply of protected workers. b. decrease the supply of protected workers. c. increase the demand of protected workers. d. decrease the demand of protected workers.

Answer: C LO-5 Level: Difficult

33. When hiring decisions are based on factors other than productivity a. total revenue increases compared to nondiscriminatory firms. b. profit will be lower compared to nondiscriminatory firms. c. costs will be lower compared to nondiscriminatory firms. d. profit will be approximately the same as nondiscriminatory firms.

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Test Bank

Answer: B LO-5 Level: Moderate

34. A consequence of the ADA is that it a. includes lower levels of employment of disabled workers because of concerns for additional costs of hiring disabled workers. b. eliminates concerns of additional costs of hiring disabled workers increasing demand. c. contains provisions that eliminate employer and customer discrimination. d. increases levels of employment of older and disabled workers.

Answer: A LO-5 Level: Difficult

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c20; Chapter 20: Poverty and the Distribution of Income

Learning Objectives LO-1: Describe the distribution of income in the U.S. and the global distribution of income LO-2: Explain various measures of income inequality LO-3: Describe various measures of poverty LO-4: Summarize the issues surrounding global poverty and inequality LO-5: Describe some of the primary causes of poverty LO-6: Describe the impacts of various poverty policies

Multiple Choice

1. a. b. c. d.

The total value of everything own less any debt owed is a flow of assets a stock of assets wealth capital

Answer: C LO-1 Level: Easy

2. a. b. c. d.

A tool used to show the levels of income in an economy and the percentage of individuals or households earning those income levels is a(n) income distribution income index Gini index Laffer curve

Answer: A LO-1 Level: Easy

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3. a. b. c. d.

Test Bank

The income distribution in the United States is evenly distributed has a normal distribution skewed biased

Answer: C LO-1 Level: Easy

4. a. b. c. d.

The income distribution in the United States is considered evenly distributed because income has increased, on average, evenly for all wage earners has a normal distribution because the highest bracket of income earners is still at the medium wage considered skewed since a very small percentage of households can earn very high incomes and a large percentage of households earn low incomes. evenly proportioned as income is proportionate to skills.

Answer: C LO-1 Level: Moderate

5. a. b. c. d.

When considering the U.S. income distribution which of the following is correct?

Since the 1960s the lowest earning quintile of the U.S. income distribution has earned a smaller share of the nation’s income.

The highest earning quintile of the U.S. income distribution earned a smaller share of the nation’s income in 1969 than in 2009.

The highest earning quintile of the income distribution earned a larger share of the nation’s income in 1969 than in 2009.

The highest earning quintile of the U.S. income distribution earned a larger share of the nation’s income in 1969 than in 2009.

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Test Bank

Answer: B LO-1 Level: Moderate

6. a. b. c. d.

The largest ____________ economies in the world earned roughly ___________ of the world’s income.

10; one-half 12; two-thirds 15; one-third 20; one-fourth

Answer: B LO-1 Level: Easy

7. a. b. c. d.

__________________ are a common measurement of income inequality.

GNH indices Lorenz curves Income ratios Pay gaps

Answer: C LO-2 Level: Easy

8. a. b. c. d.

This measurement of income inequality compares the incomes of those in the upper end of an income distribution to the incomes of those in the lower end of the income distribution.

GNH indices Lorenz curves income ratios pay gaps

Answer: C LO-2

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Test Bank

Level: Easy

9. a. b. c. d.

The 85:15 ratio compares the income of household at the 85th percentile with the income of households at the 15th percentile and provides a coefficient of comparison compares the income of household at the 15th percentile with the income of households at the 85th percentile and provides an index of income comparison compares the income of household at the 85th percentile with the income of households at the 15th percentile and provides a multiplier for income compares the income of household at the 15th percentile with the income of households at the 85th percentile and provides a margin of income growth

Answer: A LO-2 Level: Difficult

10. The income at the 90th percentile for a hypothetical country is $120,000 and the income at the 10th percentile is $15,000. The 90:10 income ratio is a. 0.111 b. 0.125 c. 8 d. 10.50 Answer: C LO-2 Level: Moderate

11. The income at the 85th percentile for an Econogreat is $100,000 and the income at the 15th percentile is $8,500. Which of the following is true? a. The incomes of those at the 85th percentile of the income distribution for Econogreat are 8.l5 percent as large as the incomes of those at the 15th percentile. b. The incomes of those at the 85th percentile of the income distribution for Econogreat are 1.5 percent as large as the incomes of those at the 15th percentile.

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c. d.

Test Bank

The incomes of those at the 85th percentile of the income distribution for Econogreat are 11.8 times as large as the incomes of those at the 15th percentile.

The incomes of those at the 85th percentile of the income distribution for Econogreat are 1.5 times as large as the incomes of those at the 15th percentile.

Answer: C LO-2 Level: Difficult

12. A measurement of income inequality that compares the earnings of those at one point in the income distribution to the earnings of those at another point in the income distribution is a a. Laffer curves b. Lorenz curves c. income ratios d. Gini Coefficient Answer: C LO-2 Level: Easy

13. A commonly used measurement of income inequality that ranges from 0 to 1 is the a. Laffer curves b. Lorenz curves c. income ratios d. Gini Coefficient Answer: D LO-2 Level: Easy

14. A Gini coefficient of 0.9 indicates a. relatively high rates of income inequality b. High rates of income inequality c. Moderate rates of income inequality

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d.

Test Bank

Low rates of income inequality

Answer: A LO-2 Level: Easy

15. Consider Figure 8 from your text. Which of the listed countries has the highest level of income inequality, which has the lowest level of income equality?

a. b. c. d.

Mexico; India India; Mexico Brazil; Sweden Sweden; Brazil

Answer: C LO-2 Level: Moderate

16. Traditionally, poverty has been measured using a. national income guidelines b. income guidelines c. consumption guidelines d. both income and consumption guidelines

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Test Bank

Answer: D LO-3 Level: Easy

17. The poverty line a. is the income threshold for a person to be classified as in poverty b. is the consumption threshold for a person to be classified as in poverty c. is the income or consumption threshold for a person to be classified as in poverty d. is the national income baseline for measuring global poverty Answer: C LO-3 Level: Easy

18. In 2011 the U.S. poverty guideline defined as a single household as ‘in poverty” if annual income was a. at $22, 350 b. at $18, 500 c. at $10, 890 d. $1.25 per day Answer: C LO-3 Level: Easy

19. In 2011 the U.S. poverty guideline defined the poverty line for a family of four at a. at $22, 350 b. at $18, 500 c. at $10, 890 d. $1.25 per day Answer: A LO-3

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Test Bank

Level: Easy

20. The percentage of people with incomes below the poverty line is known as the a. Gini coefficient b. poverty rate c. pay gap d. GNH Answer: B LO-3 Level: Easy

21. Poverty rates are high for all of the following except a. people with low levels of education b. non-Hispanic whites c. households headed by single women d. people under 18 Answer: B LO-3 Level: Easy

22. Global poverty rates generally are measured using a poverty line of a. at $22, 350 b. at $18, 500 c. at $10, 890 d. $1.25 per day Answer: D LO-3 Level: Easy

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23. An example of an absolute measure of poverty is a. 60% of national median b. the minimum level of income c. median household income d. standard of living Answer: B LO-3 Level: Moderate 24. An absolute measure of poverty a. uses position in the income distribution to determine the poverty line b. is a moderate measurement of poverty c. uses a fixed income or consumption level to set the poverty line d. similar to measuring income inequality Answer: C LO-3 Level: Moderate

25. Less than ______________ percent of population in North America, Australia, and Russia live on less than __________ per day. a. 2; $1.25 b. 4; $1.75 c. 10; $2.25 d. 20; $10.5 Answer: A LO-4 Level: Easy

26. Which of the following statements is true about global poverty? a. Eastern Asia and Western Asia has experience a slight decline in poverty since 1990 b. most regions of the world have experienced a decline in poverty rates since 1990 c. Northern Africa has seen an increase in poverty since 1990 d. Southern Asia’s level of poverty has remained constant.

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Test Bank

Answer: B LO-4 Level: Easy

27. The MDG is a. An organization focusing on global cooperation to address global poverty introduced by the United States b. an effort established by the United Nations and other intergovernmental organizations and consist of a set of goals and targets to eliminate extreme poverty c. an organization established by the World Bank to address and enforce policies in place to address global poverty. d. a movement by developed countries to find solutions to global income inequality and poverty.

Answer: B LO-4 Level: Moderate

28. Patterns of poverty can be characterized by a. demographics b. family c. educational characteristics d. all of the above Answer: D LO-5 Level: Easy

29. Demographics, family characteristics and educational characteristics are considered a. structural factors of poverty b. cyclical factors of poverty c. individual-level factors of poverty d. frictional factors of poverty

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Test Bank

Answer: C LO-5 Level: Moderate

30. Factors of the causes of poverty can be grouped as a. structural and cyclical factors b. structural and individual-level factors c. cyclical and frictional d. individual-level and cyclical Answer: B LO-5 Level: Moderate

31. Individual-level causes of poverty include all of the following except a. productivity b. government institutions c. restricted opportunities d. incentives and preferences Answer: B LO-5 Level: Easy

32. Structural causes of poverty income include all of the following except a. macroeconomic downturns b. resource availability and resource use c. government institutions d. discrimination Answer: D LO-5 Level: Moderate

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Test Bank

33. The personal rate of productivity a. has a direct relationship with the demand for their labor and income b. has an inverse relationship with the demand for their labor and income c. has a direct relationship with the demand for their labor and an inverse relationship with income d. has an inverse relationship with the demand for their labor and a direct relationship with income Answer: A LO-5 Level: Difficulty

34. Which of the following would most likely have a higher rate of poverty? a. a person with four years of college or more b. married couples c. a person under 18 d. a female head of household Answer: D LO-5 Level: Moderate

35. Which of the following would most likely have a lower rate of poverty? a. married couples b. a person under 18 years of age c. males head of household, no wife d. Asian Answer: A LO-5 Level: Moderate

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Test Bank

36. All of the following except ____________ are included in the U.S. poverty policies. a. direct payments b. school lunch programs c. Head Start d. Unemployment benefits Answer: D LO-6 Level: Easy

37. A complicating issue for global poverty policies includes a. political unrest that directs priorities away from global cooperation efforts b. lack of labor and capital resources in undeveloped countries to build on poverty policies c. the crossing of geographical and governmental lines resulting in no institution that has the ability to set and enforce poverty policy d. the lack of support from governments for appropriate poverty policies Answer: C LO-6 Level: Moderate

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Test Bank

c21; Chapter 21: The Economics of Health Care

Learning Objectives LO-1: Describe the trends in costs and quality of U.S. health care LO-2: Compare the cost and quality of the U.S. healthcare relative to other developed nations LO-3: Describe the factors that have contributed to the rising cost of health care LO-4: Analyze the role that externalities play in the health care market LO-5: Assess the potential impacts of healthcare reform proposals

Multiple Choice

1. a. b. c. d.

Americans are projected to spend __________________ on health care by 2020. $1,500 per person $10,000 per person $15,000 per person $17,500 per person

Answer: B LO-1 Level: Easy

2. a. b. c. d.

In 2010 the U.S. spent approximately _________ of U.S. total income on health care.

5% 8% 12% 16%

Answer: D LO-1 Level: Easy

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3. a. b. c. d.

Test Bank

The U.S. spends approximately _______________ the percentage of national income on health than does the UK or Japan.

One-fourth Two-thirds Double Three times

Answer: C LO-2 Level: Easy

4. a. b. c. d.

In comparison with other developed countries the U.S. has __________ infant mortality rates and _______ life expectancy.

Higher; higher Lower; lower Higher; lower Lower; higher

Answer: C LO-2 Level: Easy

5. a. b. c. d.

Factors that have driven up health care costs include each of the following except Behavioral factors Insurance Technology Improved fitness facilities

Answer: D LO-3 Level: Easy

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6. a. b. c. d.

Test Bank

One reason for the relatively larger increase in health care costs in America versus similar countries is America’s Rising use of health insurance, a third-party payer Increasing attention to health and fitness Faster and higher rate of use of high-tech medical care Decline in health-related issues

Answer: C LO-3 Level: Moderate

7. a. b. c. d.

The average cost of care for a premature infant in the United States is $25,000 $50,000 $70,000 $100,000

Answer: C LO-3 Level: Easy

8. a. b. c. d.

Contributing to the high U.S. health care costs are Rates of obesity Smoking Hypertension All of the above

Answer: D LO-3 Level: Easy

9. a.

Which of the following is correct?

A major cause of rising health care costs is because of limited supply of options of health care.

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b. c. d.

Test Bank

A major cause of rising health care costs is the increased in taxes.

A major cause of rising health care is lifestyle choices.

A major cause of rising health care is the additional costs to employers.

Answer: C LO-3 Level: Moderate

10. About _____________ of Americans use health insurance. a. 50% b. 75% c. 84% d. 99% Answer: C LO-3 Level: Easy

11. Medicare is government insurance for individuals a. Who are unemployed b. Who are over 65 years old c. Who are injured d. Who are poor Answer: B LO-3 Level: Easy

12. Medicaid is government insurance for a. The unemployed b. Americans over 65 years old c. The injured d. The poor

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Test Bank

Answer: D LO-3 Level: Easy

13. A reason for purchasing insurance is to a. Save b. Spread out risk among groups of people c. Defy risk d. Budget for the future Answer: B LO-3 Level: Easy

14. Those who purchase health insurance a. Benefit from purchasing the insurance because it reduces the risk of having to pay for all of the medical costs b. Benefit from purchasing the insurance because of it is risk neutral c. Benefit from purchasing the insurance because its increases uncertainty d. Benefit from purchasing the insurance because health insurance increases level of wages.

Answer: A LO-3 Level: Moderate

15. A ___________ occurs when the provider or seller of a good or service is paid by someone other than the buyer of the good a. Deductible b. Positive externality c. Third-party payment d. All of the above Answer: C LO-3

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Level: Easy

16. According to your health insurance you pay 25% of all covered health care expenses. This payment is called your a. Co-payment b. Deductible c. Third-party payment d. Externality Answer: A LO-3 Level: Moderate

17. You go to the doctors and your bill for the office visit and lab costs is $250.00. You have a 25% co-payment. What is your marginal cost of this visit? a. $25.00 b. $62.50 c. $200.00 d. $250.00 Answer: B LO-3 Level: Moderate

18. ______________ occurs when people change their behavior to undertake more risk. a. A third-party payment b. Deductible c. Moral hazard d. Risk-adversity Answer: C LO-3 Level: Easy

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19. Moral hazard is an example of a. Risk-adversity b. Reverse incentive c. Risk neutrality d. Decreased demand Answer: B LO-3 Level: Difficult

20. John has health insurance through his work. He pays a minimal monthly amount for the insurance. Because the cost of the health insurance is primarily covered by a third party there is less incentive to practice healthful living behavior. This is an example of a. Adverse selection b. Moral hazard c. Symmetrical information d. Gresham’s Law Answer: B LO-3 Level: Moderate

21. Fee-for-service a. Typically increases demand for treatments prescribed b. Typically decreases demand for treatments prescribed c. Typically increases supply of treatments provided d. Typically decreases supply of treatments provided Answer: A LO-3 Level: Difficult

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Test Bank

22. In a fee-for-service system a. Doctors charge a fee for each visit or procedure, rather than being paid a fixed salary b. Doctors are paid a fixed amount rather by visit or procedure c. Doctors receive an additional fee per visit or service in addition to a fixed amount d. Doctors have the ability to change the fee charged depending on the diagnosis.

Answer: A LO-3 Level: Moderate

23. A physician-induced demand a. Occurs when patients demand more treatment than is prescribed b. Occurs when additional diagnostic treatments are requested to supplement the physician’s original requests c. Occurs when doctors prescribe more treatment than is necessary in order to increase their own income d. Occurs when insurance companies considers a treatment for coverage Answer: C LO-3 Level: Moderate

24. Which of the following is correct? a. The healthcare improvements experience a market failure because costs are imposed on a third party. b. The healthcare improvements experience a market failure because benefits are experienced by a third party. c. The optimal quantity of healthcare improvements occurs where MBprivate = MCprivate d. The optimal quantity of healthcare improvements occurs where MBsocial = MCprivate Answer: B LO-4 Level: Moderate

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Test Bank

25. The marginal benefit(s) of healthcare includes a. A longer life b. A reduction of loss of output c. Increased quality of life d. All of the above Answer: D LO-4 Level: Moderate

26. The marginal benefits that accrue only to individual decision makers are a. Private marginal costs b. Private marginal benefits c. Social marginal costs d. Social marginal benefits Answer: B LO-4 Level: Easy

27. The marginal benefits that accrue to society as a whole are a. Private marginal costs b. Private marginal benefits c. Social marginal costs d. Social marginal benefits Answer: D LO-4 Level: Easy

28. When benefits are received by society in addition to the benefits received from the consumer of the product a. The private demand curve underestimates the social demand curve b. The social demand curve underestimates the private demand curve

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c. d.

Test Bank

The private demand curve overestimates the social demand curve The social demand curve is equal to the private demand curve

Answer: A LO-4 Level: Moderate

Reference: Use the graph below to answer questions 29-31.

29. **Which of the following represents the positive externality associated with healthimproving activities? a. The distance between point A and B b. The distance between B and D c. The distance between D and C d. The distance between C and A Answer: A LO-4 Level: Difficult

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Test Bank

30. **If there were no positive externality _____________ would be the optimal quality a. Q*private b. Q*social c. (Q*social - Q*private) d. Point D Answer: A LO-4 Level: Moderate

31. **With the positive externality _____________ would be the optimal quality. a. Q*private b. Q*social c. (Q*social - Q*private) d. Point D Answer: B LO-4 Level: Moderate

32. Social marginal benefits a. Is equal to private marginal benefits b. Is equal to private marginal benefits plus external benefits c. Is equal to private marginal costs minus external benefits d. Is equal to social marginal benefits plus private marginal benefits Answer: B LO-4 Level: Easy

33. External benefits received from a positive externality a. Is equal to social marginal benefits plus private marginal benefits b. Is equal to social marginal benefits minus private marginal benefits c. Is equal to private marginal benefits divided by external benefits

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d.

Test Bank

Is equal to social marginal benefits divided by external benefits

Answer: B LO-4 Level: Moderate

34. Approximately __________________ Americans are without any form of health insurance. a. 25 million b. 46 million c. 60 million d. 84 million Answer: B LO-5 Level: Easy

35. Methods included in recent health care reform bills include each of the following methods except a. Children can now stay on parents’ health insurance plans until age 26 rather than age 19 or when they finish college b. Small businesses have access to tax credits to help them provide health insurance for their employees c. Health insurance companies are allowed to screen applicants for preexisting conditions d. Health insurance companies are prohibited from ending coverage when people get sick Answer: C LO-5 Level: Moderate

36. While policies to expand health insurance to previously uninsured a. May potentially lower mortality rates for those without insurance b. Will increase costs to insurers and their customers c. Will decrease to social costs to private insurers d. Will impose additional benefits to private insurance owners

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Test Bank

Answer: B LO-5 Level: Moderate

37. Tradeoffs for expanding health insurance coverage include a. Increased costs b. Decreased social costs c. Increased private benefits d. Decreased external benefits Answer: A LO-5 Level: Easy

38. Proponents of mandated government insurance argue a. Increasing insurance will increase gross private investment from insurance companies b. Increasing insurance coverage will reduce costs that are passed on to others when an insured person seeks treatment in a hospital c. Increasing insurance coverage will reduce benefits passed on to private consumers of healthimproving activities d. Increasing insurance coverage will increase national output due to increased health and productivity Answer: B LO-5 Level: Moderate

39. Opponents of government mandated insurance argue a. Requiring insurance impinges on individual freedom b. Requiring insurance increases private benefits c. Requiring insurance reduces private costs d. Requiring insurance reduces external benefits

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Test Bank

Answer: A LO-5 Level: Moderate

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Test Bank

c22; Chapter 22: Monetary Policy and the Federal Reserve

Learning Objectives LO-1: Define the concept of money LO-2: Explain how the fractional reserve banking system allows banks to create money LO-3: Explain how the market for loans functions LO-4: Describe the structure of the Federal Reserve System LO-5: Summarize the roles of the Federal Reserve LO-6: Explain how monetary policy takes place LO-7: Illustrate the impact of monetary policy on the economy LO-8: Access the tradeoffs associated with monetary policy

Multiple Choice

1. a. b. c. d.

The system of using something as money began with the Federal Reserve System. the development of the FOMC. the barter exchange. the SEC.

Answer: C LO-1 Level: Easy

2. a. b. c. d.

An item that is widely accepted as payment for goods and services is a barter exchange. exchange rate. trade exchange. medium of exchange.

Answer: D LO-1

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Test Bank

Level: Easy

3. a. b. c. d.

The primary functions of money include each of the following except barter facilitator. medium of exchange. store of value. unit of account.

Answer: A LO-1 Level: Easy

4. a. b. c. d.

The function of money that provides you a means of purchasing a cup of your favorite coffee is barter facilitator. medium of exchange. store of value. unit of account.

Answer: B LO-1 Level: Easy

5. a. b. c. d.

The function of money that allows you to save is barter facilitator. medium of exchange. store of value. unit of account.

Answer: C LO-1 Level: Easy

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6. a. b. c. d.

Test Bank

The function of money that allows you to comparison shop is barter facilitator. medium of exchange. store of value. unit of account.

Answer: D LO-1 Level: Easy

7. a. b. c. d.

The price tag on your dream car serves as a facilitator of trade. a medium of exchange. a store of value. a unit of account.

Answer: D LO-1 Level: Moderate

8. a. b. c. d.

An advantage of the medium of exchange function of money is that it facilitates trade. provides a value for goods and service. allows for comparison of prices. allows consumers to time their purchases.

Answer: A LO-1 Level: Moderate

9. a. b.

Providing consumers with a means of timing purchases is the barter facilitator. the medium of exchange function of money.

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c. d.

Test Bank

the store of value function of money. the unit of account function of money.

Answer: C LO-1 Level: Moderate

10. Which of the following provides a standard definition of the money supply? a. Money in circulation b. Money stored in bank vaults c. Printed money d. Money stored for distribution at the regional Federal Reserve Banks Answer: A LO-1 Level: Easy

11. The M1 money supply includes each of the following except a. cash. b. demand deposits. c. savings deposits and savings bonds. d. travelers checks.

Answer: C LO-1 Level: Easy

12. You received $100 in cash as a birthday gift. You deposit this money into your checking account. This deposit a. increased the M1 money supply because of the increase of demand deposits. b. decreased the M1 money supply because cash was taken out of circulation. c. increased the M1 money supply because the cash is now in the bank vault and in your checking account. d. did not change the M1 money supply.

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Test Bank

Answer: D LO-1 Level: Moderate

13. The total of M1 is Checkable Deposits Savings Deposits Money-Market Accounts Travelers Checks Cash Small Time Deposits a. $1,265. b. $2,165. c. $2,765. d. $6,165.

Billions of Dollars $600 2,500 1,500 15 650 900

Answer: A LO-1 Level: Easy

14. The requirement on banks to hold only a portion of their deposits as reserves is known as a. the federal reserve system. b. the fractional reserve banking system. c. the federal open market system. d. the federal deposit insurance system.

Answer: B LO-2 Level: Easy

15. The cash holdings of a bank are also known as a. total reserves.

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b. c. d.

Test Bank

required reserves. excess reserves. the money multiplier.

Answer: A LO-2 Level: Easy

16. The percentage of deposits that a bank must hold as reserves by law is known as a. total reserves. b. required reserves. c. excess reserves. d. the money multiplier.

Answer: B LO-2 Level: Easy

17. A deposit of $8,500 is made to Econobank which has a 10 percent reserve rate. Which of the following statements about this deposit is true? a. Econobank’s total reserve increased by $850. b. Econobank’s required reserve increased by $7,650. c. Econobank’s excess reserves increased by $7,650. d. Econobank’s vault cash increased by $850.

Answer: C LO-2 Level: Moderate

18. Econobank has the following required reserve requirements Transaction Accounts Requirement $0 to $12.4 0% More than $12.4 million to $79.5 million 3% More than $79.5 million 10%

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Test Bank

If Econobank has $68.5 million in checking deposits what is the amount of required reserves? a. $1.683 million b. $2.055 million c. $6.85 million d. $68. million Answer: A LO-2 Level: Difficult

19. Total reserves is equal to a. required reserves minus excess reserves. b. required reserves plus excess reserves. c. required reserves times the required reserve rate. d. required reserves times the money multiplier.

Answer: B LO-2 Level: Easy

20. A bank receives a deposit of $10,000 and has a required reserve rate of 15%. What amount is available for loans to the bank? a. $1,000 b. $1,500 c. $8,500 d. $10,000 Answer: C LO-2 Level: Moderate

21. A bank receives a deposit of $15,000 and has a required reserve rate of 20%. What is the potential amount of new money that can be created? a. $3,000

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b. c. d.

Test Bank

$12,000 $15,000 $75,000

Answer: D LO-2 Level: Moderate

22. The money multiplier tells the maximum amount a. that total reserves can increase for a given increase in deposits. b. that required reserves can increase for a given increase in deposits. c. that excess reserves can increase for a given increase in deposits. d. that the money supply can increase for a given increase in deposits.

Answer: D LO-2 Level: Easy

23. Money supply can be expanded and contracted by a multiple equal to a. the required reserve ratio. b. the reciprocal of the required reserve ratio. c. excess reserves. d. the reciprocal of the amount of excess reserves.

Answer: B LO-2 Level: Easy

24. In the market for loans the supply (S) comes primarily from a. demand deposit accounts. b. checking accounts. c. savings accounts. d. the M1 money supply.

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Test Bank

Answer: C LO-3 Level: Easy

25. In the market for loans the demand (D) comes a. from savings accounts. b. the M1 money supply. c. individuals and households. d. businesses only.

Answer: C LO-3 Level: Easy

26. The price of loans is a. the federal funds rate. b. the discount rate. c. the open market rate. d. the interest rate.

Answer: D LO-3 Level: Easy

27. In the market for loans, if the interest rate is above market equilibrium quantity demanded is a. greater than quantity supplied and a surplus of money is available for loans. b. less than quantity supplies and a surplus of money is available for loans. c. greater than quantity supplied and a shortage of money is available for loans. d. less than quantity supplies and a shortage of money is available for loans.

Answer: B LO-3 Level: Moderate

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Test Bank

28. In the market for loans, if the interest rate is below market equilibrium quantity demanded is a. greater than quantity supplied and a surplus of money is available for loans. b. less than quantity supplies and a surplus of money is available for loans. c. greater than quantity supplied and a shortage of money is available for loans. d. less than quantity supplies and a shortage of money is available for loans.

Answer: C LO-3 Level: Moderate

29. In the market for loans an interest rate above market equilibrium will a. result in an increase of interest rates to meet the demand for loans. b. result in a decrease of interest rates to reduce the supply of available funds. c. not result in a change of interest rates as they are determined by members of a bank board. d. have no affect on the market for loans.

Answer: B LO-3 Level: Moderate

30. The structure of the Federal Reserve System consists of a. the Board of Governors and the Federal Open Market Committee. b. the Board of Governors and the 12 Federal Reserve Regional banks. c. the Federal Open Market Committee and the commercial banking system. d. the U. S. Department of Treasury and the Federal Open Market Committee.

Answer: B LO-4 Level: Easy

31. Which of the following statements concerning the Federal Reserve Board of Governors is true?

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a. b. c. d.

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Twelve members of the Federal Reserve Board of Governors are nominated by the president and approved by Congress to serve staggered seven year terms.

Seven members of the Federal Reserve Board of Governors are nominated by the president and approved by Congress to serve staggered two year terms.

Fourteen members of the Federal Reserve Board of Governors are appointed by the president to serve staggered two year terms.

Seven members of the Federal Reserve Board of Governors are appointed by the president to serve staggered 14 year terms.

Answer: D LO-4 Level: Moderate

32. Which of the following statements best describes the Federal Reserve role for banks? a. The Federal Reserve is a bank for banks. b. The Federal Reserve is the controller of all banks. c. The Federal Reserve is the auditor for all banks. d. The Federal Reserve provides money for banks.

Answer: A LO-5 Level: Easy

33. The primary roles of the Federal Reserve System are to a. ensure economic growth and promote stable prices. b. ensure economic growth and promote employment. c. ensure economic growth and limit economic contractions. d. promote stable prices and employment.

Answer: D LO-5 Level: Easy

34. The Federal Reserve conducts monetary policy by

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a. b. c. d.

Test Bank

influencing Congress to pass laws manipulating the availability of loans. influencing the ability of banks to create loans from their excess reserves. mandating banks concerning loans availability. supervising banks on their use of vault cash.

Answer: B LO-6 Level: Easy

35. The tools of monetary policy include all of the following except a. open market operations. b. discount rate. c. reserve requirements. d. prime interest rates.

Answer: D LO-6 Level: Easy

36. The buying and selling of securities from banks and investors is handled through the a. open market operations. b. discount rate. c. reserve requirements. d. prime interest rates.

Answer: A LO-6 Level: Easy

37. When the Federal Reserve wants to stimulate the economy it can undertake a. a contractionary monetary policy and sell securities. b. a contractionary monetary policy and buy securities. c. an expansionary monetary policy and sell securities. d. an expansionary monetary policy and buy securities.

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Answer: D LO- 7 Level: Moderate

38. The economy is heating up and concerns of inflation are present. To ease this situation the Federal Reserve can undertake a. a contractionary monetary policy and sell securities. b. a contractionary monetary policy and buy securities. c. an expansionary monetary policy and sell securities. d. an expansionary monetary policy and buy securities.

Answer: A LO-7 Level: Moderate

39. A disadvantage of monetary policy includes a. the political pressure from Congress. b. the inability to be flexible. c. the tradeoff to the economy. d. the effects on the money supply.

Answer: C LO-8 Level: Easy

40. Which of the following is an accurate statement concerning the tradeoff to the economy resulting from monetary policy? a. The buying of securities from an expansionary monetary policy may stifle output and result in a recession. b. The tradeoff of an expansionary monetary policy is that while the buying of securities will increase money supply and stimulate the economy through increased spending, there will be increased pressure on prices thus running the risk of inflation.

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c. d.

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The buying of securities from a contractionary monetary policy will result in an increase in the number of loans and a decreased price level.

The selling of securities in a contractionary monetary policy may result in an increase in unemployment.

Answer: B LO-8 Level: Difficult

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Test Bank

c23; Chapter 23: Fiscal Policy and the Federal Budget

Learning Objectives LO-1: Summarize how the federal budget is allocated LO-2: Describe how the government raises money through taxes and borrowing LO-3: Explain the difference between government deficits and debts LO-4: Illustrate how fiscal policy impacts the economy using an aggregate demand and aggregate supply model LO-5: Assess the tradeoffs associated with fiscal policy

Multiple Choice

1. a. b. c. d.

Types of government spending includes spending determined by current obligations spending determined by policymaker choices spending determined by current obligations and policymaker choices spending determined by Congress

Answer: C LO-1 Level: Moderate

2. a. b. c. d.

Nondiscretionary spending by the government would include all of the following except Social Security National defense Food stamps Interest on the national debt

Answer: B LO-1 Level: Easy

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3. a. b. c. d.

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Discretionary spending by the government would include lengthening or shortening the length of time the government pays unemployment insurance benefits education national defense all of the above are discretionary spending

Answer: D LO-1 Level: Easy

4. a. b. c. d.

Nondiscretionary government spending accounts for approximately what proportion of government spending? .25 .33 .4 .6

Answer: D LO-1 Level: Easy

5. a. b. c. d.

Discretionary accounts for approximately __________ percent of spending in the federal budget. .25 .33 .4 .6

Answer: C LO-1 Level: Easy

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6. a. b. c. d.

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The federal government raises revenue primarily from Social Security Taxes Borrowing from the public Both taxes and borrowing from the public

Answer: D LO-2 Level: Easy

7. a. b. c. d.

The largest source of revenue for the government is from Social insurance and retirement taxes Corporate income taxes Individual income taxes Borrowing

Answer: C LO-2 Level: Easy

8. a. b. c. d.

The _______________ is a level of income that is taxed at a different ___________.

Corporate tax; average tax rate Corporate tax; marginal tax rate Income tax bracket; average tax rate Income tax bracket; marginal tax rate

Answer: D LO-2 Level: Moderate

9.

If you earn less than $10,000 you have a 10% tax obligation. If you earn an income between $10,000 and $35,000 your tax obligation is 15%. Income in the range of $35,001 and $60,000 has a tax obligation of $25%. Income in the range of $60,001 and $85,000 has

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a. b. c. d.

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a tax obligation of 28%. Income greater than $85,000 has a tax obligation of 33%. Last year you earned $62,000. Your tax obligation is $10,560 $12,060 $20,460 $20,790

Answer: A LO-2 Level: Difficult

10. If you earn less than $10,000 you have a 10% tax obligation. If you earn an income between $10,000 and $35,000 your tax obligation is 15%. Income in the range of $35,001 and $60,000 has a tax obligation of $25%. Income in the range of $60,001 and $85,000 has a tax obligation of 28%. Income greater than $85,000 has a tax obligation of 33%. Last year you earned $62,000. Your marginal tax rate is a. .15% b. .25% c. .28% d. .33% Answer: C LO-2 Level: Moderate

11. In 2012 borrowing made up ____________ percent of the federal revenue compared to __________ percent in 1970. a. 34.5; 4.6 b. 26.1; 7.7 c. 23.9; 5.6 d. 9.5; 16.1 Answer: C LO-2 Level: Easy

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12. In 2012 the third largest source of revenue for the federal government was from a. individual income tax b. excise taxes c. social insurance and retirement taxes d. borrowing Answer: D LO-2 Level: Easy

Reference: Use the graph for questions 13-15.

13. **Consider the graph where G represents government spending and T represents government revenue. A budget surplus would be associated with area(s) a. 1 b. 2 c. 3 d. 1 and 3 Answer: B

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LO-3 Level: Moderate

14. **Consider the graph where G represents government spending and T represents government revenue. A budget deficit would be associated with area(s) a. 1 b. 2 c. 3 d. 1 and 3 Answer: A LO-3 Level: Moderate

15. **Consider the graph where G represents government spending and T represents government revenue. Which of the following statement is true? a. Tax revenue is inversely related to GDP b. Government spending is inversely related to GDP c. Tax revenue is positively related to GDP d. Government spending is inversely related to tax revenue Answer: C LO-2 Level: Moderate

16. A federal deficit occurs when a. federal spending is less than federal revenue b. federal spending is greater than federal revenue c. federal borrowing is greater than federal revenue d. federal revenue is greater than federal borrowing Answer: B LO-3 Level: Easy

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17. Federal debt is a. an accumulation of deficit borrowing that has not been paid off b. the difference between federal spending and revenue for a specific period of time c. the total of all past deficits d. the difference between federal borrowing and federal spending Answer: A LO-3 Level: Easy

18. The federal debt includes each of the following except a. publically-held debt from the sale of U.S. Treasuries b. government held debt c. Social Security Trust Fund d. Federal Reserve Notes Answer: D LO-3 Level: Moderate

19. In year one the federal government experienced a deficit of $25 million. This was followed by two years of surpluses of $30 million and $40 million, respectively. However, in year four the federal government again experienced deficit spending of $35 million. If budget surpluses are used to pay down the debt. At the end of these four years, the federal debt would have a. increased $10 million b. decreased $10 million c. increased $20 million d. stayed the same Answer: B LO-3 Level: Difficult

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20. Fiscal policy a. uses government spending and transfers to influence the economy b. uses government spending and taxes to provide more equality of income and wealth c. uses government spending and taxes to influence the economy d. uses taxes and transfers to insure economic health Answer: C LO-4 Level: Easy

21. ________________ is used when policymakers actively change government spending or taxation in response to changes in the economy. a. discretionary fiscal policy b. nondiscretionary fiscal policy c. expansionary fiscal policy d. contractionary fiscal policy Answer: A LO-4 Level: Easy

22. Discretionary fiscal policy a. does not require specific action or policy changes b. changes with levels of GDP c. requires action taken in conjunction with the Federal Reserve System. d. requires specific action by Congress to change taxes and government spending Answer: D LO-4 Level: Moderate

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23. Federal policy changes that uses automatically changes taxes and/or government spending to help stabilize the economy are known as a. discretionary fiscal policy b. nondiscretionary fiscal policy c. expansionary fiscal policy d. contractionary fiscal policy Answer: B LO-4 Level: Moderate

24. This is built into our progressive tax structure and income-based welfare system a. discretionary fiscal policy b. nondiscretionary fiscal policy c. expansionary fiscal policy d. contractionary fiscal policy Answer: B LO-4 Level: Moderate

25. Fiscal policy used to expand aggregate demand is a. discretionary fiscal policy b. nondiscretionary fiscal policy c. expansionary fiscal policy d. contractionary fiscal policy Answer: C LO-4 Level: Easy

26. Fiscal policy used to decrease aggregate demand is a. discretionary fiscal policy b. nondiscretionary fiscal policy

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c. d.

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expansionary fiscal policy contractionary fiscal policy

Answer: D LO-4 Level: Easy

27. Classical economic theories such as those prior to the Great Depression supported balanced budgets and limited government involvement in the markets. Economists who favor this school of thought would support a. tax cuts during economic downturns and the reduction of government spending b. tax increases during economic downturns with increases in government spending c. tax cuts during economic downturns d. tax increases during periods of expansion Answer: A LO-4 Level: Difficult

28. A follower of John Maynard Keynes would recommend which of the following during economic slowdowns? a. increasing taxes and government spending b. increasing taxes and decreasing government spending c. decreasing taxes and increasing government spending d. decreasing taxes and decreasing government spending Answer: C LO-4 Level: Moderate

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29. If the economy is at point “a” with an output of Y1 what type of fiscal policy would be used to increase output to Y2?

a. b. c. d.

Contractionary Expansionary Reactionary Stabilizing

Answer: B LO-4 Level: Moderate

30. Which of the following is true concerning expansionary fiscal policy? a. Expansionary fiscal policy is designed to control aggregate demand using increases of taxes and cuts in government spending b. Expansionary fiscal policy causes an outward shift of the aggregate demand curve resulting in an increase in output. c. Expansionary fiscal policy results in inflation when employed at relatively low levels of GDP. d. Expansionary fiscal policy is a last-resort policy used by the Federal Reserve System.

Answer: B LO-4 Level: Moderate

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31. Which of the following is true concerning contractionary fiscal policy? a. Contractionary fiscal policy is necessary to manipulate aggregate supply and maintain output. b. Contractionary fiscal policy results in recession. c. The purpose of contractionary fiscal policy is to slow down the economy by shifting the aggregate demand curve inward and removing pressure on price levels. d. Contractionary fiscal policy is appropriate when an output gap is being experienced.

Answer: C LO-4 Level: Difficult

Reference: Use the graph to answer questions 32-35.

32. **What type of fiscal policy would shift aggregate demand from AD3 to AD4? a. Contractionary b. Expansionary c. Reactionary d. Stabilizing Answer: B LO-4 Level: Easy

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33. **What type of fiscal policy would shift aggregate demand from AD3 to AD2? a. Contractionary b. Expansionary c. Reactionary d. Stabilizing Answer: A LO-4 Level: Easy

34. **Which of the following statements is true? a. Increasing taxes while decreasing government spending would result in a shift of the aggregate demand from AD1 to AD2. b. Decreasing taxes would result in a shift of the aggregate demand from AD2 to AD1. c. Increasing taxes would result in a shift of the aggregate demand from AD3 to AD4. d. Decreasing taxes while increasing government spending would result in a shift of the aggregate demand from AD3 to AD4.

Answer: C LO-4 Level: Difficult

35. **Which of the following fiscal policy options would have greater potential of causing inflation? a. An expansionary policy shifting aggregate demand from AD1 to AD2 b. A contractionary policy shifting aggregate demand from AD4 to AD3 c. An expansionary policy shifting aggregate demand from AD3 to AD4 d. A contractionary policy shifting aggregate demand from AD2 to AD1 Answer: C LO-4 Level: Moderate

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36. Contractionary fiscal policy a. includes cuts in government spending and increases in taxes and is designed to slow down the economy. b. reduces aggregate demand and shifts the aggregate demand curve inward c. includes increases in government spending and decreases in taxes and is designed to stimulate the economy d. Both “a” and “b” Answer: D LO-4 Level: Easy

37. The economy is “heating up” and price pressure is being reported. Which of the following would be appropriate? a. cutting taxes b. increasing taxes c. increasing government spending d. increasing government spending and cutting taxes Answer: B LO-4 Level: Moderate

38. A potential tradeoff for reducing pressure on price levels associated with contractionary fiscal policy is a. loss of output b. gain of output c. increase of aggregate demand d. stagflation Answer: A LO-5 Level: Moderate

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39. When expansionary fiscal policy is used to stimulate the economy a potential trade off may be a. loss of output b. stagflation c. inflationary pressure d. recession Answer: C LO-5 Level: Moderate

40. A trade off for contractionary fiscal policy may be a. pressure on prices b. inflation c. unemployment d. increases in output Answer: C LO-5 Level: Easy

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